TABLE OF CONTENTS

LOAN
1. Garcia v. Theo
2. Pantaleon v. American Express, Inc.
3. Producers Bank of the Phil. v. CA
4. Pajuyo v. CA
5. Republic v. Bagtas
6. BPI Family Bank v. Franco
7. Frias v. San Diego- Sison
8. Conception v. CA
9. Sps. Castro v. TAN
10. Siga-an v. Villanueva
11. Tan v. CA
12. Carpio vs. Chua Ng
13. PRISMA Construction v. Development Corp.
14. Sps. Silos v. PNB
DEPOSIT
1.
2.
3.
4.
5.
6.
7.

BPI v. IAC
DURBAN Apartment v. Poineer Insurance and Surety Corp.
TRIPLE-V Food Services v. Filipino Merchant Insurance Corp.
Lipat v. Pacific Banking Corp.
CA-Agro Industrial Development Corp. v. CA
Ortiz v. Kayanan
YHT Realty Corp. v. CA

GUARANTY
1. Dio v. CA
2. Escao v. Ortigas
3. Tupaz v. CA
4. Palmarez v. CA
5. Phil. Blooming Mills v. CA
6. Bitanga v. Pyramid Construction Engineering Corp.
7. JN Development Corp. v. Philippine Exports and Foreign Loan Guaranty, Ltd.
8. Stronghold Insrance Company, Inc. v. Tokyo Construction Company, Ltd.
9. Ong v. Philippine Commercial International Bank
10. E. Zobel, Inc. v. CA

LOAN
CAROLYN M. GARCIA v. RICA MARIE S. THIO
GR No. 154878, 16 March 2007
FACTS:
Respondent Thio received from petitioner Garcia two crossed checks which amount to
US $100,000 and US $500,000, respectively, payable to the order of Marilou Santiago.
According to petitioner, respondent failed to pay the principal amounts of the loans when
they fell due and so she filed a complaint for sum of money and damages with the RTC.
Respondent denied that she contracted the two loans and countered that it was Marilou Satiago
to whom petitioner lent the money. She claimed she was merely asked the petitioner to give the
checks to Santiago. She issued the checks for P76,000 and P20,000 not as payment of interest
but to accommodate petitioners request that respondent use her own checks instead of
Santiagos.
RTC ruled in favor of petitioner. CA reversed RTC and ruled that there was no contract
of loan between the parties.
ISSUES:
(1) Whether or not there was a contract of loan between petitioner and respondent.
(2) Who borrowed money from petitioner, the respondent or Marilou Santiago?
RULING:
(1)

The Court held in the affirmative. A loan is a real contract, not consensual, and as such is

perfected only upon the delivery of the object of the contract. Upon delivery of the contract of
loan (in this case the money received by the debtor when the checks were encashed) the debtor
acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal
amount. It is undisputed that the checks were delivered to respondent.
(2)

However, the checks were crossed and payable not to the order of the respondent but to

the order of a certain Marilou Santiago. Delivery is the act by which the res or substance is
thereof placed within the actual or constructive possession or control of another. Although
respondent did not physically receive the proceeds of the checks, these instruments were
1

placed in her control and possession under an arrangement whereby she actually re-lent the
amount to Santiago.
Thus, such petition is granted.

POLO S. PANTALEON vs. AMERICAN EXPRESS INTERNATIONAL, INC., (AMEX)

G.R. No. 174269

May 8, 2009

FACTS:
Petitioner, lawyer Polo Pantaleon, with his family went on an escorted tour of Western
Europe. On the last day of the tour, the group arrived at the Coster Diamond House in which the
group agreed that the visit should end by 9:30 a.m. to allow enough time to take a guided city
tour of Amsterdam. While in the diamond house, Mrs. Pantaleon decided to buy a diamond and
also a pendant and a chain which totaled U.S. $13,826.00.

Around 9:15 am, Pantaleon

presented his American Express credit card together with his passport to the Coster sales clerk.
The sales clerk took the cards imprint, and asked Pantaleon to sign the charge slip. The charge
purchase was then referred electronically to respondents Amsterdam office at 9:20 a.m.
At 9:40am, Pantaleon asked the store clerk to cancel the sale to avoid further delaying
the tour group. At around 10:00a.m, Coster decided to release the items even without AMEXs
approval of the purchase. Due to the delay, the city tour of Amsterdam was cancelled due to
lack of time. The spouses Pantaleon offered their apologies but were met by their tour mates
with stony silence and visible irritation. There were also two instances similar to the incident in
Amsterdam wherein Pantaleon purchased golf equipment using his AMEX card, but he ended
up barrowing money after more than 30 minutes of non-approval. The other incident is when
Pantaleon used the card to purchase childrens shoes at a store in Boston, and it took 20
minutes before it was approved.
In Manila, Pantaleon sent a letter demanding an apology for the for AMEXs refusal to
provide credit authorization for the said purchases. AMEX refused to apologize stating that the
delay in authorizing the purchase from Coster was attributable to the circumstance that the
charged purchase of US $13,826.00 was out of the usual charge purchase pattern established.
Pantaleon filed an action for damages in the RTC which he won. In the CA the RTC decision
was reversed, hence this petition.
ISSUE: Whether or not AMEX breached its contractual obligation
RULING:

YES. Notwithstanding the popular notion that credit card purchases are approved "within
seconds," there really is no strict, legally determinative point of demarcation on how long must it
take for a credit card company to approve or disapprove a customers purchase, much less one
specifically contracted upon by the parties. Yet this is one of those instances when "youd know
it when youd see it," and one hour appears to be an awfully long, patently unreasonable length
of time to approve or disapprove a credit card purchase
It is not disputed that AMEX has the right, if not the obligation, to verify whether the
credit it is extending upon on a particular purchase was indeed contracted by the cardholder,
and that the cardholder is within his means to make such transaction. The culpable failure of
AMEX is not the failure to timely approve petitioners purchase, but the more elemental failure to
timely act on the same, whether favorably or unfavorably. AMEX should have informed
Pantaleon the reason for the delay, and duly advised him that resolving the same could take
some time.

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK) vs. HON.
COURT OF APPEALS AND FRANKLIN VIVES
G.R. No. 115324. February 19, 2003
Callejo, Sr., J.
FACTS:
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and
friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating
his business, the Sterela Marketing and Services (Sterela). Specifically, Sanchez asked private
respondent to deposit in a bank a certain amount of money in the bank account of Sterela for
purposes of its incorporation.

She assured private respondent that he could withdraw his

money from said account within a months time. With this, Mrs. Vivies, Sanchez and a certain
Estrella Dumagpi, secretary of Doronilla, went to the bank to open an account with Mrs. Vives
and Sanchez as signatories. A passbook was then issued to Mrs. Vives. Subsequently, private
respondent learned that part of the money was withdrawn without presentment of the passbook
as it was his wife got hold of such. Mrs. Vives could not also withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla who opened a current
account for Sterela and authorized the bank to debit savings.
Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his clients money. Doronilla issued another check for P212,000.00 in
private respondents favor but the check was again dishonored for insufficiency of funds.
Private respondent instituted an action for recovery of sum of money in the Regional
Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner.
The RTC ruled in favor of the private respondent which was also affirmed in toto by the CA.
Hence this petition.
ISSUE:
Whether or not the transaction between the Doronilla and respondent Vives was one of
a simple loan?

RULING:
5

No. A circumspect examination of the records reveals that the transaction between them
was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of
loans in this wise:
By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum; or money or
other consumable thing, upon the condition that the same amount of the same
kind and quality shall be paid, in which case the contract is simply called a loan
or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However, there are some
instances where a commodatum may have for its object a consumable thing. Article 1936 of the
Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to have the very same goods returned
at the end of the period agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. In case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such determination.

PAJUYO v. CA
GR No. 146364 June 3, 2004
FACTS:
Pajuyo, through a Kasunduan, entrusted a house, built on a lot not his own, to Guevara
for the latter's use provided he should return the same upon demand and with the condition that
Guevara should be responsible of the maintenance of the property. Upon demand Guevara
refused to return the property to Pajuyo. The petitioner then filed an ejectment case against
Guevara with the MTC who ruled in favor of the petitioner. On appeal with the CA, the appellate
court reversed the judgment of the lower court ruling that the contractual relationship of Pajuyo
and Guevara was that of a commodatum.
ISSUE: Whether the relationship of Pajuyo and Guevara is that of a commodatum.
RULING:
No An essential feature of commodatum is that it is gratuitous. Another feature of
commodatum is that the use of the thing belonging to another is for a certain period. If the use
of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in
which case the contractual relation is called a precarium.
Under the Civil Code, precarium is a kind of commodatum. The Kasunduan reveals that
the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the
Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in
good condition. The imposition of this obligation makes the Kasunduan a contract different from
a commodatum. The effects of the Kasunduan are also different from that of a commodatum.
Case law on ejectment has treated relationship based on tolerance as one that is akin to a
landlord-tenant relationship where the withdrawal of permission would result in the termination
of the lease.

REPUBLIC v. BAGTAS
G.R. No. L-17474 October 25, 1962
FACTS:
Bagtas borrowed three bulls from the Bureau of Animal Industry for one year for
breeding purposes subject to payment of breeding fee of 10% of book value of the bull. Upon
expiration, Bagtas asked for renewal. The renewal was granted only to one bull.
Bagtas offered to buy the bulls at its book value less depreciation but the Bureau
refused. The Bureau said that Bagtas should either return or buy it at book value. Bagtas proved
that he already returned two of the bulls, and the other bull died during a Huk raid, hence,
obligation was already extinguished. He claims that the contract is a commodatum. Thus, it was
a loss through fortuitous event and should be borne by the owner.
ISSUE: WON Bagtas is liable for the death of the bull.
RULING:
Yes. Commodatum is essentially gratuitous. However, in this case, there is a 10%
charge. If this is considered compensation, then the case at bar is a lease. Lessee is liable as
possessor in bad faith because the period already lapsed.
Even if this is a commodatum, Bagtas is still liable because the fortuitous event
happened when he held the bull and the period stipulated already expired. He is liable because
the thing loaned was delivered with appraisal of value and there was no contrary stipulation
regarding his liability in case there is a fortuitous event.

BPI-Family Bank vs. Amado Franco and CA

GR No. 123498, November 23, 2007
FACTS:
Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current
account with BPI-FB. Soon thereafter, First Metro Investment Corporation (FMIC) also opened a
time deposit account with the same branch of BPI-FB with a deposit of P100,000,000.00,
Subsequently, Franco opened three accounts, namely, current, savings, and time deposit, with
BPI-FB. The total amount of P2,000,000.00 used to open Francos account is traceable to a
check issued by Tevesteco. In turn, the funding for the P2,000,000.00 check was part of the
P80,000,000.00 debited by BPI-FB from FMICs time deposit account and credited to
Tevestecos current account pursuant to an Authority to Debit purportedly signed by FMICs
officers.
It appears, however, that the signatures of FMICs officers on the Authority to Debit were
forged. Unfortunately, Tevesteco had already effected several withdrawals from its current
account, including the P2,000,000.00 paid to Franco. BPI-FB in order to protect its interest
instructed Arangorin to debit Francos savings and current accounts for the amount remaining
therein. In the meantime, two checks drawn by Franco against his BPI-FB current account were
dishonored upon presentment for payment, and stamped with a notation account under
garnishment. Apparently, Francos current account was garnished by virtue of an Order of
Attachment.
Immediately, upon receipt of such notice Franco filed a Motion to Discharge Attachment
with the trial court and pre-terminated his time deposit account with BPI-FB. Consequently, in
light of BPI-FBs refusal to heed Francos demand, Franco filed a complaint praying for the
following reliefs: 1) the interest on the remaining balance of his current account, 2) the balance
on his savings account and 3) payment of damages.
The RTC rendered judgment in favour of Franco and against BPI-FB. On appeal the
Court of Appeals affirmed the trial court decision with modification.
ISSUE:
Whether or not Franco had a better right to the deposits in the subject accounts which
are part of the proceeds of a forged Authority to Debit.
9

RULING:
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but
not as a legal consequence of its unauthorized transfer of FMICs deposits to Tevestecos
account. BPI-FB conveniently forgets that the deposit of money in banks is governed by the
Civil Code provisions on simple loan or mutuum. As there is a debtor-creditor relationship
between a bank and its depositor, BPI-FB ultimately acquired ownership of Francos deposits,
but such ownership is coupled with a corresponding obligation to pay him an equal amount on
demand. Although BPI-FB owns the deposits in Francos accounts, it cannot prevent him from
demanding payment of BPI-FBs obligation by drawing checks against his current account, or
asking for the release of the funds in his savings account. Thus, when Franco issued checks
drawn against his current account, he had every right as creditor to expect that those checks
would be honored by BPI-FB as debtor.

10

BOBIE ROSE FRIAS v. FLORA SAN DIEGO-SISON

G.R. No. 155223. April 3, 2007
FACTS:
On 7 Dec 1990, Bobie Rose Frias and Dr. Flora San-Diego Sison entered into a MOA
over Frias property with a consideration of 3 Million pesos. Sison has 6 months from the date of
contracts execution to notify Frias of her intention to purchase the property with the
improvements at 6.4M. Prior to this 6 month period, Frias may still offer the property to other
persons, provided that 3M shall be paid to Sison including interest based on prevailing
compounded bank interest plus amount of sale in excess of 7M [should the property be sold at a
price greater than 7M]. In case Frias has no other buyer within 6 months from the contracts
execution, no interest shall be charged by Sison on the 3M. In the event that on the 6th month,
Sison would decide not to purchase the property, Frias has 6 months to pay 3M (amount shall
earn compounded bank interest for the last 6 months only). 3M treated as a loan and the
property considered as the security for the mortgage.
Upon notice of intention to purchase, Sison has 6 months to pay the balance of 3.4M
(6.4M less 3M MOA consideration). Frias received from Sison 3M (2M in cash; 1M post-dated
check dated February 28, 1990, instead of 1991, which rendered the check stale). Frias gave
Sison the TCT and the Deed of Absolute Sale over the property. Sison decided not to purchase
the property, so she notified Frias through a letter dated March 20, 1991 [Frias received it only
on June 11, 1991],and Sison reminded Frias of their agreement that the 2M Sison paid should
be considered as a loan payable within 6 months. Frias failed to pay this amount.
Sison filed a complaint for sum of money with preliminary attachment. Sison averred that
Frias tried to deprive her of the security for the loan by making a false report of the loss of her
owners copy of TCT, executing an affidavit of loss and by filing a petition [1] for the issuance of
a new owners duplicate copy. RTC issued a writ of preliminary attachment upon the filing of a
2M bond.
RTC found that Frias was under obligation to pay Sison 2M with compounded interest
pursuant to their MOA. RTC ordered Frias to pay Sison:
1
2

2M + 32% annual interest beginning December 7, 1991 until fully paid

70k representing premiums paid by Sison on the attachment bond with legal interest
counted from the date of this decision until fully paid
11

100k moral, corrective, exemplary damages [liable for moral damages because of Frias

fraudulent scheme]
100k attorneys fees + cost of litigation

The CA affirmed RTC with modification32% reduced to 25%. CA said that there was no
basis for Frias to say that the interest should be charged for 6 months only. It said that a loan
always bears interest; otherwise, it is not a loan. The interest should commence on June 7,
1991 until fully paid, with compounded bank interest prevailing at the time [June 1991] the 2M
was considered as a loan (as certified by the bank).
ISSUE: WON compounded bank interest should be limited to 6 months as contained in the
MOA.
RULING:
No. CA committed no error in awarding an annual 25% interest on the 2M even beyond
the 6-month stipulated period. In this case, the phrase for the last six months only should be
taken in the context of the entire agreement.SC notes that the agreement speaks of two (2)
periods of 6 months each. No interest will be charged for the 1st 6-month period while Sison
was making up her mind, but only for the 2nd 6-month period after Sison decided not to buy the
property. There is nothing in the MOA that suggests that interest will be charged for 6 months
only even if it takes forever for Frias to pay the loan.
The payment of regular interest constitutes the price or cost of the use of money, and
until the principal sum due is returned to the creditor, regular interest continues to accrue since
the debtor continues to use such principal amount. For a debtor to continue in possession of the
principal of the loan and to continue to use the same after maturity of the loan without payment
of the monetary interest constitutes unjust enrichment on the part of the debtor at the expense
of the creditor.

12

CONCEPCION v. COURT OF APPEALS

G.R. No. 122079. June 27, 1997
FACTS:
On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life
Savings and Trust Company) granted to the Concepcions a loan amounting to P1,400,000.00.
The Concepcions executed a promissory note and a real estate mortgage over their property.
Said loan carried an interest rate of 16% per annum payable in quarterly amortizations. The
promissory note provided that the Concepcions had authorized:
". . . the Bank to correspondingly increase the interest rate presently

stipulated in this

transaction without advance notice to me/us

The bank unilaterally increased the interest rate from:
16% (Php 67, 830. 00); 21% (Php 77, 619. 72) on 17 February 1980; 30% (Php 104, 661. 10)
on October 17, 1984; and 38% (Php 123, 797. 05) on 17 November 1984.
Failing to pay the bank's President made a demand on the Concepcions for the total amount of
Php 393,878.81 but no payment was received. On 14 April 1986, the bank filed a petition for
extrajudicial foreclosure and subsequently won in a public bidding after which a new transfer
certificate of title was issued in its name. On 29 July 1987, the Concepcions filed an action for
the cancellation of the foreclosure sale, the declaration of nullity of title in favor of the bank, and
the declaration of nullity of the unilateral increases of the interest rates on their loan.
On 31 August 1992, the trial court found for the defendants, that the plaintiffs have no
cause of action either against defendant. On 15 September 1995, the appellate court affirmed
the trial court's decision.
ISSUE: Whether or not the bank is authorized to increase the stipulated rate without advance
notice to the plaintiffs?
RULING:
NO. The validity of "escalation" or "escalator" clauses in contracts, in general, was
upheld by the Supreme Court in Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro
and Del Valle:
13

"Some contracts contain what is known as an 'escalator clause,' which is defined as one
in which the contract fixes a base price but contains a provision that in the event of specified
cost increases, the seller or contractor may raise the price up to a fixed percentage of the base.

However in Philippine National Bank vs. Court of Appeals:

"It is basic that there can be no contract in the true sense in the absence of the element
of agreement, or of mutual assent of the parties.
We cannot countenance petitioner bank's posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan.
That would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
Hence in Philippine National Bank v. Court of Appeals, et al.:
A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void to increase the interest
rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts.
Thus private respondent Home Savings Bank and Trust Company shall pay to
petitioners the excess the bid price it received from the foreclosed property in question over and
above the unpaid balance of the loan computed at the original interest rate.

14

Spouses Castro v Tan

G.R. No. 168940. November 24, 2009
FACTS:
Angelina de Leon Tan, and her husband Ruben Tan owned a residential lot. They entered into
an agreement, known as the Kasulatan ng Sanglaan ng Lupa at Bahay, with the spouses
Castro to secure a loan of P30,000.00. Under the contract, they undertook to pay the mortgage
debt within 6 months with an interest of 5% per month, compounded monthly. When Ruben
died, Angelina undertook the responsibility of paying the loan. However she failed to pay the
same upon maturity. Thereafter, she offered to pay the spouses the principal amount plus a
portion of the interest but the spouses refused and demanded the payment of the accumulated
sum. Later on, the spouses caused the extrajudicial foreclosure of the real estate mortgage and
emerged as the only bidder in the auction sale. Tan failed to redeem the property, thus the title
was consolidated in favour of the spouses. A writ of possession was then issued followed by
ejectment of Angelina from her former property.
Angelina Tan, together with the other respondents filed a complaint for nullification of the
mortgage averring that the interest rate imposed on the principal amount is unconscionable.
ISSUE:
Whether the 5% monthly interest rate, compounded monthly is unconscionable, and should be
equitably reduced to the legal rate of 12% per annum
RULING:
Yes. While the Court agrees with the Sps. Castro that parties to a loan agreement have
wide latitude to stipulate on any interest rate in view of the Central Bank Circular which
suspended the Usury Law ceiling on interest, it is also worth stressing that interest rates
whenever unconscionable may still be declared illegal. There is nothing in said circular which
grants lenders carte blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets. The 5% monthly interest rate, or 60%
per annum, compounded monthly as stipulated in the Kasulatan is even higher than the 3%
monthly interest rate imposed in another case. Thus, the 5% monthly interest is excessive,
iniquitous, unconscionable and exorbitant, contrary to morals, and the law. The Kasulatan is
void ab initio for being violative of Article 1306 of the Civil Code. The legal interest of 12% per
annum should be imposed.
15

Siga-an v Villanueva
G.R. No. 173227. January 20, 2009
FACTS:
Alicia Villanueva, a businesswoman engaged in supplying office materials and
equipments to the Philippine Navy Office (PNO), received a loan of P 540,000.00 from
Sebastian Siga-an, a military officer and comptroller of the PNO. The loan was not written but
merely an oral agreement. There was no written agreement of the interest between the parties.
Villanueva issued two checks with a total worth of P700,000.00 in favor of Siga-an as payment
of the loan. These checks were encashed. The excess of P160,000.00 was for the payment of
the interest of the loan, unaware of the law on interest. Aside from issuing the said two checks,
Villanueva also paid the amount of P175,000.00 to Sig-an as additional interest. Villanueva was
compelled to pay this additional interest because Siga-an threatened to block or disapprove the
transaction of Villanueva with the PNO. Siga-an is alleging that Villanuava issued a promissory
note that provides that Villanueva is owing Siga-an capital and interest.
ISSUE: Whether or not there should be payment of interest?
RULING:
The promissory note was issued with intimidation from Siga-an. The promissory note
was made because of the fear of Villanueva from the threats of Siga-an. Furthermore, the law
expressly mandates as provided in Article 1956 of the Civil Code that there will be no interest
shall due unless it has been expressly stipulated in writing. Monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The concurrence of the two conditions is required for
the payment of monetary interest. However, if there was delay on payment, and even in the
absence of express stipulation, regarding payment of interest, the debtor is compelled to pay
compensatory interest which is different from the monetary interest in the case at bar. Thus, the
collection of interest without any stipulation in writing is prohibited by law. Villanueva is entitled
to reimbursement from the interest she paid to Siga-an.

16

Antonio Tan vs. Court of Appeals

GR No. 116285 (2001)
FACTS:
Antonio Tan (petitioner) obtained 2 loans, each for P2, 000,000 from Cultural Center of
the Philippines (CCP) evidenced by a promissory note in amount of P3, 411,421.32; payable in
5 installments. Petitioner defaulted but after a few partial payments he had the loans
restructured by respondent Cultural Center of the Philippines (CCP). Petitioner failed to pay any
installment on the said restructured loan. In a letter, petitioner requested and proposed to
respondent CCP a mode of paying the restructured loan a) 20% of the principal amount of the
loan upon the respondent giving its conformity to his proposal and b) the balance on the
principal obligation payable 36 monthly installments until fully paid. Petitioner requested for a
moratorium on his loan obligation until the following year allegedly due to a substantial
deduction in the volume of his business and on account of the peso devaluation. No favorable
response was made to said letters. Instead, CCP demanded full payment, within ten (10) days
from receipt of said letter P6, 088,735.03. CCP filed complaint for the collection of a sum of
money. Petitioner argues that there is no basis in law for the charging of interest on the
surcharges for the reason that the New Civil Code is devoid of any provision allowing the
imposition of interest on surcharges and there is no legal basis for the imposition of interest on
the penalty charge for the reason that the law only allows imposition of interest on monetary
interest but not the charging of interest on penalty, hence penalties should not earn interest.
ISSUE: Whether or not petitioner Tan is correct.
RULING:
Petition was denied. There are legal bases for the imposition of the interest on the
penalty and for charging of interest on surcharges. Art. 1226 provides In obligations 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. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation. In the case at bar, the promissory note expressed the imposition of
both interest and penalties in case of default on the part of the petitioner in the payment of
the subject restructured loan. Moreover, Article 2209 provides If the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there

17

being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum. In the case at bar,
the penalty charge of 2% per month began to accrue from the time of default by the
petitioner. The reckoning point is provided under Art. 2212: Interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent upon this point. In
the case at bar, the interest began to run on the penalty interest upon the filing of the complaint
in court by CCP. Therefore, petitioner is bound to pay the interest on the total amount of the
principal, the monetary interest and the penalty interest.

18

SPOUSES DAVID B. CARPO and RECHILDA S. CARPO

vs. ELEANOR CHUA and ELMA DY NG
G.R. Nos. 150773, September 30, 2005
TINGA, J.
FACTS:
On 18 July 1995, petitioners borrowed from Eleanor Chua and Elma Dy Ng the amount
of P175,000.00, payable within six (6) months with an interest rate of six percent (6%) per
month. To secure the payment of the loan, petitioners mortgaged their residential house and lot
situated at San Francisco, Magarao, Camarines Sur. Petitioners failed to pay the loan upon
demand. Consequently, the real estate mortgage was extrajudicially foreclosed and the
mortgaged property sold at a public auction. The house and lot was awarded to respondents,
who were the only bidders, for the amount of P367,457.80.
Upon failure of petitioners to exercise their right of redemption, a certificate of sale was
issued. The original TCT was cancelled and TCT No. 29338 was issued in the name of
respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and lot,
prompting respondents to file a petition for writ of possession with the RTC. The court issued
an Order for the issuance of a writ of possession. On the other hand, petitioners filed a
complaint for annulment of real estate mortgage and the consequent foreclosure proceedings.
Petitioners consigned the amount of P257,197.26 with the RTC.
Meanwhile, a temporary restraining order was issued upon motion enjoining the
enforcement of the writ of possession. The RTC suspended the enforcement of the writ of
possession pending the final disposition of real estate mortgage and the consequent foreclosure
proceedings. Against this Order, respondents filed a petition for certiorari and mandamus
before the CA.
ISSUE:
1.

Whether or not the agreed rate of interest of 6% per month or 72% per annum is so

excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and
void
19

2.

Whether or not the invalidity of the stipulation on interest carries with it the invalidity of the

principal obligation

RULING:
1.

Yes. It is apparent that the stipulated interest in the subject loan is excessive, iniquitous,

unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in

Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. In the ordinary course, the codal provision
may be invoked to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set in the above-cited cases, this stipulation is similarly invalid.
2.

The principal obligation subsists despite the nullity of the stipulated interest. Hence, it is

clear and settled that the principal loan obligation still stands and remains valid. By the same
token, since the mortgage contract derives its vitality from the validity of the principal obligation,
the invalid stipulation on interest rate is similarly insufficient to render void the ancillary
mortgage contract.

20

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S.

PANTALEON vs ARTHUR F. MENCHAVEZ
G.R. No. 160545; March 9, 2010
FACTS:
December 8, 1993, Pantaleon, President and Chairman of the Board of PRISMA,
obtained a P1M loan from the respondent, with monthly interest of P40,000.00 payable for 6
months, or a total obligation of P1,240,000.00 payable within 6 mos. To secure the payment of
the loan, Pantaleon issued a promissory. Pantaleon signed the promissory note in his personal
capacity and as duly authorized by the Board of Directors of PRISMA. The petitioners failed to
completely pay the loan within the 6-month period.
As of January 4, 1997, respondent found that the petitioners still had an outstanding
balance of P1,364,151.00, to which respondent applied a 4% monthly interest.
On August 28, 1997, respondent filed a complaint for sum of money to enforce the
unpaid balance, plus 4% monthly interest. In their Answer, the petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the interest
was not provided in the promissory note. Pantaleon also denied that he made himself personally
liable and that he made representations that the loan would be repaid within six (6) months.
RTC found that the respondent issued a check for P1M in favor of the petitioners for a
loan that would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a
6-month period. RTC ordered the petitioners to jointly and severally pay the respondent the
amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully paid.
Petitioners appealed to CA insisting that there was no express stipulation on the 4%
monthly interest. CA favored respondent but noted that the interest of 4% per month, or 48% per
annum, was unreasonable and should be reduced to 12% per annum. MR denied hence this
petition.
ISSUE:
Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of
interest apply to the 6-month payment period only or until full payment of the loan?

21

RULING:
Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith. When the terms of a contract are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs.
Courts have no authority to alter the contract by construction or to make a new contract for the
parties; a courts duty is confined to the interpretation of the contract the parties made for
themselves without regard to its wisdom or folly, as the court cannot supply material stipulations
or read into the contract words the contract does not contain. It is only when the contract is
vague and ambiguous that courts are permitted to resort to the interpretation of its terms to
determine the parties intent.
Article 1956 of the Civil Code specifically mandates that no interest shall be due unless
it has been expressly stipulated in writing. The payment of interest in loans or forbearance of
money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2)
the agreement for the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of interest at a stipulated rate. The collection of interest
without any stipulation in writing is prohibited by law.
The interest of P40,000.00 per month corresponds only to the six-month period of the
loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory
note. Thereafter, the interest on the loan should be at the legal interest rate of 12% per annum.
The facts show that the parties agreed to the payment of a specific sum of money of
P40,000.00 per month for six months, not to a 4% rate of interest payable within a 6-month
period.
No issue on the excessiveness of the stipulated amount of P40,000.00 per month was
ever put in issue by the petitioners; they only assailed the application of a 4% interest rate, since
it was not agreed upon.
Therefore, as agreed by the parties, the loan of P1M shall earn P40,000.00 per month
for a period of 6 months, for a total principal and interest amount of P1,240,000.00. Thereafter,
interest at the rate of 12% per annum shall apply. The amounts already paid by the petitioners
during the pendency of the suit, amounting toP1,228,772.00 as of February 12, 1999, should be
deducted from the total amount due, computed as indicated above.

22

The case was remanded to the trial court for the actual computation of the total amount
due.

23

SPOUSES EDUARDO and LYDIA SILOS vs. PHILIPPINE NATIONAL BANK

G.R. No. 181045, July 2, 2014
Facts:
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two
decades of operating a department store and buying and selling of ready-to-wear apparel.
Respondent Philippine National Bank (PNB) is a banking corporation organized and existing
under Philippine laws.
To secure a one-year revolving credit line of P150, 000.00 obtained from PNB,
petitioners constituted in August 1987 a Real Estate Mortgage over a 370-square meter lot in
Kalibo, Aklan covered by Transfer Certificate of Title No. (TCT) T-14250. In July 1988, the credit
line was increased to P1.8 million and the mortgage was correspondingly increased to P1.8
million. In July 1989, a Supplement to the Existing Real Estate Mortgage was executed to cover
the same credit line, which was increased to P2.5 million, and additional security was given in
the form of a 134-square meter lot covered by TCT T-16208. In addition, petitioners issued eight
Promissory Notes and signed a Credit Agreement. The eight Promissory Notes, on the other
hand, contained a stipulation granting PNB the right to increase or reduce interest rates "within
the limits allowed by law or by the Monetary Board. The Real Estate Mortgage agreement
provided the same right to increase or reduce interest rates "at any time depending on whatever
policy PNB may adopt in the future."
Petitioners religiously paid interest on the notes. In August 1991, an Amendment to
Credit Agreement was executed by the parties
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made
good on the promissory notes, religiously paying the interests without objection or fail. But in
1997, petitioners faltered when the interest rates soared due to the Asian financial crisis.
Petitioners sole outstanding promissory note for P2.5 million executed in July 1997 and due 120
days later or on October 28, 1997 became past due, and despite repeated demands, petitioners
failed to make good on the note. Thus, PNB foreclosed on the mortgage, and on January 14,
1999, TCTs T-14250 and T-16208 were sold to it at auction for the amount of P4,324,172.96.21
The sheriffs certificate of sale was registered on March 11, 1999.
On March 24, 2000, petitioners filed a civil case seeking annulment of the foreclosure
sale and an accounting of the PNB credit. Petitioners theorized that after the first promissory
note where they agreed to pay 19.5% interest, the succeeding stipulations for the payment of
interest in their loan agreements with PNB which allegedly left to the latter the sole will to
determine the interest rate became null and void. Petitioners added that because the interest
rates were fixed by respondent without their prior consent or agreement, these rates are void,
and as a result, petitioners should only be made liable for interest at the legal rate of 12%. They
claimed further that they overpaid interests on the credit, and concluded that due to this
overpayment of steep interest charges, their debt should now be deemed paid, and the
foreclosure and sale of TCTs T-14250 and T-16208 became unnecessary and wrongful. As for
24

the imposed penalty of P581,666.66, petitioners alleged that since the Real Estate Mortgage
and the Supplement thereto did not include penalties as part of the secured amount, the same
should be excluded from the foreclosure amount or bid price, even if such penalties are
provided for in the final Promissory Note.
On February 28, 2003, the trial court rendered judgment dismissing the Civil Case.
Petitioners appealed to the CA. The appeal was partly granted. Therefore decision of the
Regional Trial Court per Order dated June 4, 2003 was affirmed with modification.
Hence, this petition.
Issue: Whether or not the unilateral action of PNB in increasing rate violated the mutuality of
contracts under Article 1308 of the Civil Code.
Ruling:
Yes. The court held that the unilateral action of the PNB in increasing the interest rate on
the private respondents loan violated the mutuality of contracts ordained in Article 1308 of the
Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on their
essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties, is void
. . . . Hence, even assuming that the . . . loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there was none) to increase
the interest rate at will during the term of the loan, that license would have been null and
void for being violative of the principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker partys (the debtor) participation
being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
The Court ruled on Spouses Almeda v. Court of Appeals, that the binding effect of any
agreement between parties to a contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between the parties; and (2) that there must
be mutuality between the parties based on their essential equality. Any contract which appears
to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is
void. Any stipulation regarding the validity or compliance of the contract which is left solely to the
will of one of the parties, is likewise, invalid.

25

It is plainly obvious, therefore, from the undisputed facts of the case that respondent
bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates
on the loan without the prior assent of the latter. In fact, the manner of agreement is itself
explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be
due unless it has been expressly stipulated in writing." What has been "stipulated in writing"
from a perusal of interest rate provision of the credit agreement signed between the parties is
that petitioners were bound merely to pay 21% interest, subject to a possible escalation or deescalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the
limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this
is in fact readily resolved by a careful reading of the credit agreement because the same plainly
uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate.

26

DEPOSIT
Bank of the Philippine Island vs. Intermediate Appellate Court
G.R. No. L-66826, August 19, 1988

FACTS:
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in Commercial Bank and
Trust Company of the Philippines (COMTRUST), which was later on absorbed by the the Bank
of the Philippine Islands, a dollar savings account and a peso current account.
On December 8, 1975, Zshornack entrusted to COMTRUST, thru Virgilio Garcia,
assistant

Branch

Manager

of

COMTRUST

US

$3,000.00 cash (greenbacks)

for safekeeping, and that the agreement was embodied in a document stating that COMTRUST
already received the said amount in his dollar account for safekeeping. However, when
Zshornack demanded the return of the amount, the bank refused to do so. COMTRUST averred
that the sum was disposed of in this manner: US$2,000.00 was sold and the peso proceeds
amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip
accomplished by Garcia; the remaining US$1,000.00 was also sold later and the peso proceeds
amounting to P8,350.00 were deposited to his current account per deposit slip also
accomplished by Garcia. Thus, the US$3,000.00 was properly credited to Zshornack's current
account at prevailing conversion rates.
ISSUE:
Whether or not the contract between the parties is one of a deposit
RULING:
It is a contract of deposit defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
The document acknowledging the receipt of the money (greenbacks) by the bank for
safekeeping show that the intent of the parties was really for the bank to safely keep the dollars
27

and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money
on May 10, 1976, or over five months later.
Nothing in the document states that the parties intend to sell the US dollars to the
Central Bank within one business day from receipt. Otherwise, the contract of depositum would
never have been entered into at all.

28

DURBAN APARTMENTS CORPORATION/CITY GARDEN HOTEL

vs. PIONEER INSURANCE AND SURETY CORPORATION
G.R. NO. 179419,

January 12, 2011

NACHURA, J.:
FACTS:
On April 30, 2002, Jeffrey See arrived in a Suzuki Grand Vitara, and checked in at the
City Garden Hotel before midnight, and its parking attendant Vicente Justimbaste got the key to
said Vitara to park it, issuing See a valet parking customers claim stub. See was awakened by
a telephone call from the Hotel Chief Security Officer, Ernesto Horlador, Jr., informing him that
his Vitara was carnapped while it was parked unattended at the parking area of Equitable PCI
Bank, near City Garden Hotel. Forthwith, the incident was reported to the Makati City Police
Anti-Carnapping Unit, which conducted an investigation and found that a prior similar incident
happened in the Hotels valet parking service and that no necessary precautions were taken to
prevent its repetition. Thereafter, See recovered the amount of P1,163,250.00 from the car
insurer, Pioneer Insurance and Surety Corporation. Despite written demands by the latter to
Durban Apartments, no payment or reimbursement was made to the insurer. Hence, on July 22,
2003, Pioneer Insurance, by right of subrogation, filed a Complaint for Recovery of Damages
against Durban Apartments and Justimbaste, alleging that the latter was negligent in the
selection and supervision of its employee Justimbaste. During the pre-trial conference, both
Durban Apartments and Justimbaste, represented by Atty. Nestor Mejia, failed to file their pretrial brief, thus, they were declared in default and Pioneer Insurance was allowed to present its
evidence ex parte. The RTC of Makati City ruled in favor of Prioneer Insurance, ordering Durban
Apartments to pay the money claim with legal interest from July 22, 2003, plus attorneys fees
and costs of suit amounting to P120,000. This was affirmed by the CA, hence, this present
petition.
ISSUE: Whether or not Durban Apartments is liable to Pioneer Insurance for the loss of Sees
vehicle?
RULING:
The Court ruled in the affirmative. It is a rule that factual findings of the trial court,
especially when affirmed by the appellate court are accorded the highest degree of respect and
are considered conclusive between the parties. And that the petitioner was in default, thus,
29

correctly allowing the respondent to present evidence ex parte. On the merits of the case,
respondent Pioneer Insurance substantiated the allegations in its complaint, i.e., a contract of
necessary deposit existed between the insured Jeffrey See and petitioner Durban Apartments.
Article 1962, in relation to Article 1998 of the Civil Code defines a contract of deposit and a
necessary deposit made by persons in hotels or inns. Plainly, from the facts found by the lower
courts, the insured See deposited his vehicle for safekeeping with petitioner through the latters
employee Justimbaste who in turn issued a claim stub to See. Thus, the contract of deposit was
perfected from Sees delivery, when he handed over to Justimbaste the keys to his vehicle,
which Justimbaste received with the obligation of safely keeping and returning it. Therefore,
ultimately, petitioner is liable for the loss of Sees vehicle.

30

TRIPLE-V vs. FILIPINO MERCHANTS

G.R. No. 160544. February 21, 2005
FACTS:
On March 2, 1997 a certain Mary Jo-Anne De Asis dined at petitioner's Kamayan
Restaurant at 15 West Avenue, Quezon City. De Asis was using a Mitsubishi Galant Super
Saloon Model 1995, assigned to her by her employer Crispa Textile Inc. On said date, De Asis
availed of the valet parking service of petitioner and entrusted her car key to petitioner's valet
counter. A corresponding parking ticket was issued as receipt for the car. Few minutes later,
Madridano noticed that the car was not in its parking slot and its key no longer in the box where
valet attendants usually keep the keys of cars entrusted to them. The car was never recovered.
Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino Merchants
Insurance Company, Inc. (FMICI). Having indemnified Crispa in the amount of P669.500 for the
loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed with the RTC at Makati
City an action for damages against petitioner Triple-V Food Services, Inc.
ISSUE: Whether or not there is a Depositary contract when the De asis entrusted the car to the
petitioner.
RULING:
In a contract of deposit, a person receives an object belonging to another with the
obligation of safely keeping it and returning the same. A deposit may be constituted even
without any consideration. It is not necessary that the depositary receives a fee before it
becomes obligated to keep the item entrusted for safekeeping and to return it later to the
depositor. Specious is petitioner's insistence that the valet parking claim stub it issued to De
Asis contains a clear exclusion of its liability and operates as an explicit waiver by the customer
of any right to claim indemnity for any loss of or damage to the vehicle. The parking claim stub
embodying the terms and conditions of the parking, including that of relieving petitioner from any
loss or damage to the car, is essentially a contract of adhesion, drafted and prepared as it is by
the petitioner alone with no participation whatsoever on the part of the customers, like De Asis,
who merely adheres to the printed stipulations therein appearing. Petitioner must not be
allowed to use its parking claim stub's exclusionary stipulation as a shield from any
responsibility for any loss or damage to vehicles or to the valuables contained therein. Here, it is
evident that De Asis deposited the car in question with the petitioner as part of the latter's
enticement for customers by providing them a safe parking space within the vicinity of its
restaurant. In a very real sense, a safe parking space is an added attraction to petitioner's
restaurant business because customers are thereby somehow assured that their vehicle are
safely kept, rather than parking them elsewhere at their own risk. Having entrusted the subject
car to petitioner's valet attendant, customer De Asis, like all of petitioner's customers, fully
expects the security of her car while at petitioner's premises/designated parking areas and its
safe return at the end of her visit at petitioner's restaurant.

31

Spouses Alfredo and Estelita Lipat vs. Pacific Banking Corporation

GR No. 142435, April 30, 2003
Justice Quisumbing
FACTS:
The spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export Trading"
(BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon
City. BET was engaged in the manufacture of garments for domestic and foreign consumption.
The Lipats also owned the "Mystical Fashions" in the United States, which sells goods imported
from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to
manage BET in the Philippines while she was managing "Mystical Fashions" in the United
States. In order to facilitate the convenient operation of BET, Estelita Lipat executed on 14
December 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to
obtain loans and other credit accommodations from Pacific Banking Corporation (Pacific Bank).
She likewise authorized Teresita to execute mortgage contracts on properties owned or coowned by her as security for the obligations to be extended by Pacific Bank including any
extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting
to P583,854.00 to buy fabrics to be manufactured by BET and exported to "Mystical Fashions"
in the United States. As security therefor, the Lipat spouses, as represented by Teresita,
executed a Real Estate Mortgage over their property located at No. 814 Aurora Blvd., Cubao,
Quezon City. Said property was likewise made to secure other additional or new loans, etc. On
5 September 1979, BET was incorporated into a family corporation named Bela's Export
Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in
the business of manufacturing and exportation of all kinds of garments of whatever kind and
description and utilized the same machineries and equipment previously used by BET. Its
incorporators and directors included the Lipat spouses who owned a combined 300 shares out
of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives
and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the
vice-president and general manager. Eventually, the loan was later restructured in the name of
BEC and subsequent loans were obtained by BEC with the corresponding promissory notes
32

duly executed by Teresita on behalf of the corporation. A letter of credit was also opened by
Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after
BEC executed the corresponding trust receipt therefor. Export bills were also executed in favor
of Pacific Bank for additional finances. These transactions were all secured by the real estate
mortgage over the Lipats' property. The promissory notes, export bills, and trust receipt
eventually became due and demandable. Unfortunately, BEC defaulted in its payments. After
receipt of Pacific Bank's demand letters, Estelita Lipat went to the office of the bank's liquidator
and asked for additional time to enable her to personally settle BEC's obligations. The bank
acceded to her request but Estelita failed to fulfill her promise. Consequently, the real estate
mortgage was foreclosed and after compliance with the requirements of the law the mortgaged
property was sold at public auction. On 31 January 1989, a certificate of sale was issued to
respondent Eugenio D. Trinidad as the highest bidder.
On 28 November 1989, the spouses Lipat filed before the Quezon City RTC a complaint
for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint alleged,
among others, that the promissory notes, trust receipt, and export bills were all ultra vires acts of
Teresita as they were executed without the requisite board resolution of the Board of Directors
of BEC. The Lipats also averred that assuming said acts were valid and binding on BEC, the
same were the corporation's sole obligation, it having a personality distinct and separate from
spouses Lipat. It was likewise pointed out that Teresita's authority to secure a loan from Pacific
Bank was specifically limited to Mrs. Lipat's sole use and benefit and that the real estate
mortgage was executed to secure the Lipats' and BET's P583,854.00 loan only. In their
respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot
evade payments of the value of the promissory notes, trust receipt, and export bills with their
property because they and the BEC are one and the same, the latter being a family corporation.
Trinidad further claimed that he was a buyer in good faith and for value and that the Lipat
spouses are estopped from denying BEC's existence after holding themselves out as a
corporation. After trial on the merits, the RTC dismissed the complaint. The Lipats timely
appealed the RTC decision to the Court of Appeals in CA-G.R. CV 41536. Said appeal,
however, was dismissed by the appellate court for lack of merit. The Lipats then moved for
reconsideration, but this was denied by the appellate court in its Resolution of 23 February
2000. The Lipat spouses filed the petition for review on certiorari.

33

ISSUE:
Whether BEC and BET are separate business entities, and thus the Lipt spouses can
isolate themselves behind the corporate personality of BEC.
RULING:
No. When the corporation is the mere alter ego or business conduit of a person, the
separate personality of the corporation may be disregarded. This is commonly referred to as the
"instrumentality rule" or the alter ego doctrine, which the courts have applied in disregarding the
separate juridical personality of corporations. As held in one case, where one corporation is so
organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality
or adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be
disregarded. The control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the controlled corporation
has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its
principal. The evidence on record shows BET and BEC are not separate business entities. (1)
Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC,
respectively; (2) both firms were managed by their daughter, Teresita, 19 years of age; (3) both
firms were engaged in the garment business, supplying products to "Mystical Fashion," a U.S.
firm established by Estelita Lipat; (4) both firms held office in the same building owned by the
Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the
corporation itself had no visible assets; (8) the board of directors of BEC was composed of the
Burgos and Lipat family members; (9) Estelita had full control over the activities of and decided
business matters of the corporation; and that (10) Estelita Lipat had benefited from the loans
secured from Pacific Bank to finance her business abroad and from the export bills secured by
BEC for the account of "Mystical Fashion." It could not have been coincidental that BET and
BEC are so intertwined with each other in terms of ownership, business purpose, and
management.
Apparently, BET and BEC are one and the same and the latter is a conduit of and merely
succeeded the former. The spouses' attempt to isolate themselves from and hide behind the
corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the
34

classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. BEC is a
mere continuation and successor of BET, and the Lipat spouses cannot evade their obligations
in the mortgage contract secured under the name of BEC on the pretext that it was signed for
the benefit and under the name of BET.

35

CA-Agro Industrial Development Corporation v. Court of Appeals

G.R. No. 90027. March 3, 1993
Davide, JR., J:
FACTS:
Petitioner and the spouses Ramon and Paula Pugao entered into an agreement
whereby the former purchased from the latter two (2) parcels of land. Among the terms and
conditions of the agreement were that the titles to the lots shall be transferred to the petitioner
upon full payment of the purchase price and that the owner's copies of the certificates of titles
thereto and that title shall be deposited shall be deposited in a safety deposit box of any bank.
Petitioner and the Pugaos then rented Safety Deposit Box of private respondent Security Bank
and Trust Company. Thereafter, a certain Mrs. Margarita Ramos offered to buy from the
petitioner the two (2) lots. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank to open the safety deposit
box and get the certificates of title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates.
ISSUE: Whether or not the contractual relation between a commercial bank and another party is
one of a contract of rent of a safety deposit box with respect to its contents placed by the latter
one of bailor and bailee or one of lessor and lessee?
RULING:
The contract for the rent of the safety deposit box is not an ordinary contract of lease as
defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the
same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on
deposit; the contract in the case at bar is a special kind of deposit. It cannot be characterized as
an ordinary contract of lease under Article 1643 because the full and absolute possession and
control of the safety deposit box was not given to the joint renters the petitioner and the
Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither
of the renters could open the box. On the other hand, the respondent Bank could not likewise
open the box without the renter's key. In this case, the said key had a duplicate which was made
so that both renters could have access to the box.
36

BARTOLOME ORTIZ v. HON. UNION C. KAYANAN, in his capacity as Judge of the Court
of First Instance of Quezon, Branch IV; ELEUTERIO ZAMORA, QUIRINO COMINTAN,
VICENTE FERRO, AND GREGORIO PAMISARAN
G.R. No. L-32974. July 30, 1979.
FACTS:
(1) The lot in controversy was formerly the subject of Homestead Application of Martin Dolorico
II, plaintiffs ward who died; that since then it was plaintiff who continued the cultivation and
possession of the property, without however filing any application to acquire title thereon;
(2) That in the Homestead Application, Martin Dolorico II named his uncle, Martin Dolorico I as
his heir and successor in interest, so that in 1951 Martin Dolorico I executed an affidavit
relinquishing his rights over the property in favor of defendants Quirino Comintan and Eleuterio
Zamora, his grandson and son-in-law, respectively, and requested the Director of Lands to
cancel the homestead application;
(3) That on the strength of the affidavit, Homestead Application was cancelled and thereafter,
defendants Comintan and Zamora filed their respective sales applications; that plaintiff filed his
protest on alleging that he should be given preference to purchase the lot inasmuch as he is the
actual occupant and has been in continuous possession of the same since 1931; and inspite of
plaintiffs opposition,
(4) Portion A of the property was sold at public auction wherein defendant Comintan was the
only bidder; that an investigation was conducted on plaintiffs protest by Assistant Public Lands
Inspector Serapion Bauzon who submitted his report to the Regional Land Officer, and who in
turn rendered a decision, dismissing plaintiffs claim and giving due course to defendants sales
applications on the ground that the relinquishment of the homestead rights of Martin Dolorico I
in favor of Comintan and Zamora is proper, the former having been designated as successor in
interest of the original homestead applicant and that because plaintiff failed to participate in the
public auction, he is forever barred to claim the property;
(5) That plaintiff filed a motion for reconsideration of this decision which was denied by the
Director of Lands in his oreder dated June 10, 1959; that finally, on appeal to the Secretary of
Agriculture and Natural Resources, the decision rendered by the Regional Land Officer was
affirmed in toto.
(6) The CFI rendered judgment awarding one-half portion of the property in litigation in favor of
defendant QUIRINO COMINTAN, being the successful bidder in the public auction conducted
by the Bureau of Lands and hereby giving due course to the Sales Application of defendant
Eleuterio Zamora over the other half.
(7) The Appellate Court affirmed the decision of the trial court.
ISSUE:

37

Whether or not petitioner is still entitled to retain for his own exclusive benefit all the fruits of the
property for being a possessor in good faith.
RULING:
The Supreme Court held that even after his good faith ceases, the possessor in fact can
still retain the property, pursuant to Article 546 of the New Civil Code, until he has been fully
reimbursed for all the necessary and useful expenses made by him on the property. This right of
retention has been considered as one of the conglomerate of measures devised by the law for
the protection of the possessor in good faith. Its object is to guarantee the reimbursement of the
expenses, such as those for the preservation of the property, or for the enhancement of its utility
or productivity. It permits the actual possessor to remain in possession while he has not been
reimbursed by the person who defeated him in the possession for those necessary expenses
and useful improvements made by him on the thing possessed. The principal characteristic of
the right of retention is its accessory character. It is accessory to a principal obligation.
Considering that the right of the possessor to receive the fruits terminates when his good faith
ceases, it is necessary in order that this right to retain may be useful, to concede to the creditor
the right to secure reimbursement from the fruits of the property by utilizing its proceeds for the
payment of the interest as well as the principal of the debt while he remains in possession. This
right of retention of the property by the creditor, according to Scaevola, in the light of the
provisions of Article 502 of the Spanish Civil Code, is considered not a coercive measure to
oblige the debtor to pay, depriving him temporarily of the enjoyment of the fruits of his property,
but as a means of obtaining compensation for the debt.

38

YHT Realty, Lainez, Payam vs CA and McLoughlin

G.R. No. 126780. February 17, 2007
FACTS:
McLoughlin was an Australian businessman-philanthropist who met a certain Bhrunilda
Mata Tan and befriended him. Tan convinced McLoughlin to transfer from Sheraton Hotel and
stay at Tropicana Hotel during trips to the Philippines. Petitioners Lainez, as manager, Payam
and Danilo Lopez, had the custody of the keys for the safety deposit boxes, were all employees
at Tropicana.
McLoughlin started staying at said Tropicana Hotel and registered therein from
December 1984 to 1987. On October 30, 1987, McLoughlin arrived from Australia and
registered with Tropicana. He rented safety deposit box which could only be opened through the
use of 2 keys, one of which is given to the registered guest, and the other remaining in the
possession of the management of the hotel.
When a registered guest wished to open his safety deposit box, he alone could
personally request the management who then would assign one of its employees to accompany
the guest and assist him in opening the safety deposit box with the two keys. When McLoughlin
went for a trip in Hong Kong and without checking out the hotel, he left some US and Australian
dollars in the safety deposit box.
Upon his return, he went back to Australia; there he noticed that some USD 5000 and
jewellery he bought from Hong Kong were missing. When he came back to the Philippines,
again registered and rented a safety deposit box with Tropicana, placing therein some USD
15000, AUD 10000 and some important documents. He requested to open the safety deposit
box, but he found out that USD 2000, and AUD 4500 were missing. He confronted Lainez and
Payam; they told him that Tan was able to open the safety deposit box. Tan admitted to the said
actuation and added that she was assisted by Lainez, Lopez and Payam. Lopez wrote a PN and
requested Tan to sign it, which the latter did. Despite the execution of the PN, McLoughlin
insisted that it must be the hotel who must assume responsibility for the loss he suffered.
However, Lopez refused to accept the responsibility relying on the conditions for renting the
deposit box, which held free and blameless Tropicana for any loss in the contents of the safety
deposit box.
ISSUE: WON a hotel may evade liability for the loss of items left with it for safekeeping by its
guests, by having these guests execute written waivers holding the establishment or its

39

employees free from blame for such loss in light of Article 2003 of the Civil Code which voids
such waivers?
RULING:
No. Petitioners were directed, jointly and severally, to pay private respondent.
Article 2003 provides that the hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought by the guest. Any
stipulation between the hotel-keeper and the guest whereby the reasonability of the former as
set for the in articles 1998 to 2001 is suppressed or diminished shall be void. The hotel business
like the common carrier's business is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons
and belongings. The twin duty constitutes the essence of the business. The law in turn does not
allow such duty to the public to be negated or diluted by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on guests
for their signature.
In an early case, to hold hotel-keepers or innkeepers liable for the effects of their guests,
it is not necessary that they be actually delivered to the innkeepers or their employees. It is
enough that such effects are within the hotel or inn. With greater reason should the liability of
the hotelkeeper be enforced when the missing items are taken without the guests knowledge
and consent from a safety deposit box provided by the hotel itself.
The undertaking manifestly contravened Article 2003 of the Civil Code it allowed
Tropicana to be released from liability arising from any loss in the contents of the safety deposit
box for any cause whatsoever. Evidently, the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit box whether or not negligence was
incurred by Tropicana or its employees.
The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to
loss of, or injury to, the personal property of the guests even if caused by servants or employees
of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force
majeure. It is the loss through force majeure that may spare the hotel-keeper from liability. In the
case at bar, there is no showing that the act of the thief or robber was done with the use of arms
or through an irresistible force to qualify the same as force majeure.

40

GUARANTY
Dio vs. Court of Appeals (1992)
G.R. No. 89775. November 26, 1992
FACTS:
In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru its representative Uy
Tiam, applied for and obtained credit accommodations from Metrobank in the sum of
Php700,000. This was secured by Continuing Suretyships separately executed by petitioners
Norberto Uy (who agreed to pay Php300,000) and Jacinto Dio (who bound himself liable up to
Php800,000). Uy Tiam paid the obligation under this letter of credit in 1977. UTEFS obtained
another credit accommodation in 1978, which was likewise settled before he applied and
obtained another in 1979 in the sum of Php815,600. This sum covered UTEFS purchase of
fertilizers from Planters Producst. Uy and Dio did not sign the application for this credit and
were not asked to execute suretyship or guarantee. UTEFS executed a trust receipt whereby it
agreed to deliver to Metrobank the goods in the event of non-sale, and if sold, the proceeds will
be delivered to Metrobank. However, UTEFS did not comply with its obligation. As a result,
Metrobank demanded payment from UTEFS and the sureties, Uy & Dio. The sureties refused
to pay on the ground that the obligation for which they executed the continuing suretyship
agreement has been paid. RTC ruled in favor of the petitioners, CA affirmed.
ISSUE: Whether or not the petitioners are liable for payment of the 1979 transaction under the
continuing suretyship agreement they executed in 1977. Assuming that they are, what is the
extent of their liability.
RULING:
The Supreme Court held that Uy & Dio are liable. The agreement they executed in
1977 is a continuing suretyship, one which is not limited to a single transaction but which
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable.
The agreement that petitioners signed expressly provided that it is a continuing guaranty and
shall be in full force and effect until written notice to the bank that it has been revoked by the
surety. As to the 2nd issue, petitioners are only liable up to the maximum limit fixed in the
continuing suretyship agreements (Php800,000 for Dio and Php300,000 for Uy). The law is
clear that a guarantor may bind himself for less, but not for more than the principal debtor, both

41

as regards the amount and the onerous nature of the conditions (Art. 2054). CA decision
ordering petitioners to pay P2,397,883.68 which represents the amount due inclusive of interest
and charges, is modified.

42

Escano vs. Ortigas

G.R. no. 151953, June 29, 2007
FACTS:
On 28 April 1980, Private Development Corporation of the Philippines (PDCP) entered
into a loan agreement with Falcon Minerals, Inc., whereby PDCP agreed to make available and
lend to Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms
and conditions. On the same day, three stockholders-officers of Falcon, namely: respondent
Rafael Ortigas, Jr., George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed to assume in their individual capacity, solidary liability
with Falcon for the due and punctual payment of the loan contracted by Falcon with PDCP. In
the meantime, two separate guaranties were executed to guarantee the payment of the same
loan by other stockholders and officers of Falcon, acting in their personal and individual
capacities. One Guaranty was executed by petitioner Salvador Escao, while the other by
petitioner Mario M. Silos, Ricardo C. Silverio, Carlos L. Inductivo and Joaquin J. Rodriguez.
ISSUE:
Whether or not the obligation to repay is solidary
RULING:
When there is a concurrence of two or more creditors or of two or more debtors in one
and the same obligation, Art. 1207 of the NCC states that among them, there is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. Art.1210 supplies further caution against the broad interpretation of
solidarity by providing the indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility. This provision established that in the
case of concurrence of two or more creditors or of two or more debtors in one and the same
obligation, and in the absence of express and indubitable terms characterizing the obligation as
solidary, the presumption is that the obligation is only joint. It thus becomes incumbent upon the
party alleging that the obligation is indeed solidary in character to prove such fact with a
preponderance of evidence. Note that art. 2047 itself specifically calls for the application of the
provision on joint and solidary obligation to surety-ship contracts. Art.1217 of the NCC thus
comes into play, recognizing the right of reimbursement from a co-debtor in favor of the one who
43

paid. However, a significant distinction still lies between a joint and several debtors, on one
hand, and a surety on the other hand. Solidarity signifies that the creditor can compel anyone of
the joint and several debtors or the surety alone to answer for entirety of the principal debt. The
difference lies in the respective faculties of the joint and several debtors and the surety to seek
reimbursement for the sums they paid out to the creditor.

44

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ v. THE COURT OF APPEALS and BANK OF
THE PHILIPPINE ISLANDS
G.R. No. 145578. November 18, 2005
CARPIO, J.:
FACTS:
Jose Tupaz and Petronila Tupaz were Vice-President for Operations and VicePresident/Treasurer, respectively, of El Oro Corporation. El Oro Corporation had a contract with
the PH Army to supply the latter with survival bolos. To finance the purchases of the raw
materials for the bolos, the petitioners (on behalf of El Oro) applied with BPI for 2 commercial
letters of credit.
The letters of credit were in favor of El Oros suppliers, Tanchaoco Incorporated and
Maresco Corporation. BPI granted the application and issued the letters of credit for
P564,871.05 and P294,000.00 to Tanchaoco Incorporated and Maresco Corporation
respectively.
Simultaneous with the issuance of the letters of credit, the petitioners signed trust
receipts in favor of BPI: (a) Jose signed in his personal capacity a trust receipt corresponding for
the first letter of credit, binding himself to sell the goods and to remit the proceeds to BPI, if sold,
or to return the goods, if not sold, on or before 29December 1981; (b) both petitioners signed in
their capacities as officers of El Oro a trust receipt covering the second letter of credit to remit
proceeds/return goods by 8 December 1981. Tanchauco Incorporated and Maresco Corp.
complied with their obligation and delivered the raw materials to El Oro. BPI then paid the
2 corporations P564, 871.05 and P294,000 accordingly.
However, petitioners did not comply with their undertakings under the trust receipts. BPI
made several demands for payment but El Oro made partial payments only. Final demand
letters were then sent but El Oro replied that it could not fully pay its debt because the AFP
had delayed in their payment for the bolos.
BPI charged petitioners with estafa under Sec. 13 of the Trust Receipts Law. In the RTC,
petitioners were acquitted based on reasonable doubt. However, they are solidarily liable with El
Oro for the balance of the principal debt under the trust receipts. The Court of Appeals affirmed
RTCs decision. The trust receipts clearly showed the terms that the petitioners signed the same
as surety for the corporation and that they bound themselves directly and immediately liable in
case of default without need of demand.
ISSUES:
(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts
under the trust receipts;
(2) If so:

45

(a) Whether petitioners liability is solidary with El Oro Corporation; and

(b) Whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their civil
liability.
RULING:
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are not theirs
but the direct liability of the corporation they represent. As an exception, directors or officers are
personally liable for the corporations debts only if they so contractually agree or stipulate. Jose
Tupaz is liable as GUARANTOR.
Jose Tupazs acquittal did not extinguish his civil liability.
The rule is that where the civil action is impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal - where the acquittal is based on reasonable doubt as
only preponderance of evidence is required in civil cases; where the court expressly declares
that the liability of the accused is not criminal but only civil in nature as, for instance, in the
felonies of estafa, theft, and malicious mischief committed by certain relatives who thereby incur
only civil liability (See Art. 332, Revised Penal Code); and, where the civil liability does not arise
from or is not based upon the criminal act of which the accused was acquitted.
Here, BPI chose not to file a separate civil action to recover payment under the trust
receipts. Instead, BPI sought to recover payment in the criminal cases. Although the trial court
acquitted Jose Tupaz, his acquittal did not extinguish his civil liability. As the Court of Appeals
correctly held, his liability arose not from the criminal act of which he was acquitted (ex delito)
but from the trust receipt contract (ex contractu). Jose Tupaz signed the trust receipt in his
personal capacity.

46

Palmares v. Court of Appeals

G.R. No. 126490, March 31, 1998
Regalado, J.:
FACTS:
Private respondent M.B. Lending Corporation extended a loan in the amount of 30, ooo
pesos payable on or before May 12, 1990 to Spouses Osmena and Merlyn Azarraga together
with petitioner Estrella Palmares pursuant to a promissory note dated March 13, 1990.
Petitioner Palmares and the spouses were able to pay a total of 16,300 pesos but after
September 26, 1991, no payments were made by the spouses leaving a balance of 13,700
pesos. Consequently, M.B. Lending Corporation filed a complaint against petitioner Palmares on
the basis of her solidary liability under the promissory note to the exclusion of the principal
debtors by reason of insolvency.
Palmares liability under the promissory note is expressed in the second and third
paragraph:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable
with the above principal maker of this note
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment
of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in
the payment of the note subject to the same conditions above-contained.
ISSUE: Whether or not the act of Palmares in signing a promissory note as a co-maker and
binding herself to be jointly and severally liable with the principal debtors in case of the latter
defaults in the payment of the loan is deemed to be that of a guarantor who warrants the
solvency of the debtor?
RULING:

47

NO. The Court held that it is a cardinal rule in the interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. In this case, Palmares expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of the note. Thus, the terms of
the contract are clear, explicit and unequivocal that petitioners liability is that of a surety.
***Important Points in this case:
Difference between Suretyship and Guaranty
Guaranty

Suretyship

An insurer of the solvency of the debtor

An undertaking that the debtor shall pay
or a guarantor agrees that the creditor
after proceeding against the principal
may proceed against the guarantor if
the principal is unable to pay
A guarantor contracts to pay if by the
use of due diligence, the debt cannot
be made out of the principal debtor.

An insurer of the debt

An undertaking that the debt shall be
paid or a surety promises to pay the
principals debt if the principal will not
pay
Undertakes directly for the payment
and is so responsible at once if the
principal debtor makes default
A surety is not entitled as a matter of
right to be given notice of the principals
default; surety is bound to take notice of
principals default and to perform the
obligation

The creditor has the right to proceed even against the surety alone if the obligation is
joint and several since the obligation of the surety is the same as that of the principal.
Where a creditor refrains from proceeding against the principal, the surety is not
exonerated. In other words, 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.

48

PHIL. BLOOMING MILLS INC. vs. COURT OF APPEALS

GR. No. 142381, Oct. 15, 2003
FACTS:
C h i n g w a s t h e S e n i o r V i c e - P r e s i d e n t o f P h i l . B l o o m i n g M i l l s I n c . ( P B M ) . In
his personal capacity and not as a corporate officer, signed a Deed of Suretyship dated 21 July
1977 binding himself as a primary obligor and not as mere guarantor of PBM. Subsequently,
PMB obtained a loan from Traders Royal Bank (TRB). When the latter failed to pay its loan,
TRB filed an action holding Ching liable under the Deed of Suretyship.
However, Ching asserted that the Deed of Suretyship dated 21 July 1977 could not
answer for obligations not yet in existence at the time of its execution. Specifically, Ching
maintained that the Deed of Suretyship could not answer for debts contracted by PBM in 1980
and 1981. Ching contended that no accessory contract of suretyship could arise without an
existing principal contract of loan.

ISSUE: Whether or not Ching is liable for credit obligations contracted by Philippine
Blooming Mills Inc. against Traders Royal Bank before and after the execution of the Deed of
Suretyship
RULING:
The court held that Ching is liable for credit obligations contracted by Philippine
Blooming Mills Inc. against Traders Royal Bank before and after the execution of the
Deed of Suretyship. This is evident from the tenor of the deed itself, referring to
amounts to PBM may now be indebted or may hereafter become indebted to
Traders Royal Bank. The law expressly allows a suretyship for future debts. Article
2053 provides that 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.
Furthermore, Article 2053 is the basis for contracts denominated as continuing guaranty
or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective in its operation and is generally intended to
49

provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise
stated, a continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof. A guaranty shall be construed as continuing when by the terms
thereof it is evident that the object is to give a standing credit to the principal debtor to be used
from time to time either indefinitely or until a certain period; especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract states that the guaranty is to secure
advances to be made "from time to time," it will be construed to be a continuing one.

50

BENJAMIN BITANGA vs. PYRAMID CONSTRUCTION ENGINEERING CORPORATION

G.R. No. 173526; August 28, 2008
CHICO-NAZARIO, J.:
FACTS:
Pyramid Construction Engineering Corp. entered into an agreement with Macrogen
Realty, of which Bitanga is the President, to construct the Shoppers Gold Building. PCEC
commenced civil, structural, and architectural works on the construction project. However,
Macrogen Realty failed to settle respondents progress billings. Bitanga assured respondent that
the account would be paid, and requested to continue working on the project.
In August 1998, PCEC suspended work on the construction since the payment of
unsettled accounts had not been complied with. Respondent instituted with the Construction
Industry Arbitration Commission (CIAC) a case for arbitration against Macrogen Realty. Before
the arbitration could be set for trial, PCEC and Macrogen Realty entered into a Compromise
Agreement where Macrogen Realty agreed to pay P6,000,000.00 in six monthly installments,
with each installment to be delivered on the 15 th day of the month. Macrogen Realty agreed that
if it would default in the payment of two successive monthly installments, immediate execution
could issue against it for the unpaid balance, without need of judgment or decree from any court
or tribunal.
Bitanga guaranteed the obligations of Macrogen Realty by executing a Contract of
Guaranty. CIAC approved the Compromise Agreement. However, Macrogen Realty failed and
refused to pay all the monthly installments. Hence, respondent moved for the issuance of a writ
of execution which CIAC granted.
The sheriff filed a return stating that he was unable to locate any property of Macrogen
Realty, except its bank deposit of P20,242.33, with the Planters Bank. PCEC then madea
written demand on petitioner, as guarantor of Macrogen Realty, to pay the P6,000,000.00, or to
point out available properties of the Macrogen Realty within the Philippines sufficient to cover
the obligation guaranteed. Yet, respondents demands were left unheeded.

51

The RTC ruled that Bitanga and Marilyn to pay the amount less the bank deposit of
Macrogen Realty with Planters Bank. Marilyn filed a Motion to Dismiss asserting that
respondent had no cause of action against her, since she did not co-sign the Contract of
Guaranty with her husband but was dismissed. The CA found Marilyn not liable which it
declared that a contract cannot be enforced against one who is not a party to it. The Court of
Appeals stated further that the substantial ownership of shares in Macrogen Realty by Marilyn
Bitanga was not enough basis to hold her liable.
ISSUE: Whether or not Bitanga is entitled to the benefit of excussion?
RULING:
NO. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. The guarantor who
pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted all the property of the debtor and
resorted to all the legal remedies against the debtor.
Article 2060 of the Civil Code requires that in order for the guarantor to make use of the
benefit of excussion, he must set it up against the creditor upon the latters demand for payment
and point out to the creditor available property of the debtor within the Philippines sufficient to
cover the amount of the debt.
It must be stressed that despite having been served a demand letter, Bitanga still failed
to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as
required. Such failure on petitioners part forecloses his right to set up the defense of excussion.

52

JN DEVELOPMENT CORPORATION and SPS. RODRIGO and LEONOR STA. ANA v.

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION
[G.R. No. 151060. August 31, 2005]
FACTS:
JN Development Corporation (JN) and Traders Royal Bank (TRB) entered into an
agreement that the latter would extend to JN an Export Packing Credit Line for two million pesos
(P2, 000,000). The loan was covered by several securities, including a real estate mortgage and
a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee
Corporation (Phil Guarantee), covering seventy percent (70%) of the credit line, with the latter
issuing a guarantee in favor of TRB.
For failure of petitioner JN to pay upon maturity, Respondent was made to pay. When JN
failed to reimburse the latter, respondent filed a Complaint for collection of money and damages
against herein petitioners.
The RTC dismissed respondents Complaint as well as the counterclaim of petitioners. It
ruled that petitioners are not liable to reimburse Phil Guarantee what it had paid to TRB since
the latter was able to foreclose the real estate mortgage executed by JN, thus extinguishing
petitioners obligation. According to the RTC, the failure of TRB to sue JN for the recovery of the
loan precludes Phil Guarantee from seeking recoupment from what it paid to TRB. Thus, Phil
Guarantees payment to TRB amounts to a waiver of its right under Art. 2058 of the Civil Code.
ISSUE:
Whether or not petitioner is still liable to indemnify the guarantor despite the latter
seemingly waiving its right to excussion.
RULING:
Yes. The Court held that Phil Guarantees waiver of the right of excussion cannot
prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor
to indemnify the guarantor what the latter has paid. Under a contract of guarantee, the
guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.

53

The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However,
the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal remedies against the debtor. This is what is
otherwise known as the benefit of excussion.

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STRONGHOLD INSURANCE COMPANY, INC. VS. TOKYU CONSTRUCTION COMPANY,

LTD.
G.R. Nos. 158820-21, June 5, 2009
NACHURA, J.:
FACTS:
Tokyu Construction Company(respondent), Ltd., a member of a consortium of four (4)
companies, was awarded by the Manila International Airport Authority a contract for the
construction of the Ninoy Aquino International Airport (NAIA) Terminal 2 (also referred to as the
project). On July 2, 1996, respondent entered into a Subcontract Agreement with G.A. Gabriel
Enterprises, owned and managed by Remedios P. Gabriel (Gabriel), for the construction of the
projects Storm Drainage System (SDS) for P33,007,752.00 and Sewage Treatment Plant (STP)
for P23,500,000.00, or a total contract price of P56,507,752.00. The parties agreed that the
construction of the SDS and STP would be completed on August 10, 1997 and May 31, 1997,
respectively.
In accordance with the terms of the agreement, respondent paid Gabriel 15% of the
contract price, as advance payment, for which the latter obtained from petitioner Stronghold
Insurance Company, Inc. Surety Bonds

dated February 26, 1996 and April 15, 1996, to

guarantee its repayment to respondent. Gabriel also obtained from petitioner Performance
Bonds to guarantee to respondent due and timely performance of the work. Both bonds were
valid for a period of one year from date of issue.
Gabriel defaulted in the performance of her obligations. On February 10, 1997, in a
letter sent to Gabriel, respondent manifested its intention to terminate the subcontract
agreement. Respondent also demanded that petitioner comply with its undertaking under its
bonds. On February 26, 1997, both parties (respondent and Gabriel) agreed to revise the scope
of work, reducing the contract price for the SDS phase from P33,007,752.00 to P1,175,175.00
and the STP from P23,500,000.00 to P11,095,930.50,fixing the completion time on May 31,
1997.
Gabriel thereafter obtained from Tico Insurance Company, Inc. (Tico) Surety and
Performance Bonds to guarantee the repayment of the advance payment given by respondent
to Gabriel and the completion of the work for the SDS, respectively.

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Still, Gabriel failed to accomplish the works within the agreed completion period.
Eventually, on April 26, 1997, Gabriel abandoned the project. Respondent made formal
demands against petitioner and Tico to make good their obligations under their respective
performance and surety bonds. However, all of them failed to heed respondents demand.
Respondent prayed that Gabriel, Tico, and petitioner be held jointly and severally liable for the
payment of the additional costs it incurred in completing the project covered by the subcontract
agreement.
ISSUE: Whether Stronghold can be held liable on its bonds
RULING:
YES. Strongholds liability was not affected by the revision of the contract price, scope of
work, and contract schedule. Neither was it extinguished because of the issuance of new bonds
procured from Tico. As early as February 10, 1997, respondent already sent a letter to Gabriel
informing the latter of the delay incurred in the performance of the work, and of the formers
intention to terminate the subcontract agreement to prevent further losses. Apparently, Gabriel
had already been in default even prior to the aforesaid letter; and demands had been previously
made but to no avail. By reason of said default, Gabriels liability had arisen; as a consequence,
so also did the liability of petitioner as a surety arise.
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. By its very nature, under the laws regulating
suretyship, the liability of the surety is joint and several but is limited to the amount of the bond,
and its terms are determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee. By the language of the bonds issued by
petitioner, it guaranteed the full and faithful compliance by Gabriel of its obligations in the
construction of the SDS and STP specifically set forth in the subcontract agreement, and the
repayment of the 15% advance payment given by respondent. These guarantees made by
petitioner gave respondent the right to proceed against the former following Gabriels noncompliance with her obligation.
Indeed, 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

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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.
However, a surety is not released by a change in the contract, which does not have the
effect of making its obligation more onerous. In the instant case, the revision of the subcontract
agreement did not in any way make the obligations of both the principal and the surety more
onerous. To be sure, petitioner never assumed added obligations, nor were there any additional
obligations imposed, due to the modification of the terms of the contract. Failure to receive any
notice of such change did not, therefore, exonerate petitioner from its liabilities as surety.
Neither can petitioner be exonerated from liability simply because the bonds it issued were
replaced by those issued by Tico.
Notwithstanding the issuance of the new bonds, the fact remains that the event insured
against, which is the default in the performance of Gabriels obligations set forth in the
subcontract agreement, already took place. By such default, petitioners liability set in. Thus,
petitioner remains solidarily liable with Gabriel, subject only to the limitations on the amount of
its liability as provided for in the Bonds themselves.

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SPOUSES ALFREDO and SUSANA ONG

vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
G.R. No. 160466. January 17, 2005
PUNO, J.:
FACTS:
Petitioners-spouses Alfredo and Susana Ong, its President and Treasurer, respectively of
Baliwag Mahogany Corporation (BMC), a domestic corporation engaged in the manufacture and
export of finished wood products, obtained a loan from respondent where they sign as sureties on
three (3) promissory notes issued to secure some of BMCs loans, totalling five million pesos
(P5,000,000.00).
On April 20, 1992, respondent Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB) considered debtor BMC in default of its
obligations and sought to collect payment from petitioners-spouses as sureties. Respondent filed a
case for collection of a sum of money against petitioners-spouses.
The complaint alleged that in 1991, BMC needed additional capital for its business and
applied for various loans, amounting to P5M which respondent granted under the terms of the notes
which 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 BMCs insolvency, or if it is declared to be in a state of suspension of payments.
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.
On October 13, 1992, a Memorandum of Agreement (MOA) was executed by debtor BMC, and the
consortium of creditor banks of BMC (respondent bank is included). The MOA took effect upon its
approval by the SEC on November 27, 1992.
Thereafter, petitioners-spouses moved to dismiss the complaint, arguing that 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

58

acted as BMCs 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 courts 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.
ISSUE: Whether or not the collection suit of respondent to petitioners as surety should prosper.
RULING:
No. 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 BMCs 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.
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, 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

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collection suits against BMC. Respondent banks 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.
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
Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties
can prosper. The trial courts denial of petitioners motion to dismiss was proper.

60

E. ZOBEL, INC. v. THE COURT OF APPEALS

G.R. No. 113931 May 6, 1998
FACTS:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation (now
SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to finance the purchase of two maritime barges and one tugboat which would
be used in their molasses business secured by a chattel mortgage over the three vessels to be
acquired and a Continuing Guaranty by Ayala International Philippines, Inc., as petitioner E.
Zobel, Inc., in favor of SOLIDBANK.
Respondent spouses defaulted in the payment upon maturity. SOLIDBANK filed a
complaint for sum of money with a prayer for a writ of preliminary attachment. Petitioner moved
to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished
pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to
be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the
chattel mortgage with the appropriate government agency. SOLIDBANK opposed the motion
contending that Article 2080 is not applicable because petitioner is not a guarantor but a surety.
The document referred to as "Continuing Guaranty" dated August 21, 1985 (Exh. 7) states as
follows: "For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now
obligated to you as surety and in order to induce you, in your discretion, at any other manner, to
or at the request or for the account of the borrower..."
ISSUE:
Whether or not petitioner under the "Continuing Guaranty"obligated itself to SOLIDBANK
as a guarantor or a surety.
RULING:
A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.

61

A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of
another in case the latter does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety is
usually bound with his principalby the same instrument, executed at the same time, and on the
same consideration. He is an original promissor and debtor from the beginning, and is held,
ordinarily, to know every default of his principal. Usually, he 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. On the other hand, the contract of
guaranty is the gurantor's own separate undertaking, in which the principal does not join.
In the case at bar, E. Zobel, Inc. signed as surety. Even the title of the document in
"Continuing Guranty," the court's interpretation is not limited to the title alone but to the contents
and intention of the parties more specifically if the language is clear and positive. The obligation
of defendant Zobel being that of a surety, Article 2080 of the New Civil Code will not apply as it
is only for those acting as guarantor. In fact, in the letter of defendants to plaintiff, it is requesting
that the chattel mortgage on the vessels and tugboat be waived or rescinded by the bank
inasmuch as the said loan is covered by the Continuing Guranty by Zobel in favor of the plaintiff
thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition
of the guaranty.

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