Atok Finance Corporation v.

CA, 222 SCRA 232, (1993)

Atok vs. CA (222 SCRA 232, G.R. No. 80078, May 18, 1993) ATOK
FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS,
SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B.
ARRIETA, PABLITO BERMUNDO and LEOPOLDO
HALILI, respondents. FACTS: Atok and Sanyu Chemical entered
into a Continuing Suretyship Agreement in favor of Atok Finance
with the latter being the creditor and Sanyu Chemical and several
stockholders as sureties. SanyuChemical, in consideration of
receipt from Atok Finance of the amount of P105,000.00, assigned
several receivables in favor of Atok. Later, additional trade
receivables were assigned by Sanyu Chemical to Atok Finance
with a total face value of P100,378.45. Atok Finance commenced
action against Sanyu Chemical, and the sureties before the RTC to
collect the sum of P120,240.00. Atok Finance alleged that Sanyu
Chemical had failed to collect and remit the amounts due under
the trade receivables. Sanyu Chemical and the individual private
respondents sought dismissal of Atok's claim upon the ground
that such claim had prescribed under Article 1629 of the Civil
Code and for lack of cause of action. The private respondents
contended that the Continuing Suretyship Agreement, being an
accessory contract, was null and void since, at the time of its
execution, Sanyu Chemical had no pre-existing obligation due to
Atok Finance. It is the contention of respondents that the
suretyship agreement is null and void because it is not in
consonance with the laws on guaranty and security. The said
agreement was entered into by the parties two years before the
Deed of Assignment was executed. Thus, allegedly, it ran counter
to the provision that guaranty cannot exist independently
because by nature it is merely an accessory contract: first,
because this contract, just like guaranty, cannot exist without a
valid obligation (Art. 2052, Civil Code); and, second, although it
may be given as security for future debt (Art. 2053, C.C.), the
obligation contemplated in the case at bar cannot be considered
'future debt' as envisioned by this law ISSUES. 1. May a surety
agreement, being an accessory contract, be effected to secure
future (non-existing) debts? May the continuing suretyship
agreement be declared null and void for alleged lack of
consideration since there was still no pre-existing obligation for
the surety to attach to? 2. WON private respondents are liable
under the Deed of Assignment which they, along with the
principal debtor Sanyu Chemical, executed in favor of petitioner,
on the receivables thereby assigned. HELD1. Surety agreements
may secure future debts. It is true that a guaranty or a suretyship
agreement is an accessory contract in the sense that it is entered
into for the purpose of securing the performance of another
obligation which is denominated as the principal obligation. It is
also true that Article 2052 of the Civil Code states that "a
guarantee cannot exist without a valid obligation." This legal
proposition is not, however, like most legal principles, to be read
in an absolute and literal manner and carried to the limit of its
logic. The argument of respondents has been debunked in the
cases of National Rice and Corn Corporation (NARIC) v. Jose A.
Fojas and Alto Surety Co., Inc. and in Rizal Commercial Banking
Corporation v. Arro. In NARIC v Fojas: This defense is untenable,
because in its complaint the NARIC averred, and the appellant did
not deny that these bonds were posted to secure the additional
credit that Fojas has applied for, and the credit increase over his
original contract was sufficient consideration for the bonds. That
the latter were signed and filed before the additional credit was
extended by the NARIC is no ground for complaint. Article 1825 of
the Civil Code of 1889, in force in 1948, expressly recognized that
'a guaranty may also be given as security for future debts the
amount of which is not yet known. In RCBC v Arro: The surety
agreement which was earlier signed by Enrique Go., Sr. and
private respondent, is an accessory obligation, it being dependent
upon a principal one which, in this case is the loan obtained by
Daicor as evidenced by a promissory note. What obviously
induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil
Code.
Ongsiako v. The World Wide Insurance, 104 Phil 61, (1958)

Today is Monday, March 06, 2017

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-12077 June 27, 1958

EMMANUEL C. ONGSIAKO, ET AL., plaintiffs,

vs.
THE WORLD WIDE INSURANCE and SURETY CO., INC., ET AL., defendan

THE WORLD WIDE INSURANCE and SURETY CO. INC.,cross-claimant-app

vs.
CATALINA DE LEON, cross-defendant-appellee.

Villareal and Amacio for appellant.

Mariano M. Magsalin and Macario L. Nicolas for appellee.

BAUTISTA ANGELO, J.:

On November 10, 1951, Catalina de Leon executed in favor of Augusto V. Ong

promissory note in the amount of P1,200.00, payable ninety (90) days after d
with interest at 1 per cent per month. On the same date, a surety bond was
executed by Catalina de Leon, as principal, and the World Wide Insurance & S
Co., Inc., as surety, whereby they bound to pay said amount jointly and sever
Augusto V. Ongsiako. As the obligation was not paid on its date of maturity ei
Catalina de Leon or by the surety notwithstanding the demands made upon t
Ongsiako brought this action on March 6, 1953 in the Municipal Court of Mani
recover the same from both the principal and the surety. Judgment having be
rendered for the plaintiff, both defendants appealed to the court of first insta
the latter court, Catalina de Leon failed to answer and so she was declared in
default. In due time the surety company filed its answer setting up a counterc
against plaintiff and a cross-claim against its co-defendant.

After hearing, the court rendered judgment ordering Catalina de Leon to pay
the sum of P1,200.00, with interest at the rate of 1 per cent per month from
February 10, 1952, and the sum of P300.00 as attorneys' fees, and costs. Def
surety company was likewise ordered to pay to plaintiff the same judgment b
the proviso that "execution should not issue against defendant The World-Wid
Insurance & Surety Co., Inc., until a return is made by the Sheriff upon execut
against defendant Catalina de Leon showing that the judgment against her re
unsatisfied in whole or in part; and provided, further, that defendant Catalina
Leon shall reimburse to defendant Company whatever amount the latter mig
under this judgment together with such expenses as may be necessary to eff
said reimbursement." From this judgment, the surety company appealed and
case is now before us because, as certified by the Court of Appeals, it only in
questions of law. Augusto V. Ongsiako, having died in the meantime, was sub
by his special administrators Emmanuel Ongsiako and Severino Santiangco.

The surety bond in question was executed in November 10, 1951 and among
important provisions it contains is the following: that the principal and the su
"are held and firmly bound unto Dr. Augusto V. Ongsiako in the sum of One Th
Two Hundred Pesos (P1,200.00), Philippine Currency, for the payment of whic
and truly to be made, we bind ourselves ... jointly and severally, firmly by the
presents" (and referring to the Promissory Note) "whose terms and conditions
made parts hereof." In said bond there also appears a special condition which
recites: "The Liability of the World-Wide Insurance & Surety Co., Inc. under th
will expire on February 10, 1952." The note therein referred to, on the other h
provides that the obligation is payable ninety days from date of issue, Novem
1951, which means that its date of maturity is February 10, 1952. The eviden
shows that neither the principal nor the surety paid the obligation on said dat
maturity and immediately thereafter demands for payment were made upon
Thus, it appears that as early as February 12, 1952, or two days thereafter, th
creditor wrote to the surety company a letter notifying it of the failure of its p
to pay the obligation and requesting that it make good its guaranty under the
(Exhibit B), which demand was reiterated in subsequent letters (Exhibits C, D
To these demands, the company merely set up the defense that it only acted
guarantor and as such its liability cannot be exacted until after the property o
principal shall have been exhausted (Exhibit G).

It therefore appears that appellant has no justification whatever to resist the

the plaintiff for in the judgment appealed from it is precisely provided that ex
of judgment should not issue against it until after it is shown that the executi
the judgment against the principal has been returned by the sheriff unsatisfie
which was the only excuse given by said appellant in not fulfilling its commitm
under the bond. And yet it appealed from said judgment just to put up the ad
defense that its liability under the bond has already expired because of the c
that its liability shall expire on February 10, 1952. Even if this were true, we c
however this stipulation as unfair and unreasonable for it practically nullifies
nature of the undertaking assumed by appellant. It should be noted that the
principal obligation is payable ninety days from date of issue, which falls on F
10, 1952. Only on this date can demand for payment be made on the princip
debtor. If the debtor should fail to pay and resort is made to the surety for pa
on the next day, it would be unfair for the latter to allege that its liability has
expired. And yet such is the stand taken by appellant. As the terms of the bon
should be given a reasonable interpretation, it is logical to hold that the liabil
the surety attaches as soon as the principal debtor defaults, and notice there
given the surety within reasonable time to enable it to take steps to protect it
interest. This is what was done by appellee in the present case. After all, the
has a remedy under the law which is to foreclose the counterbond put up by
principal debtor. This is in effect what was done by the lower court.

This Court has taken note of the reprehensible attitude adopted by the surety
company in this case by resorting to improper means in an effort to evade its
responsibility under the law. An instance of such attitude is the insertion in th
of a provision which in essence tends to nullify its commitment. This is a subt
of making money thru trickery and deception. Such practice should be stoppe
only to protect honest dealers or people in financial stress. Because of such im
conduct, this Court finds no justification for the present appeal and considers
frivolous and unnecessary. For this appellant should be made to pay treble co

Wherefore, the decision appealed from is affirmed, with treble costs against
appellant.

Citizen Surety and Insurance Co. v. CA, 162 SCRA 738

(1988)
G.R. No. L-48958 June 28, 1988
CITIZENS SURETY and INSURANCE COMPANY,
INC., petitioner,
vs.
COURT OF APPEALS and PASCUAL M. PEREZ, respondents.
F. Sumulong & Associates Law Offices for petitioner.
GUTIERREZ, JR., J.:
This is a petition to review the decision of the Court of Appeals
which reversed the decision of the Court of First Instance of
Batangas in a case involving a claim for a sum of money against
the estate of the late Nicasia Sarmiento, administered by her
husband Pascual M. Perez.
On December 4, 1959, the petitioner issued two (2) surety bonds
CSIC Nos. 2631 and 2632 to guarantee compliance by the
principal Pascual M. Perez Enterprises of its obligation under a
"Contract of Sale of Goods" entered into with the Singer Sewing
Machine Co. In consideration of the issuance of the aforesaid
bonds, Pascual M. Perez, in his personal capacity and as attorney-
in-fact of his wife, Nicasia Sarmiento and in behalf of the Pascual
M. Perez Enterprises executed on the same date two (2)
indemnity agreements wherein he obligated himself and the
Enterprises to indemnify the petitioner jointly and severally,
whatever payments advances and damage it may suffer or pay as
a result of the issuance of the surety bonds.
In addition to the two indemnity agreements, Pascual M. Perez
Enterprises was also required to put up a collateral security to
further insure reimbursement to the petitioner of whatever losses
or liabilities it may be made to pay under the surety bonds.
Pascual M. Perez therefore executed a deed of assignment on the
same day, December 4,1959, of his stock of lumber with a total
value of P400,000.00. On April 12, 1960, a second real estate
mortgage was further executed in favor of the petitioner to
guarantee the fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with its obligation
under the contract of sale of goods with Singer Sewing Machine
Co., Ltd. Consequently, the petitioner was compelled to pay, as it
did pay, the fair value of the two surety bonds in the total amount
of P144,000.00. Except for partial payments in the total sum of
P55,600.00 and notwithstanding several demands, Pascual M.
Perez Enterprises failed to reimburse the petitioner for the losses
it sustained under the said surety bonds.
The petitioner filed a claim for sum of money against the estate of
the late Nicasia Sarmiento which was being administered by
Pascual M. Perez.
In opposing the money claim, Pascual M. Perez asserts that the
surety bonds and the indemnity agreements had been
extinguished by the execution of the deed of assignment. After
the trial on the merits, the Court of First Instance of Batangas
rendered judgment on April 15, 1968, the dispositive portion of
which reads:
WHEREFORE, considering that the estate of the late, Nicasia
Sarmiento is jointly and severally liable to the Citizens' Surety and
Insurance Co., Inc., for the amount the latter had paid the Singer
Sewing Machine Company, Ltd., the court hereby orders the
administrator Pascual M. Perez to pay the claimant the sum of
P144,000.00, with interest at the rate of ten (10%) per cent per
annum from the date this claim was filed, until fully paid, minus
the payments already made in the amount of P55,600.00." (pp.
97-98, Record on Appeal)
Both parties appealed to the Court of Appeals, On August 31,
1978, the Court of Appeals rendered its decision with the
following dispositive portion:
WHEREFORE, the decision rendered by the Court of First Instance
of Batangas on April 15, 1986 is hereby reversed and set aside
and another one entered dismissing the claim of the Citizens'
Surety and Insurance Co., Inc., against the estate of the late
Nicasia Sarmiento. No pronouncement as to costs. (p. 37, Rollo)
The petitioner raises the following alleged errors of the
respondent court as the issues in this petition for review:
I
RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT
THE OBLIGATION OF PRIVATE RESPONDENT PASCUAL M. PEREZ
HAD BEEN EXTINGUISHED BY VIRTUE OF THE EXECUTION OF THE
DEED OF ASSIGNMENT (EXHIBIT "1") AND/OR THE RELEASE OF
THE SECOND REAL ESTATE MORTGAGE (EXHIBIT "2").
II
RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT
THERE WAS DATION IN PAYMENT BY VIRTUE OF THE EXECUTION
OF THE DEED OF ASSIGNMENT (EXHIBIT "1").
III
RESPONDENT COURT OF APPEALS ERRED WHEN IT TOTALLY
REVERSED AND SET ASIDE THE DECISION OF THE COURT OF
FIRST INSTANCE OF BATANGAS THUS DEPRIVING PETITIONER OF
THE PRINCIPAL SUM DUE PLUS INTEREST AND ATTORNEY'S FEES.
(p. 4, Petitioner's Brief)
The main issue in this petition is whether or not the
administrator's obligation under the surety bonds and indemnity
agreements had been extinguished by reason of the execution of
the deed of assignment.
It is the general rule that when the words of a contract are plain
and readily understandable, there is no room for construction
thereof (San Mauricio Milling Co. v. Ancheta, 105 SCRA 371).
However, this is only a general rule and it admits exceptions.
Pascual M. Perez executed an instrument denominated as "Deed
of Assignment." Pertinent portions of the deed read as follows:
I, Pascual M. Perez, Filipino, of legal age, married, with residence
and postal address at 115 D. Silang, Batangas, as the owner and
operator of a business styled "PASCUAL M. PEREZ ENTERPRISES,"
with office at R-31 Madrigal Building, Escolta, Manila, hereinafter
referred to as ASSIGNOR, for and in consideration of the issuance
in my behalf and in favor of the SINGER SEWING MACHINE
COMPANY, LTD., of two Surety Bonds (CSIC) Bond Nos. 2631 and
2632 each in the amount of SEVENTY TWO THOUSAND PESOS
(P72,000.00), or with a total sum of ONE RED FORTY-FOUR
THOUSAND PESOS (Pl44,000.00), Philippine Currency, by the
CITIZENS' SURETY AND INSURANCE CO., INC., a corporation duly
organized and existing under and by virtue of the laws of the
Republic of the Philippines, with principal office at R-306
Samanillo Building, Escolta, Manila, Philippines, and duly
represented in the act by its Vice-President and General Manager,
ARISTEO L. LAT, hereinafter referred to as ASSIGNEE, assign by
these presents, unto said ASSIGNEE, its heirs, successors,
administrators or assigns the herein ASSIGNOR'S stock (Insured)
of low grade lumber, class "No. 2 COMMON" kept and deposited at
Tableria Tan Tao at Batangas, Batangas, with a total measurement
of Two Million (2,000,000.00) board feet and valued of P0.20 per
board feet or with a total value of P400,000.00 which lumber is
intended by the ASSIGNOR for exportation under a Commodity
Trade Permit, the condition being that in the event that the herein
assignor exports said lumber and as soon as he gets the
necessary export shipping and related and pertinent documents
therefor, the ASSIGNOR will turn said papers over to the herein
ASSIGNEE, conserving all of the latter's dominion, rights and
interests in said exportation.
The ASSIGNEE hereby agrees and accepts this assignment under
the conditions above-mentioned. (pp. 77-79, Record on Appeal)
On its face, the document speaks of an assignment where there
seems to be a complete conveyance of the stocks of lumber to
the petitioner, as assignee. However, in the light of the
circumstances obtaining at the time of the execution of said deed
of assignment, we can not regard the transaction as an absolute
conveyance. As held in the case of Sy v. Court of Appeals, (131
SCRA 116,124):
It is a basic and fundamental rule in the interpretation of contract
that if the terms thereof are clear and leave no doubt as to the
intention of the contracting parties, then the literal meaning of
the stipulations shall control but when the words appear contrary
to the evident intention of the parties, the latter shall prevail over
the former. (Labasan v. Lacuesta, 86 SCRA 16) In order to judge
the intention of the parties, their contemporaneous and
subsequent acts shall be principally considered.(Emphasis
supplied)
The petitioner issued the two (2) surety bonds on December 4,
1959 in behalf of the Pascual M. Perez Enterprises to guaranty
fullfillment of its obligation under the "Contract of Sale of Goods"
entered into with the Singer Sewing Machine Co. In consideration
of the two surety bonds, two indemnity agreements were
executed by Pascual M. Perez followed by a Deed of Assignment
which was also executed on the same date.
In the case of Lopez v. Court of appeals (114 SCRA 673), we
stated that:
The indemnity agreement and the stock assignment must be
considered together as related transactions because in order to
judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally
considered. (Article 1371, New Civil Code). Thus, considering that
the indemnity agreement connotes a continuing obligation of
Lopez towards Philamgen, while the stock assignment indicates a
complete discharge of the same obligation, the existence of the
indemnity agreement whereby Lopez had to pay a premium of
P1,000.00 for a period of one year and agreed at all times to
indemnify Philamgen of any and all kinds of losses which the
latter might sustain by reason of it becoming a surety, is
inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of Philamgen. There would
have been no necessity for the execution of the indemnity
agreement if the stock assignment was really intended as an
absolute conveyance. Hence, there are strong and cogent reasons
to conclude that the parties intended said stock assignment to
complement the indemnity agreement and thereby sufficiently
guarantee the indemnification of Philamgen should it be required
to pay Lopez" loan to Prudential Bank. (at pp. 682-683)
The respondent court stated that "by virtue of the execution of
the deed of assignment ownership of administrator-appellant's
lumber materials had been transferred to the claimant-appellant
and this amounted to dation in payment whereby the former is
considered to have alienated his property in favor of the latter in
satisfaction of a monetary debt (Artide 1245). As a consequence
thereof, administrator-appellant's obligation under the surety
bonds is thereby extinguished upon the execution of the deed of
assignment." This statement is not sustained by the records.
The transaction could not be dation in payment. As pointed out in
the concurring and dissenting opinion of Justice Edgardo L. Paras
and the dissenting opinion of Justice Mariano Serrano when the
deed of assignment was executed on December 4, 1959, the
obligation of the assignor to refund the assignee had not yet
arisen. In other words, there was no obligation yet on the part of
the petitioner, Citizens' Surety and Insurance Company, to pay
Singer Sewing Machine Co. There was nothing to be extinguished
on that date, hence, there could not have been a dation in
payment.
In the case of Lopez v. Court of Appeals (supra) we had the
occasion to explain:
Considering the above jurisprudence, We find that the debt or
obligation at bar has not matured on June 2, 1959 when Lopez
'alienated' his 4,000 shares of stock to Philamgen. Lopez'
obligation would arise only when he would default in the payment
of the principal obligation (the loan) to the bank and Philamgen
had to pay for it. Such fact being adverse to the nature and
concept of dation in payment, the same could not have been
constituted when the stock assignment was executed. Moreover,
there is no express provision in the terms of the stock assignment
between Philamgen and Lopez that the principal obligation (which
is the loan) is immediately extinguished by reason of such
assignment. (at p. 686)
The deed of assignment cannot be regarded as an absolute
conveyance whereby the obligation under the surety bonds was
automatically extinguished. The subsequent acts of the private
respondent bolster the fact that the deed of assignment was
intended merely as a security for the issuance of the two bonds.
Partial payments amounting to P55,600.00 were made after the
execution of the deed of assignment to satisfy the obligation
under the two surety bonds. Since later payments were made to
pay the indebtedness, it follows that no debt was extinguished
upon the execution of the deed of assignment. Moreover, a
second real estate mortgage was executed on April 12, 1960 and
eventually cancelled only on May 15, 1962. If indeed the deed of
assignment extinguished the obligation, there was no reason for a
second mortgage to still have to be executed. We agree with the
two dissenting opinions in the Court of Appeals that the only
conceivable reason for the execution of still another mortgage on
April 12, 1960 was because the obligation under the indemnity
bonds still existed. It was not yet extinguished when the deed of
assignment was executed on December 4, 1959. The deed of
assignment was therefore intended merely as another collateral
security for the issuance of the two surety bonds.
Recapitulating the facts of the case, the records show that the
petitioner surety company paid P144,000.00 to Singer on the
basis of the two surety bonds it had issued in behalf of Pascual
Perez Enterprises. Perez in turn was able to indemnify the
petitioner for its payment to Singer in the amount of P55,600.00
thus leaving a balance of only P88,400.00.
The petitioner surety company was more than adequately
protected. Lumber worth P400,000.00 was assigned to it as
collateral. A second real estate mortgage was also given by Perez
although it was later cancelled obviously because the
P400,000.00 worth of lumber was more than enough guaranty for
the obligations assumed by the petitioner. As pointed out by
Justice Paras in his separate opinion, the proper procedure was for
Citizens' Insurance and Surety Co., to collect the remaining
P88,400.00 from the sales of lumber and to return whatever
remained to Perez. We cannot order the return in this decisions
because the Estate of Mrs. Perez has not asked for any return of
excess lumber or its value. There appears to have been other
transactions, surety bonds, and performance bonds between the
petitioner and Perez Enterprises but theseare extraneous matters
which, the records show, have absolutely no bearing on the
resolution of the issues in this petition.
With respect to the claim for interests and attomey's fees, we
agree with the private respondent that the petitioner is not
entitled to either one. It had the means to recoup its investment
and losses many times over, yet it chose to litigate and delay the
final determination of how much was really owing to it. As stated
by Justice Paras in his separate opinion:
Interest will not be given the Surety because it had all the while
(or at least, it may be presumed that such was the case) the
P400,000.00 worth of lumber, from which value the 'refunding' by
assignor could have been deducted if it had so informed the
assignor of the plan.
For the same reason as in No. (5), attomey's fees cannot be
charged, for despite the express stipulation on the matter in the
contract, there was actually no failure on the part of the assignor
to comply with the obligation of refinding. The means of
compliance was right there with the Surety itself-. surely it could
have earlier conferred with the assignor on how to effect the
'refunding. (p. 39, Rollo)
WHEREFORE, the petition is hereby DISMISSED. For the reasons
above-stated, the claim of Citizens' Surety and Insurance Co., Inc.,
against the estate of Nicasia Sarmiento is DISMISSED. SO
ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.
Garcia Jr. v. CA, GR No. 80201, November 20, 1990
Antonio Garcia, Jr. vs. Court of Appeals, Lasal Development
Corp.
G.R. No. 80201, November 20, 1990

PONENTE: Cruz, J.

FACTS:
Western Minolco Corporation (WMC) obtained from Philippine
Investments Systems Organization (PISO) two loans of P2,500,000
and P1,000,000 for which it issued promissory notes. Antonio
Garcia and Ernest Kahn executed a surety agreement for the P2.5
million loan. WMC failed to pay after repeated demands. A
memorandum of agreement was entered into by WMC and its
creditors in which promissory notes were to be issued by NDC,
fully and unconditionally guaranteed by the Philippine
government, in payment of WMCs obligation. Also, the parties to
the original loans agreed to an extension of the original period of
payment and the compounding of the interest on the principal
loans.

Lasal Development Corporation, PISOs assignee of the credit,

sued Garcia. He claims that the issuance of the new promissory
notes which extended the period of payment and provided for the
compounding of the interest operated as a novation of the
contract, therefore releasing him from his obligation as surety.
ISSUE: Whether or not there was a novation of the contract.

HELD:
No. An obligation to pay a sum of money is not novated in a new
instrument by changing the term of payment and adding other
obligations not incompatible with the old one. It is not proper to
consider an obligation novated as in the case at bar by the mere
granting of extension of payment which did not even alter its
essence. To sustain novation necessitates that the same be so
declared in unequivocal terms or that there is complete and
substantial incompatibility between the two obligations.

Visayan Surety & Insurance Corp. v. CA, GR No. 127261,

September 7, 2001

[G. R. No. 127261. September 7, 2001]

PARDO, J.:

The Case

The case is a petition to review and set aside a

decision[1] of the Court of Appeals affirming that of the
Regional Trial Court, Bian, Laguna, Branch 24, holding the surety
liable to the intervenor in lieu of the principal on a replevin bond.

The Facts

The facts, as found by the Court of Appeals, [2] are as follows:

On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe

Ibajan filed with the Regional Trial Court, Laguna, Bian a
complaint against spouses Jun and Susan Bartolome, for replevin
to recover from them the possession of an Isuzu jeepney, with
damages. Plaintiffs Ibajan alleged that they were the owners of
an Isuzu jeepney which was forcibly and unlawfully taken by
defendants Jun and Susan Bartolome on December 8, 1992, while
parked at their residence.

On February 8, 1993, plaintiffs filed a replevin bond through

petitioner Visayan Surety & Insurance Corporation. The contract
of surety provided thus:

WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the
VISAYAN SURETY & INSURANCE CORP., of Cebu, Cebu, with branch
office at Manila, jointly and severally bind ourselves in the sum of
Three Hundred Thousand Pesos (P300,000.00) for the return of
the property to the defendant, if the return thereof be adjudged,
and for the payment to the defendant of such sum as he/she may
recover from the plaintiff in the action.[3]

On February 8, 1993, the trial court granted issuance of a writ

of replevin directing the sheriff to take the Isuzu jeepney into his
custody. Consequently, on February 22, 1993, Sheriff Arnel Magat
seized the subject vehicle and turned over the same to plaintiff
spouses Ibajan.[4]

On February 15, 1993, the spouses Bartolome filed with the

trial court a motion to quash the writ of replevin and to order the
return of the jeepney to them.

On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo

Ibajan, filed with the trial court a motion for leave of court to
intervene, stating that he has a right superior to the plaintiffs over
the ownership and possession of the subject vehicle.

On June 1, 1993, the trial court granted the motion to

intervene.

On August 8, 1993, the trial court issued an order granting the

motion to quash the writ of replevin and ordering plaintiff Mila
Ibajan to return the subject jeepney to the intervenor Dominador
Ibajan.[5]
 On August 31, 1993, the trial court ordered the issuance of a
writ of replevin directing the sheriff to take into his custody the
subject motor vehicle and to deliver the same to the intervenor
who was the registered owner.[6]

On September 1, 1993, the trial court issued a writ of replevin

in favor of intervenor Dominador Ibajan but it was returned
unsatisfied.

On March 7, 1994, intervenor Dominador Ibajan filed with the

trial court a motion/application for judgment against plaintiffs
bond.

On June 6, 1994, the trial court rendered judgement the

dispositive portion of which reads:

WHEREFORE, in the light of the foregoing premises, judgment is

hereby rendered in favor of Dominador Ibajan and against Mila
Ibajan and the Visayan Surety and Insurance Corporation ordering
them to pay the former jointly and severally the value of the
subject jeepney in the amount of P150,000.00 and such other
damages as may be proved by Dominador Ibajan plus costs. [7]

On June 28, 1994, Visayan Surety and Insurance Corporation

and Mila Ibajan filed with the trial court their respective motions
for reconsideration.

On August 16, 1994, the trial court denied both motions.

On November 24, 1995, Visayan Surety and Insurance

Corporation (hereafter Visayan Surety) appealed the decision to
the Court of Appeals.[8]

On August 30, 1996, the Court of Appeals promulgated its

decision affirming the judgment of the trial court. [9] On September
19, 1996, petitioner filed a motion for reconsideration. [10] On
December 2, 1996, the Court of Appeals denied the motion for
reconsideration for lack of merit.[11]
 Hence, this petition.[12]

The Issue

The issue in this case is whether the surety is liable to an

intervenor on a replevin bond posted by petitioner in favor of
respondents.[13]

Respondent Dominador Ibajan asserts that as intervenor, he

assumed the personality of the original defendants in relation to
the plaintiffs bond for the issuance of a writ of replevin.

Petitioner Visayan Surety contends that it is not liable to the

intervenor, Dominador Ibajan, because the intervention of the
intervenor makes him a party to the suit, but not a beneficiary to
the plaintiffs bond. The intervenor was not a party to the
contract of surety, hence, he was not bound by the contract.

The Courts Ruling

The petition is meritorious.

An intervenor is a person, not originally impleaded in a

proceeding, who has legal interest in the matter in litigation, or in
the success of either of the parties, or an interest against both, or
is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer
thereof.[14]

May an intervenor be considered a party to a contract of surety

which he did not sign and which was executed by plaintiffs and
defendants?

It is a basic principle in law that contracts can bind only the

parties who had entered into it; it cannot favor or prejudice a third
person.[15] Contracts take effect between the parties,
their assigns, and heirs, except in cases where the rights
and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. [16]
 A contract of surety is an agreement where a party called the
surety guarantees the performance by another party called the
principal or obligor of an obligation or undertaking in favor of a
third person called the obligee.[17] Specifically, suretyship is a
contractual relation resulting from an agreement whereby one
person, the surety, engages to be answerable for the debt,
default or miscarriage of another, known as the principal. [18]

The obligation of a surety cannot be extended by implication

beyond its specified limits.[19] When a surety executes a bond, it
does not guarantee that the plaintiffs cause of action is
meritorious, and that it will be responsible for all the costs that
may be adjudicated against its principal in case the action fails.
The extent of a suretys liability is determined only by the clause
of the contract of suretyship. [20] A contract of surety is not
presumed; it cannot extend to more than what is stipulated. [21]

Since the obligation of the surety cannot be extended by

implication, it follows that the surety cannot be held liable to the
intervenor when the relationship and obligation of the surety is
limited to the defendants specified in the contract of surety.

WHEREFORE, the Court REVERSES and sets aside the

decision of the Court of Appeals in CA-G. R. CV No. 49094. The
Court rules that petitioner Visayan Surety & Insurance Corporation
is not liable under the replevin bond to the intervenor, respondent
Dominador V. Ibajan.

No costs.

SO ORDERED.

Philippine National Bank v. CA, GR. No. 33174, July 4, 1991

Republic of the Philippines
SUPREME COURT
Manila
 THIRD DIVISION

G.R. No. 33174 July 4, 1991

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE HONORABLE COURT OF APPEALS (Special Fourth
Division), LUZON SURETY CO., INC., and ESTANISLAO E.
DEPUSOY, trading under the style of E.E. DEPUSOY
CONSTRUCTION, respondents.

Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas C. Alino, Cesar T.

Basa and Roland A. Niedo for petitioner.

Tolentino, Cruz, Reyes, Lava & Manuel for respondent Luzon

Surety Co., Inc.

F.M. Ejercito for respondent E.E. Depusoy Construction.

DAVIDE, JR., J.:p

Before Us is a petition for the review on certiorari of the decision

of the Court of Appeals promulgated on 12 December 1970 in CA-
G.R. No. 36615-R 1 affirming, with modification, the decision of the
then Court of First Instance (now Regional Trial Court) of Manila,
Branch VII, dated 30 September 1959 in Civil Case No. 35163 2 an
action for collection of sum of money filed by petitioner against
private respondents. The dispositive portion of the trial court's
decision reads:

IN VIEW WHEREOF:

1. The case against Luzon Surety Co. is dismissed but

its counterclaim is also dismissed for lack of sufficient
merit;
 2. Defendant Estanislao Depusoy is condemned to pay
unto the Philippine National Bank the respective sums
as principal of P35,000.00, P30,000.00, P10,000.00, and
P25,000.00 together with the interests as outlined in
the statement of account set forth in the body of this
decision. No pronouncements as to costs.

SO ORDERED. 3

The dispositive portion of the decision of respondent Court of

Appeals reads:

WHEREFORE, with the modification that the defendant

Depusoy shall pay 10% interest on the amount of the
judgment, the decision of the trial court is hereby
affirmed in all other respects. Without pronouncement
as to costs. 4

However, immediately preceding this is a paragraph reading:

We agree with the appellant that the trial court erred in

not sentencing Estanislao Depusoy to pay attorney's
fees equivalent to 10% of the amount due. This is
expressly provided for in the promissory notes, and as it
does not appear to be unreasonable, the stipulations of
the parties should be given effect.

As carefully summarized by the Court of Appeals, the relevant

facts in this case are as follows:

On August 6, 1955, Estanislao Depusoy, doing business

under the name of E.E. Depusoy Construction, and the
Republic of the Philippines, represented by the Director
of Public Works, entered into a building contract, Exhibit
2-Luzon, for the construction of the GSIS building at
Arroceros Street, Manila, Depusoy to furnish all
materials, labor, plans, and supplies needed in the
construction. Depusoy applied for credit
accommodation with the plaintiff. This was approved by
the Board of Directors in various resolutions subject to
the conditions that he would assign all payments to be
received from the Bureau of Public Works of the GSIS to
the bank, furnish a surety bond, and the surety to
deposit P10,000.00 to the plaintiff. The total
accommodation granted to Depusoy was P100,000.00.
This was later extended by another P10,000.00 and
P25,000.00, but in no case should the loan exceed
P100,000.00, Exhibits K-1, K-2, K-3 and K-4. In
compliance with these conditions, Depusoy executed a
Deed of Assignment of all money to be received by him
from the GSIS as follows:

That I, Estanislao Depusoy, of legal age,

Filipino, married to Lourdes G. Gonzales,
doing business under the style of E. E. San
Beda Subdivision, Manila, for and in
consideration of certain loans, overdrafts or
other credit accommodations to be granted
by the PHILIPPINE NATIONAL BANK, Manila,
have assigned, transferred and conveyed and
by these presents do hereby assign, transfer
and convey unto the said PHILIPPINE
NATIONAL BANK, its successors and assigns
all payment to be received from my contract
with the Bureau of Public Works, Republic of
the Philippines date (sic) August 6, 1955.

By virtue of this assignment it is hereby

understood that the assignor hereby
acknowledges the monies, sums or payments
due from the Bureau of Public Works,
Republic of the Philippines, and which are
hereby assigned to the PHILIPPINE NATIONAL
BANK as monies, sums and payments
belonging to the PHILIPPINE NATIONAL BANK,
 and that any act or misappropriation or
conversion which the assignor or the latter's
representatives may commit with respect to
the said sums, monies and payments will
subject the assignor or the latter's
representatives to the criminal liabilities
imposed by the Penal Code and such other
damages which the Civil Code provides.

It is further understood that the PHILIPPINE

NATIONAL BANK can collect and receive any
and all sums, monies and payments above-
mentioned from the Bureau of Public Works,
Republic of the Philippines, and for that
matter said bank is hereby authorized to
indorse for deposit or for encashment any
and all checks, treasury warrants, money
orders, drafts and other kinds of negotiable
instruments that might be issued in
connection with the payment herein
assigned.

This assignment shall be irrevocable subject

to the terms and conditions of the promissory
notes, overdrafts and any other kind of
documents which the PHILIPPINE NATIONAL
BANK have (sic) required or may require the
assignor to execute to evidence the above-
mentioned obligation.

Luzon thereafter executed two surety bonds, one for

the sum of P40,000.00 Exhibit D, and the other for
P60,000.00, Exhibit E. Exhibit its D and E, except for the
amount, are expressed in the same words as follows:

That we, E. E. DEPUSOY CONSTRUCTION CO.,

of 32 2nd Street, San Beda Subdv., Manila, as
principal and LUZON SURETY COMPANY, INC.,
a corporation duly organized and existing
under and by virtue of the laws of the
Philippines, as surety, are held and firmly
bound unto the PHILIPPINE NATIONAL BANK of
Manila in the sum of SIXTY THOUSAND PESOS
ONLY (P60,000.00), Philippine Currency, for
the payment of which sum, well and truly to
be made, we bind ourselves, our heirs,
executors, administrators, successors, and
assigns, jointly and severally, firmly by these
presents:

The conditions of the obligation are as

follows:

WHEREAS, the above bounden principal, on

the . . . . day of September, 1956 in
consideration of a certain loan of
(P60,000.00) executed a Deed of Assignment
in favor of the Philippine National Bank on all
payments to be received by him from the
Bureau of Public Works in connection with a
contract dated August 6, 1956.

WHEREAS, said PHILIPPINE NATIONAL BANK,

requires said principal to give a good and
sufficient bond in the above stated sum to
secure the full and faithful performance on
his part of said Agreement.

NOW, THEREFORE, if the principal shall well

and truly perform and fulfill all the
undertakings, covenants, terms, conditions
and agreement stipulated in said Agreement
then, this obligation shall be null and void;
otherwise, it shall remain in full force and
effect.
 The liability of LUZON SURETY COMPANY,
INC., under this bond will expire January 31,
1957. Furthermore, it is hereby agreed and
understood that the LUZON SURETY
COMPANY, INC. will not be liable for any claim
not discovered and presented to the
company within THREE (3) months from the
expiration of this bond and that the obligee
hereby waives his right to file any court
action against the surety after the
termination of the period of the three months
above mentioned.

With the consent of Luzon, the bond was extended for

another 6 months from January 31, 1957.

Under the credit accommodation granted by the

plaintiff bank, Depusoy obtained several amounts from
the bank. On January 14, 1957, Depusoy received
P50,000.00 from the bank which he promised to pay in
installments on the dates therein indicated, Exhibit A.
On January 17, 1957, he received another P50,000.00
under the same conditions as the promissory note
Exhibit A, except with respect to the time of payment.
Under this arrangement all payments made by the GSIS
were payable to the Philippine National Bank. The
treasury warrants or checks, however, were not sent
directly to the plaintiff. They were received by Depusoy,
who in turn delivered them to the plaintiff bank. The
plaintiff then applied the money thus received, first, to
the payment of the amount due on the promissory
notes at the time of the receipt of the treasury warrants
or checks, and the balance was credited to the current
account of Depusoy with the plaintiff bank. A total of
P1,309,461.89 were (sic) paid by the GSIS to the
plaintiff bank for the account of Estanislao Depusoy,
Exhibit 1-Luzon. Of this amount, P246,408.91 were (sic)
 paid according to Exhibit 1 for the importation of
construction materials, and P1,063,408.91 were (sic)
received by the Loans and Discounts Department of the
plaintiff bank. This amount was disposed off by the
plaintiffs Loans & Discounts Department as follows:

a) P795,976.64 were (sic) credited to the

current account of Depusoy with the plaintiff;

b) P20,000.00 were (sic) credited to the

plaintiffs Foreign Department;

c) P2,552.94 were (sic) credited to the

payment of interest; and

d) P210,000.00 were (sic) applied to the

principal of indebtedness. (Exh. N-1).

Depusoy defaulted in his building contract with the

Bureau of Public Works, and sometime in September,
1957, the Bureau of Public Works rescinded its contract
with Depusoy. No further amounts were thereafter paid
by the GSIS to the plaintiff bank. The amount of the
loan of Depusoy which remains unpaid, including
interest, is over P100,000.00. Demands for payment
were made upon Depusoy and Luzon, and as no
payment was made, . . . 5

herein petitioner filed with the trial court a complaint (Civil Case
No. 35163) against Estanislao Depusoy and private respondent
Luzon Surety Co. Inc. (LSCI).

After trial on the merits, the trial court rendered a decision the
dispositive portion of which is above adverted to.

In dismissing the case as against LSCI, the trial court ruled that
the surety bonds it issued, Exhs. "D" and "E";
 . . . guaranteed only the faithful performance of the
deed of assignments, Exhibit C, and nothing else. That
the bonds were extended by the letters Exhs. E and I
did not change their conditions. . . . 6

Petitioner appealed from said decision to the Court of Appeals,

(C.A.-G.R. No. 6615-R) relying on the following assigned errors:

The trial court erred in holding that defendant-appellee

Luzon Surety Company, Inc. "guaranteed only the
faithful performance of the deed of assignment, Exh.
"C", and nothing else"; in holding the defense of the
appellee Luzon Surety Company, Inc., that there has
been no breach of the terms and conditions of the
bonds Exhs. "D" and "E"; in finding that the "bonds" can
only be therefore understood to guarantee that the
payment due from the GSIS to Depusoy would be
delivered unto the bank.

II

The trial court erred in not finding that the bonds (Exhs.
"D" and "E") should be read jointly with the resolutions
approving the loan (Exhs. "K" to "K-5"), the promissory
notes and the deed of assignment in the determination
of the true intent of the parties in the execution of the
bonds which are the basis of the liability of the
defendant-appellee Luzon Surety Company, Inc., in not
considering resolutions Exhs. "K" to "K-5"; promissory
notes Exhs. "B", "G", and "H" and the deed of
assignment, Exh. "C" as integral parts of the surety
bonds Exhs. "D" and "E" as therein incorporated by
reference in said surety bonds as such necessarily
bound the appellee Luzon Surety Company to their
terms.
 III

The trial court erred in not construing the terms of the

bonds in favor of the plaintiff-appellant PNB and against
the defendant-appellee Luzon Surety Company, Inc.

IV

The lower court erred in not holding that the bonds

Exhs. "D" and "E" and letters of extension Exhs. "F" and
"I" were compensated surety agreements executed as
required by PNB board resolution Exhs. "K" to "K-5" for
the purpose of securing the payment to the PNB of the
amount advanced by the said bank to the appellee
Estanislao Depusoy to finance the construction of the
GSIS building subject to the construction contract Exh.
"2-Luzon" or Exh. "O-PNB"; in not finding that Exhs. "F"
and "I" are indubitable proofs that defendant-appellee
Luzon Surety Company, Inc., is liable for the repayment
of the P100,000.00 loan and the additional
accommodations granted to the defendant-appellee
Estanislao Depusoy; and in not finding and holding that
Exhs. "D" and "E" in the sense that they have been
extended so as to secure new accommodations aside
from the original obligation mentioned in said bonds.

The trial court erred in finding that all payments due

from the GSIS construction to Depusoy were actually
delivered unto the bank; and in not finding that
Depusoy made diversions from these amounts for
which the surety should be bound to answer under the
terms of its bonds.

VI
The trial court erred in not finding that when appellee
Depusoy incurred breach (sic) in his construction
contract with the Bureau of Public Works said default on
the part of the principal in his contract resulted in a
consequent breach of his undertaking under the deed
of assignment; and that consequently any breach in the
undertaking of the principal in said deed of assignment
communicated liability to the surety; in not finding
likewise that breach on the part of the appellee
Depusoy in his undertaking under the promissory notes
meant breach of the terms of the deed of assignment
which incorporated said promissory notes and that this
breach in the deed of assignment communicated
liability to the surety under the terms of the bonds; and
that trial court (sic) erred in not finding that there was a
breach of the bonds due to the failure of the appellee
Luzon Surety Company, Inc. to see to it that the full
amount of P1,309,461.89 remitted by the GSIS to the
PNB was actually received by the PNB; in not finding
that the PNB did not receive all the amounts still due to
the said institutions as remitted by the GSIS under the
terms of the deed of assignment.

VII

The trial court erred in not sentencing defendant-

appellee Estanislao Depusoy to pay the attorney's fees
equivalent to 10% of the amounts due and the costs of
the suit.

VIII

The trial court erred in not admitting in the evidence

proof of the amount actually received by the foreign
department of the PNB and the letter of the GSIS to the
PNB as part of the rebuttal evidence of the defendant-
appellee (see evidences (sic) offered as part of the
record on appeal for purposes of review).
 IX

The trial court erred in relying exclusively for its

decision on the relation of facts presented by the
appellee-Luzon Surety Company; disregarding
evidences (sic) presented by the PNB consist of
documentary evidences (sic) disclosing patent facts
appearing on the face of said documents and that
consequently the decision is not based on the real facts
and law of the case; and consequently dismissing the
case against the Luzon Surety. 7

In due course the Court of Appeals rendered the decision

adverted to above. In disposing of the assigned errors, it patiently
examined and analyzed the facts and made an extensive,
exhaustive and well-reasoned disquisition thereon which We
deem necessary to quote:

The assignment of error maybe (sic) reduced into one

single question, what is the obligation of Luzon under
the surety bonds, or, stated otherwise, what obligation
had been guaranteed by Luzon under the terms of the
surety bonds? It is the contention of the plaintiff that
the surety bonds, Exhibits D and E, guaranteed the
payment of the loans or the debt of Depusoy to the
plaintiff to the extent of P100,000.00. Luzon, however,
contends that what it guaranteed was the performance
of Depusoy of his obligation under the Deed of
Assignment, Exhibit C, and not other agreements
between Depusoy and the bank. This contention was
upheld by the lower court. This, we believe is the
correct construction of the surety bonds. Under the
surety bonds, Depusoy and Luzon bound themselves to
the plaintiff in the sum of P100,000.00. It recited that
the principal, Depusoy, and Luzon bound themselves
jointly and severally to the PNB under the following
conditions: that "in consideration of a certain loan,
Depusoy executed a Deed of Assignment in favor of the
PNB on all payments to be received by him from the
Bureau of Public Works in connection with a contract of
August 6, 1956"; that the PNB required the principal to
give a good and sufficient bond to secure the full and
faithful performance on his part of said agreement; and
that, "if the principal shall well and truly perform and
fulfill all the undertakings, covenants, terms and
conditions, and agreements stipulated in said
agreement, this obligation shall be null and void". Now,
what are the undertakings, covenants, terms,
conditions, and agreements stipulated in the said
agreement or Deed of Assignment? The undertakings of
the principal Depusoy, under the Deed of Assignment,
Exhibit C, were to assign, transfer, and convey to the
plaintiff bank all payments to be received by Depusoy
from the Bureau of Public Works; that Depusoy
acknowledged that such sums assigned and received
by the plaintiff would belong to the PNB, and if any
conversion should be made by the assignor or his
representative, he would be criminally liable; that the
PNB could collect and receive all sums and monies, and
payments, and the bank was authorized to endorse for
deposit or for encashment all checks or money orders,
or negotiable instruments that it might receive in
connection with the assignment. Nowhere in the Deed
of Assignment nor in the bonds did Luzon guarantee
that Depusoy would pay his indebtedness to the
plaintiff and that upon Depusoy's default, Luzon would
be liable. When the terms of the agreement are clear,
there can be no room for construction. If the intention
of the parties, and particularly of Luzon, was to
guarantee the payment of the debt of Depusoy to the
plaintiff, the bonds would have recited in its preamble
that the principal was indebted to the PNB and that the
PNB required the principal to give a good and sufficient
bond to secure the faithful performance on his part of
 the terms of the promissory notes. Instead of doing so,
it recited that in consideration of a certain loan, the
principal had executed a Deed of Assignment. The
recital of the loan in the amount of P40,000.00, Exhibit
D and P60,000.00, Exhibit E, is merely a statement of
the cause or consideration of the Deed of Assignment
and not a statement of the obligation. The Deed of
Assignment necessarily was executed for a
consideration, otherwise, it would be null and void. The
obligation recited in the surety bonds, Exhibits D and E,
is not the loan, but the Deed of Assignment; and that
precisely was what was guaranteed by Luzon in the
bonds, Exhibits D and E, as shown by the following:

1) Contrary to the usual practice of the

plaintiff, Luzon did not sign the promissory
notes, Exhibits A and B;

2) Although the resolutions of the Board of

Directors required that the surety should
make a deposit of P10,000.00, Luzon did not
make such a deposit, the verbal testimony of
Delfin Santiago, Manager of the Loans and
Discounts Department, to the contrary
notwithstanding. The documentary evidence
was submitted to prove that was the fact;

3) Delfin Santiago finally admitted that what

was guaranteed was not the loan but the
Deed of Assignment.

Delfin Santiago testified as follows:

Q Did you inform the Luzon Surety

Company, Inc. of your actuation on
this fact, that is in your giving Mr.
Depusoy portions of the payments
made by the GSIS to the Philippine
National Bank pursuant to the
Deed of Assignment?

A No, because I understand that

the Luzon Surety Company, Inc.
stands as surety on that
assignment on which the full
payment of the contract is
assigned to the payments. (TSN, p.
54)

xxx xxx xxx

Q Usually Mr. Santiago, it is the

practice of the Philippine National
Bank in cases where a surety
company guarantees the account
of the borrower, the Philippine
National Bank requires the surety
company to sign the promissory
note as a co-maker, is it not?

A In case the condition is approved,

the surety I remember very well,
the last accommodation given to
Mr. Depusoy . . . that was the
condition, but the Luzon Surety
Company, Inc. did not want to sign,
so at the request of the Luzon
Surety Company, Inc. and Mr.
Depusoy, the approved
accommodation was modified in
such a way as only to the surety
bond.

ATTY. NERI: If Your Honor please.

We object to the question, it was
not covered by the direct
examination.

COURT: Answer.

A Well, apparently that was the

intention because you decided to
sign jointly and severally the
promissory note.

Q And because that was our

intention the Philippine National
Bank agreed to that desire of Luzon
Surety Company, Inc. by issuing
only a similar surety bond and not
signing as co-maker, and jointly
and severally on the promissory
note?

ATTY. NERI: Objection Your Honor,

the contract is the best evidence.

COURT: Answer.

A As usual, as at the beginning, we

take it that your bonding the Deed
of Assignment is the understanding
that all payments for the whole
contract will go to us. (TSN, pp. 55-
57, July 21, 1958)

xxx xxx xxx

Q Did you read the terms of the

bond?

A Yes, sir, that's right.

Q And you further noted in the
bond it merely guaranteed the
deed of assignment, is that
correct? of Mr. Depusoy?

A Yes, sir.

ATTY. CRUZ: And not this particular

loan, is it not?

ATTY. NERI: We refer to the

document, Your Honor.

COURT: Sustained.

(TSN, pp. 9-10, June 26, 1959)

xxx xxx xxx

ATTY. NERI: Now, Mr. Depusoy in his

testimony stated that when you
received these amounts from the
GSIS and issued credit memos . . .
in favor of Mr. Depusoy, you did not
notify the Luzon Surety Company,
Inc. of the fact of the issuance of
this (sic) credit memos in favor of
Mr. Depusoy will you state to this
Honorable Court the reason why is
that you did not give notice to the
Luzon Surety Company, Inc.?

A I did not notify the Luzon Surety

Company, Inc. of this transaction
because the bond filed by the
Luzon Surety Company, Inc., but
the terms of the bond filed by
Luzon Surety Company is that they
 understand the transaction of Mr.
Depusoy with the Philippine
National Bank.

COURT: They understand the

transaction to be. . .

WITNESS: . . . The nature of the

transaction with Mr. Depusoy in the
sense that as we . . . as appearing
in this bond Exhibit D . . . all
payments to be received by him
from the Bureau of Public Works in
connection with the contract to
secure the full and faithfully
performance on his part of the said
agreement, the agreement referred
to is the assignment of payment in
connection with the contract of Mr.
Depusoy with the GSIS.

(TSN, pp. 27-29 June 1, 1959)

In support of his contention that the surety bond was

intended to guarantee the loan, the appellant gave the
following grounds or reasons:

1) The resolution of the Board of Directors of

the plaintiff approving the loan or credit
accommodation to Depusoy required that
Depusoy should put up a bond executed by
the Luzon Surety Company, Inc., Exhibits K-3,
K-4 and K-5. The resolutions of the Board of
Directors were unilateral acts of the plaintiff
and were conditions imposed upon the
debtor, Depusoy, Luzon was not a party to
these resolutions and under the rule of res
inter alios acta, they cannot bind or prejudice
 Luzon in the absence of evidence that the
terms of the resolutions had been brought to
the attention of Luzon and that it had
acceded thereto. All that the bond stated is
that the PNB required the principal to give a
good and sufficient bond. There can be no
other consideration for the execution of the
bonds other than stated thereon in the
absence of allegation that they did not
express the true intention of the parties.

2) Appellant contends that the promissory

notes and the building contract mentioned in
the Deed of Assignment became part and
parcel of the Deed of Assignment under the
principle of incorporation by reference. We
agree that the Deed of Assignment became
part and parcel of the bond, but to say that
all promissory notes, overdrafts, and any
other kind of documents which the PNB might
require the assignor to execute to evidence
the aforementioned obligation were also
incorporated by reference to the surety bond
and became obligation of Luzon is to include
in the assignment, covenants and obligations
beyond the contemplation of the parties. The
appellant relies on the last paragraph of the
Deed of Assignment which reads: "This
assignment shall be irrevocable and subject
to the terms and conditions of the promissory
notes, overdrafts, and any other kind of
document which the PNB can require or may
require the assignor to execute to evidence
the above-mentioned obligation".

It is argued that under this stipulation, Luzon

guaranteed the payment of the promissory notes which
are the subject of this action and also the building
contract between Depusoy, its principal, and the
Bureau of Public Works. This is a very far-fetched
construction. This paragraph does not impose any
obligation upon Depusoy. All that was required of
Depusoy was to execute such documents which might
be required by the PNB to evidence the Deed of
Assignment. The words of the phrase "subject to" are
words of qualification and not of contract (Cox vs. Vat
149, 110 pp. 96-148 CCH 147) and means subject to,
meaning under the control, power or dominion or
subordinate to and not being words of contract
imposing upon defendant no contractual obligation (40
Words & Phrases 386-389). What was evidently
intended is the Deed of Assignment when it stated
"subject to the terms and conditions of the promissory
notes and overdrafts" was that any amount received by
the PNB would be applied to the payment of the
promissory notes and overdrafts in accordance with
their terms and conditions as they fell due because the
Deed of Assignment was executed not for the purpose
of making the PNB the owner of all the monies received
from the GSIS, but as a security for the payment of the
debt of Depusoy arising from the credit accommodation
granted to him by the appellant. And that this was the
intention is evident from the fact that upon receipt of
the treasury warrants and checks from the GSIS, the
appellant applied the same to the payment of the debt
of Depusoy which was due with interest and the
remainder was credited to Depusoy's current account.
This balance was subject to the free disposal of
Depusoy. Hence, out of the over P1 million received by
the Loans & Discounts Department of the appellant,
almost P800,000.00 were credited to the current
account of Depusoy and only a little over P200,000.00
was applied to his debt. Appellant contends that since
in the Deed of Assignment, Depusoy undertook to
assign, transfer, and convey to PNB all payments to be
received by him from his contract with the Bureau of
Public Works, Luzon had thereby guaranteed the faithful
performance by Depusoy of his building contract with
the Bureau of Public Works, and Depusoy having
defaulted in his building contract by reason of which the
Bureau of Public Works rescinded the building contract,
the PNB did not receive from the GSIS the full contract
price of over P2 million. This indeed is a very far-
fetched construction of the contract. What was
transferred or assigned by Depusoy to the PNB were all
payments to be received by him under the contract
with the Bureau of Public Works. Necessarily, what was
to be received by Depusoy depends upon his
performance under the contract. As long as he faithfully
performed the contract, he would receive from the GSIS
the amount due him. From the moment he defaulted
and failed to comply with the terms of the contract, he
would receive nothing and he could not assign what he
did not have. To argue that under the terms of the Deed
of Assignment, Luzon also guaranteed the faithful
performance of the building contract of Depusoy with
the Bureau of Public Works is fanciful and wishful
thinking.

3) Appellant also contends that under Exhibits F and I, it

can be seen that what was really intended to be
guaranteed by the surety agreement was the payment
of the loan. We quote Exhibits F and I.

Relative to our above-captioned bonds in the

amount of P40,000.00 dated May 28, 1956
and September 24, 1956, respectively, please
be advised that same is hereby extended for
a further period of six (6) months from
January 31, 1957. All other terms and
conditions of our above-mentioned bonds
 shall remain the same except the period of
expiration herein above mentioned. These
bonds also cover the new accommodation
given our Principal.

Relative to the above numbered bonds, in the

amount of P40,000.00 and P60,000.00 dated
May 28, 1956 and September 24, 1956,
respectively, the account secured thereby
having been reduced by virtue of payments
made by our principal, which, according to
him has but a balance of P75,000.00 we have
the honor to inform you that we are
agreeable to the extension of further credit to
our principal to the extent of the amount of
the said bonds, under the same terms and
conditions thereof.

At first glance, from the statement in Exhibit F, which

reads: "This bond also covers the new accommodation
given our principal", and in Exhibit I, that "we are
agreeable to the extension of further credit to or
principal to the extent of the amount of the said bond",
it would appear that Luzon was referring to the
obligation of Depusoy to pay the loan. But particular
attention must be paid to the statement in Exhibit F
that "all of the terms and conditions of our above-
mentioned bonds shall remain the same except the
period of expiration herein below mentioned". What
was really agreed by Luzon was the extension of the
duration of the surety bond, for under the terms of the
bonds they expired six months from their respective
dates. Any statement in Exhibit I that may be construed
as referring to the debt of Depusoy was made only by
an Asst. Manager who evidently was not familiar with
the terms of the surety bond. It must be noted that the
surety bond was executed by CS Rodriguez, General
Manager. Moreover, it cannot prevail over the testimony
of Delfin Santiago, Manager of the Loans & Discounts
Department, that what was guaranteed by the surety
bond was the Deed of Assignment.

It is also contended that if what was intended to be

guaranteed by Luzon is the Deed of Assignment, the
surety bond guaranteed nothing, because with the
execution of the Deed of Assignment, nothing
thereafter remained to be done. This is not true, for the
terms of the Deed of Assignment, Depusoy authorized
the PNB to receive all monies due from the Bureau of
Public Works and to endorse for deposit all instruments
of credit that might be issued in connection with the
payments therein assigned. Under this stipulation,
Luzon guaranteed that all the monies due Depusoy
under his building contract with the Bureau of Public
Works should be paid to the PNB. It is true that all the
checks and warrants issued by the GSIS were to be
made payable to the PNB. But under the arrangement
between the PNB, GSIS, and the Bureau of Public Works,
and Depusoy, it was Depusoy who received the
warrants or checks either from the Bureau of Public
Works or from the GSIS, and Depusoy delivered the
same to the PNB. The PNB did not take the trouble of
going to the GSIS or the Bureau of Public Works to get
the checks. One reason because the PNB did not know
when any amount would be due. There is nothing then
that could prevent an arrangement thereafter between
Depusoy and the GSIS, or the Bureau of Public Works to
make the checks payable to Depusoy, and Depusoy
from forging the signature of the PNB and appropriating
the money. This would be a violation of the Deed of
Assignment for which Luzon would be liable.

It is not disputed that no payment was made directly to

Depusoy after the Deed of Assignment. All amounts due
to Depusoy were paid to the PNB for the account of
Depusoy. It is true that in accordance with Exhibit M,
only P1,063,408.91 were received by the Loans and
Discounts Department of the plaintiff bank, and that of
the total amount of P1,309,461.89 paid by the GSIS,
P246,062.98 were paid for the importation of
construction materials. As to the so-called 10%
retention fund, there is no evidence that the Bureau of
Public Works had retained any amount. In any case
what was assigned was "all payments to be received"
under the building contract, and the 10% retention was
not to be received by Depusoy until certain conditions
had been met.

In its eight assignment of error, the appellant contends

that the lower court in not admitting proof of the
amount actually received by the PNB and the letter of
the GSIS, Exhibit Q (sic). Aside from the purely technical
reason for their rejection, their admission cannot affect
the result. Exhibit Q is a letter of the General Manager
of the GSIS to plaintiff advising plaintiff of the rescission
of the building contract. Exhibits Q, P, P-1 and P-2 are
statements of the amounts received by plaintiff's
foreign department. There is no evidence that the GSIS
had paid any amount to Depusoy in violation of the
Deed of Assignment. Not a single cent had been
received directly by Depusoy from the GSIS or the
Bureau of Public Works.

xxx xxx xxx

We agree with the appellant that the trial court erred in

not sentencing Estanislao Depusoy to pay attorney's
fees equivalent to 10% of the amount due. This is
expressly provided for in the promissory notes, and as it
does not appear to be unreasonable, the stipulation of
the parties should be given effect. 8
Its motion for reconsideration 9 having been denied by the
respondent Court of Appeals in its resolution of 1 February
1971, 10 petitioner filed the instant petition on 3 March 1971
asserting therein that:

. . . the Decision and the Resolution of respondent

COURT (Annexes A and B) are both not in accord with
the evidence, the law, and jurisprudence on the matter.

I. THE SURETY BONDS COVER THE PRINCIPAL LOANS,

THE SURETY THEREBY BECOMING LIABLE UPON
DEFAULT OF THE LATTER.

II. EVEN ASSUMING ARGUENDO THAT THE BONDS

SECURE ONLY THE DEED OF ASSIGNMENT, STILL THE
SURETY IS LIABLE FOR FAILURE OF THE PRINCIPAL TO
COMPLY WITH THE TERMS OF SUCH DEED.

III. THE DISPOSITIVE PORTION OF THE DECISION

SHOULD BE AMENDED TO THE END THAT PRIVATE
RESPONDENT RESPONDENTS BE ADJUDGED LIABLE FOR
ATTORNEY'S FEES. 11

In support of its petition, petitioner practically summoned the

same arguments which it relied upon before the Court of Appeals.

On 3 March 1971 private respondent filed a motion to dismiss the

petition 12 on the following grounds:

1. That the petition is without merit;

2. That the question raised therein are too

unsubstantial to require consideration; and

3. That the question raised are factual.

In the resolution of 8 March 1971 this Court dismissed the petition

for being factual and for lack of merit; 13however, upon motion for
reconsideration 14 this Court reconsidered the resolution and gave
due course to the petition. 15The petitioner was then required to
submit its Brief, 16 which it complied with on 12 July
1971 . 17 Private respondent LSCI filed its brief on 10 August
1971. 18 Private respondent Depusoy did not file any.

Except for the third assigned error, We find no merit in this

petition. The issues raised are factual.

The findings of facts of the Court of Appeals can withstand the

most incisive scrutiny. They are sufficiently supported by the
evidence on record and the conclusions drawn therefrom do not
justify a departure from the deeply rooted and well settled
doctrine that findings of facts of the Court of Appeals are
conclusive on this Court, 19 considering that the recognized
exceptions thereto 20 do not come to the rescue of petitioner.

We are in full accord with the conclusion of the trial court and the
Court of Appeals that the bonds executed by private respondent
LSCI were to guarantee the faithful performance of Depusoy of his
obligation under the Deed of Assignment and not to guarantee
the payment of the loans or the debt of Depusoy to petitioner to
the extent of P100,000.00. The language of the bonds is clear,
explicit and unequivocal. It leaves no room for interpretation.
Article 1370 of the Civil Code provides:

If the terms of a contract are clear and leave no doubt

upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.

Besides, even if there had been any doubt on the terms and
conditions of the surety agreement, the doubt should be resolved
in favor of the surety. As concretely put in Article 2055 of the Civil
Code, "A guaranty is not presumed, it must be expressed and
cannot extend to more than what is stipulated therein."

In the recent case of Umali, et al. vs. Court of Appeals, et

al., 21 We reiterated the unrippled rule that the liability of the
surety is measured by the terms of the contract, and, while he is
liable to the full extent thereof, such liability is strictly limited to
that assumed by its terms. 22

In La Insular vs. Machuca Go Tanco, et al., supra., this Court held:

It is undoubtedly true that the law looks upon the

contract of suretyship with a jealous eye, and the rule is
settled that the obligations of the surety cannot be
extended by implication beyond its specified limits.

Article 1827 of the Civil Code so discloses (Uy Aloc vs.

Cho Jan Ling, 27 Phil. Rep., 427); and with this doctrine
the common law is accordant. As was said by Justice
Story in Miller vs. Stewart (9 Wheat. 680; 6 L. ed., 189):

Nothing can be clearer, both upon principles and

authority, than the doctrine that the liability of a surety
is not to be extended, by implication, beyond the terms
of his contract. To the extent and in the manner, and
under the circumstances pointed out in his obligation,
he is bound, and no farther.

As earlier adverted to, there is merit in the third assigned error.

The paragraph immediately preceding the decretal portion of the
decision of respondent Court of Appeals reads as follows:

We agree with the appellant that the trial court erred in

not sentencing Estanislao Depusoy to pay attorney's
fees equivalent to 10% of the amount due. This is
expressly provided for in the promissory notes, and as it
does not appear to be unreasonable, the stipulation of
the parties should be given effect.

The dispositive portion of the questioned decision should then be

modified in the sense that the "10% interest" indicated therein
should be considered and understood as and for attorney's fees.
WHEREFORE, with the above modification, the Decision of the
Court of Appeals of 12 December 1970 in CA-G.R. No. 36615-R is
AFFIRMED, with costs against petitioner.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

Lim v. Security Bank Corp. GR. No. 188539, March 12,

2014

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 188539 March 12, 2014

MARIANO LIM, Petitioner,

vs.
SECURITY BANK CORPORATION,* Respondent.

DECISION

PERALTA, J.:

This deals with the Petition for Review on Certiorari under Rule 45
of the Rules of Court praying that the Decision 1of the Court of
Appeals (CA), promulgated on July 30, 2008, and the
Resolution2 dated June 1, 2009, denying petitioner's motion for
reconsideration thereof, be reversed and set aside.

Petitioner executed a Continuing Suretyship in favor of

respondent to secure "any and all types of credit accommodation
that may be granted by the bank hereinto and hereinafter" in
favor of Raul Arroyo for the amount of P2,000,000.00 which is
covered by a Credit Agreement/Promissory Note. 3 Said promissory
note stated that the interest on the loan shall be 19% per annum,
compounded monthly, for the first 30 days from the date thereof,
and if the note is not fully paid when due, an additional penalty of
2% per month of the total outstanding principal and interest due
and unpaid, shall be imposed.

In turn, the Continuing Suretyship4 executed by petitioner

stipulated that:

3. Liability of the Surety. - The liability of the Surety is solidary and

not contingent upon the pursuit of the Bank of whatever remedies
it may have against the Debtor or the collaterals/liens it may
possess. If any of the Guaranteed Obligations is not paid or
performed on due date (at stated maturity or by acceleration), the
Surety shall, without need for any notice, demand or any other
act or deed, immediately become liable therefor and the Surety
shall pay and perform the same.5

Guaranteed Obligations are defined in the same document as

follows:

a) "Guaranteed Obligations" - the obligations of the Debtor arising

from all credit accommodations extended by the Bank to the
Debtor, including increases, renewals, roll-overs, extensions,
restructurings, amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter owing to the
Bank, as appears in the accounts, books and records of the Bank,
whether direct or indirect, and (ii) any and all expenses which the
Bank may incur in enforcing any of its rights, powers and
remedies under the Credit Instruments as defined hereinbelow. 6

The debtor, Raul Arroyo, defaulted on his loan obligation.

Thereafter, petitioner received a Notice of Final Demand dated
August 2, 2001, informing him that he was liable to pay the loan
obtained by Raul and Edwina Arroyo, including the interests and
penalty fees amounting to P7,703,185.54, and demanding
payment thereof. For failure of petitioner to comply with said
demand, respondent filed a complaint for collection of sum of
money against him and the Arroyo spouses. Since the Arroyo
spouses can no longer be located, summons was not served on
them, hence, only petitioner actively participated in the case.
After trial, the Regional Trial Court of Davao (RTC) rendered
judgment against petitioner.7 The dispositive portion of the RTC
Decision reads as follows:

Wherefore, judgment is hereby rendered ordering defendant Lim

to pay the following sums.

1. The principal sum of two million pesos plus nineteen

percent interest of the outstanding principal interest due and
unpaid to be computed from January 28, 1997 until fully
paid, plus two percent interest per month as penalty to be
computed from February 28, 1997 until fully paid.

2. Four hundred thousand pesos as attorney's fees.

3. Thirty thousand pesos as litigation expenses.

SO ORDERED.8

Petitioner appealed to the CA, but the appellate court, in its

Decision dated July 30, 2008, affirmed the RTC judgment with the
modification that interest be computed from August 1, 1997; the
penalty should start only from August 28, 1997; the award of
attorney's fees is set at 10% of the total amount due; and the
award for litigation expenses increased to P92,321.10.9

Petitioner's motion for reconsideration of the CA Decision was

denied per Resolution dated June 1, 2009.

Petitioner then elevated the matter to this Court via a petition for
review on certiorari, where the main issue is whether petitioner
may validly be held liable for the principal debtor's loan obtained
six months after the execution of the Continuing Suretyship.

The other issues, such as the proper computation of the total

indebtedness and the amount of litigation expenses are factual
matters that had been satisfactorily addressed by the CA, to wit:
(1) the CA ruled that respondent should recompute the total
amount due, since the proceeds from the foreclosure of the real
estate and chattel mortgages were deducted only on June 20,
2001, when the public auctions were conducted on August 26,
1998 and September 7, 1999, respectively, thus, the amount of
the proceeds from the foreclosure of the mortgaged properties
should have been deducted from the amount of indebtedness on
the date the public auction was held; and (2) the CA likewise
pointed out that as can be seen from the Legal Fees Form, 10 the
litigation expense incurred by respondent was P92,321.10, the
amount it paid as filing fee. It is hornbook principle that this Court
is not a trier of facts, hence, such issues will not be revisited by
this Court in the present petition. With regard to the propriety of
making petitioner a hostile witness, respondent is correct that the
issue cannot be raised for the first time on appeal. Thus, the
Court will no longer address these issues which had been
improperly raised in this petition for review on certiorari.

The main issue deserves scant consideration, but the matter of

the award of attorney's fees deserves reexamination.

The nature of a suretyship is elucidated in Philippine Charter

Insurance Corporation v. Petroleum Distributors & Service
Corporation11 in this wise:

A contract of suretyship is an agreement whereby a party, called

the surety, guarantees the performance by another party, called
the principal or obligor, of an obligation or undertaking in favor of
another party, called the obligee. Although the contract of a
surety is secondary only to a valid principal obligation, the surety
becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor
does it receive any benefit therefrom. This was explained in the
case of Stronghold Insurance Company, Inc. v. Republic-Asahi
Glass Corporation, where it was written:

The surety's obligation is not an original and direct one for the
performance of his own act, but merely accessory or collateral to
the obligation contracted by the principal. Nevertheless, although
the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in other words,
he is directly and equally bound with the principal.
 xxxx

Thus, suretyship arises upon the solidary binding of a person

deemed the surety with the principal debtor for the purpose of
fulfilling an obligation. A surety is considered in law as being the
same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable. x x x. 12

In this case, what petitioner executed was a Continuing

Suretyship, which the Court described in Saludo, Jr. v. Security
Bank Corporation13 as follows:

The essence of a continuing surety has been highlighted in the

case of Totanes v. China Banking Corporation in this wise:

Comprehensive or continuing surety agreements are, in fact,

quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering
into a series of credit transactions with a particular company,
normally requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor. 14

The terms of the Continuing Suretyship executed by petitioner,

quoted earlier, are very clear.1wphi1 It states that petitioner, as
surety, shall, without need for any notice, demand or any other
act or deed, immediately become liable and shall pay "all credit
accommodations extended by the Bank to the Debtor, including
increases, renewals, roll-overs, extensions, restructurings,
amendments or novations thereof, as well as (i) all obligations of
the Debtor presently or hereafter owing to the Bank, as appears
in the accounts, books and records of the Bank, whether direct or
indirect, and
(ii) any and all expenses which the Bank may incur in enforcing
any of its rights, powers and remedies under the Credit
Instruments as defined hereinbelow."15 Such stipulations are valid
and legal and constitute the law between the parties, as Article
2053 of the Civil Code provides that "[a] guaranty may also be
given as security for future debts, the amount of which is not yet
known; x x x." Thus, petitioner is unequivocally bound by the
terms of the Continuing Suretyship. There can be no cavil then
that petitioner is liable for the principal of the loan, together with
the interest and penalties due thereon, even if said loan was
obtained by the principal debtor even after the date of execution
of the Continuing Suretyship.

With regard to the award of attorney's fees, it should be noted

that Article 2208 of the Civil Code does not prohibit recovery of
attorney's fees if there is a stipulation in the contract for payment
of the same. Thus, in Asian Construction and Development
Corporation v. Cathay Pacific Steel Corporation (CAPASCO), 16 the
Court, citing Titan Construction Corporation v. Uni-Field
Enterprises, Inc.,17 expounded as follows:

The law allows a party to recover attorney's fees under a written

agreement. In Barons Marketing Corporation v. Court of Appeals,
the Court ruled that:

[T]he attorney's fees here are in the nature of liquidated damages

and the stipulation therefor is aptly called a penal clause. It has
been said that so long as such stipulation does not contravene
law, morals, or public order, it is strictly binding upon defendant.
The attorney's fees so provided are awarded in favor of the
litigant, not his counsel.

On the other hand, the law also allows parties to a contract to

stipulate on liquidated damages to be paid in case of breach. A
stipulation on liquidated damages is a penalty clause where the
obligor assumes a greater liability in case of breach of an
obligation. The obligor is bound to pay the stipulated amount
without need for proof on the existence and on the measure of
damages caused by the breach.18
However, even if such attorney's fees are allowed by law, the
courts still have the power to reduce the same if it is
unreasonable. In Trade & Investment Corporation of the
Philippines v. Roblett Industrial Construction Corp., 19 the Court
equitably reduced the amount of attorney's fees to be paid since
interests and penalties had ballooned to thrice as much as the
principal debt. That is also the case here. The award of attorney's
fees amounting to ten percent (10%) of the principal debt, plus
interest and penalty charges, would definitely exceed the
principal amount; thus, making the attorney's fees manifestly
exorbitant. Hence, we reduce the amount of attorney's fees to ten
percent (10%) of the principal debt only.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision of

the Court of Appeals, dated July 30, 2008, in CA-G.R. CV No.
00462, is AFFIRMED with MODIFICATION in that the award of
attorney's fees is reduced to ten percent (10%) of the principal
debt only.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

ROBERTO A. ABAD JOSE CATRAL MENDOZA

Associate Justice Associate Justice

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer
of the opinion of the Court's Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the

Division Chairperson's Attestation, I certify that the conclusions in
the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court's
Division.

MARIA LOURDES P. A. SERENO

Chief Justice

Towers Assurance Corp. v. Ororama Supermart, GR. No. L-

45848, November 9, 1997
SECOND DIVISION

[G.R. No. L-45848. November 9, 1977.]

TOWERS ASSURANCE CORPORATION, Petitioner, v.

ORORAMA SUPERMART, ITS OWNER-PROPRIETOR, SEE
HONG and JUDGE BENJAMIN K. GOROSPE, Presiding Judge,
Court of First Instance of Misamis Oriental, Branch
I, Respondents.

Benjamin Tabique & Zosimo T. Vasalla for Petitioner.

Rodrigo F. Lim, Jr. for Private Respondent.

DECISION

AQUINO, J.:
This case is about the liability of a surety in a counterbond for the
lifting of a writ of preliminary attachment.

On February 17, 1976 See Hong, the proprietor of Ororama

Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong
and Conching Ong in the Court of First Instance of Misamis
Oriental for the collection of the sum of P58,400 plus litigation
expenses and attorneys fees (Civil Case No. 4930).

See Hong asked for a writ of preliminary attachment. On March 5,

1976, the lower court issued an order of attachment. The deputy
sheriff attached the properties of the Ong spouses in Valencia,
Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed on March 11, 1976 a
counterbond in the amount of P58,400 with Towers Assurance
Corporation as surety. In that undertaking, the Ong spouses and
Towers Assurance Corporation bound themselves to pay solidarily
to See Hong the sum of P58,400.

On March 24, 1976 the Ong spouses filed an answer with a

counterclaim. For non-appearance at the pre-trial, the Ong
spouses were declared in default.

On October 25, 1976, the lower court rendered a decision,

ordering not only the Ong spouses but also their surety, Towers
Assurance Corporation, to pay solidarily to See Hong the sum of
P58,400. The court also ordered the Ong spouses to pay P10,000
as litigation expenses and attorneys fees.chanrobles.com.ph :
virtual law library

Ernesto Ong manifested that he did not want to appeal. On March

8, 1977, Ororama Supermart filed a motion for execution. The
lower court granted that motion. The writ of execution was issued
on March 14 against the judgment debtors and their surety. On
March 29, 1977, Towers Assurance Corporation filed the instant
petition for certiorari where it assails the decision and writ of
execution.

We hold that the lower court acted with grave abuse of discretion
in issuing a writ of execution against the surety without first
giving it an opportunity to be heard as required in Rule 57 of the
Rules of Court which provides:jgc:chanrobles.com.ph

"SEC. 17. When execution returned unsatisfied, recovers had upon

bond. If the execution be returned unsatisfied in whole or in
part, the surety or sureties on any counterbond given pursuant to
the provisions of this rule to secure the payment of the judgment
shall become charged on such counterbond, and bound to pay to
the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or
sureties after notice and summary hearing in the action."cralaw
virtua1aw library

Under section 17, in order that the judgment creditor might

recover from the surety on the counterbond, it is necessary (1)
that execution be first issued against the principal debtor and that
such execution was returned unsatisfied in whole or in part; (2)
that the creditor made a demand upon the surety for the
satisfaction of the judgment, and (3) that the surety be given
notice and a summary hearing in the same action as to his
liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this case

because Towers Assurance Corporation assumed a solidary
liability for the satisfaction of the judgment. A surety is not
entitled to the exhaustion of the properties of the principal debtor
(Art. 2959, Civil Code; Luzon Steel Corporation v. Sia, L-26449,
May 15, 1969, 28 SCRA 58, 63).

But certainly, the surety is entitled to be, heard before an

execution can be issued against him since he is not a party in the
case involving his principal. Notice and hearing constitute the
essence of procedural due process. (Martinez v. Villacete, 116
Phil. 326; Alliance Insurance & Surety Co., Inc. v. Hon. Piccio, 105
Phil. 1192, 1200; Luzon Surety Co., Inc. v. Beson, L-26865-66,
January 30, 1970, 31 SCRA 313)chanrobles virtual lawlibrary

WHEREFORE, the order and writ of execution, insofar as they

concern Towers Assurance Corporation, are set aside. The lower
court is directed to conduct a summary hearing on the suretys
liability on its counterbond. No costs.

SO ORDERED.

Fernando (Chairman), Barredo, Antonio, Concepcion Jr. and

Santos, JJ., concur.

Finman General Assurance Corp. v. Salik, GR. No. 84084,

August 20, 1990

CASE: FINMAN GENERAL ASSURANCE CORPORATION vs.

ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA
GANDHI PUA, DAVID MALANAO, THE ADMINISTRATOR,
PHILIPPINE OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF LABOR AND
EMPLOYMENT

G.R. No. 84084 August 20, 1990

FACTS:
Abdulgani Salik et. al Pan Pacific Overseas Recruiting
Services, Inc. and were promised of employment by a certain
Mrs. Normita Egil. Allegedly, they had paid a sum totalling to
P30,000 (placement fee). The promise was not materialized
however.

This lead to the filing of complaint for the claim of sum of money
by the respondents before the Philippine Overseas Employment
Association (POEA). The petitioners as well impleaded Filman
General Assurance Corporation, Pan Pacifics bonding company.

Summons were served and yet petitioners failed to appear in

every hearing. Thus, ex parte proceedings have ensued.

DOLE Hon. Franklin M. Drilon (DOLE Secretary) upon the

recommendation of the POEA hearing officer, issued an Order
wherein both respondents are hereby directed to pay jointly and
severally the claims of complainants which amounted to P30,
000.

Pan Pacific Overseas Recruiting Services is hereby cancelled,

effective immediately.

*MR by the petitioners was denied.

*Petitioners filed instead a motion for Certiorari under Rule 45

ISSUE/S:

I. WHETHER OR NOT impleading Finman as co-respondent of

Pan Pacific was erroneous.
II. WHETHER OR NOT Finman should pay jointly and severally
with Pan Pacific the claims of private respondents on the
basis of the suretyship agreement between Finman and
Pan Pacific and the POEA
III. WHETHER OR NOT the findings of fact made by the POEA
and upon which the Secretary of Labor based its
questioned orders are not supported by substantial
evidence and are contrary to law.
HELD:
The petition is devoid of merit.

FIRST ISSUE:
Even if herein Finman was not impleaded in the instant case, still
it (petitioner) can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific. Moreover, private
respondents have a legal claim against Pan Pacific and its insurer
for the placement and processing fees they paid, so much so that
in order to provide a complete relief to private respondents,
petitioner had to be impleaded in the case.

SECOND ISSUE:
In the case at bar, it remains uncontroverted that herein
petitioner and Pan Pacific entered into a suretyship agreement,
with the former agreeing that the bond is conditioned upon the
true and faithful performance and observance of the bonded
principal (Pan Pacific) of its duties and obligations.

The nature of Finman's obligation under the suretyship agreement

makes it privy to the proceedings against its principal (Pan
Pacific). As such Finman is bound, in the absence of collusion, by a
judgment against its principal even though it was not a party to
the proceedings. It was also understood that under the suretyship
agreement, herein petitioner undertook itself to be jointly and
severally liable for all claims arising from recruitment violation of
Pan Pacific.

THIRD ISSUE:
By raising this issue, petitioner is in effect questioning the
Secretarys factual findings. Well-settled is the rule that findings
of facts of the respondent Secretary are generally accorded great
weight unless there was grave abuse of discretion or lack of
jurisdiction in arriving at such findings. At times even, such
findings are accorded with finality.

It can be remembered that in the series of hearings, the

petitioners were consistently absent. Despite such, they are given
notice every hearing. In the absence of any controverting
evidence, respondent Secretary of Labor admitted and considered
private respondents' testimonies and evidence as substantial.
Under the circumstances, no justifiable reason can be found to
justify disturbance of the findings of facts of the respondent
Secretary of Labor, supported as they are by substantial evidence
and in the absence of grave abuse of discretion.
South City Homes, Inc. Fortune Motors, Palawan
Manufacturing Corp. v. BA Finance Corp. GR. No. 135462,
December 7, 2001

FIRST DIVISION

[G. R. No. 135462. December 7, 2001]

SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.),

PALAWAN LUMBER MANUFACTURING CORPORATION, petitioners,
vs. BA FINANCE CORPORATION, respondent.

DECISION

PARDO, J.:

The Case

The case is a petition to set aside the decision i[1] of the Court of
Appeals, the dispositive portion of which reads:

WHEREFORE, premises considered, the appealed Decision (as

amended by that Order of July 22, 1992) of the lower court in Civil
Case No. 21944 is hereby AFFIRMED with the MODIFICATION that
defendant-appellee South City Homes, Inc. is hereby ordered to
pay, jointly and severally, with Fortune Motors Corporation,
Palawan Lumber Manufacturing Corporation and Joseph L. G.
Chua, the outstanding amounts due under the six (6) drafts and
trust receipts, with interest thereon at the legal rate from the date
of filing of this case until said amounts shall have been fully paid,
as follows:

Date of Draft Amount Balance Due

July 26, 1983 P 244,269.00 P 198,659.52

July 27, 1983 967,765.50 324,767.41

July 28, 1983 1,138,941.00 1,138,941.00

August 2, 1983 244,269.00 244,269.00

August 5, 1983 275,079.00 275,079.60

August 8, 1983 475,046.10 475,046.10

and the attorneys fees and costs of suit.

SO ORDERED.ii[2]

The Facts

The facts, as found by the Court of Appeals, are as follows:

The present controversy relates to the rights of an assignee

(financing company) of drafts and trust receipts backed up by
sureties, in the event of default by the debtor (car dealer) to
whom the assignor creditor (car manufacturer) sold and delivered
motor vehicles for resale. A consistent ruling on these cases is
hereby reiterated: that a surety may secure obligations incurred
subsequent to the execution of the surety contract.

Prior to the transactions covered by the subject drafts and trust

receipts, defendant-appellant Fortune Motors Corporation (Phils.)
has been availing of the credit facilities of plaintiff-appellant BA
Finance Corporation. On January 17, 1983, Joseph L. G. Chua,
President of Fortune Motors Corporation, executed in favor of
plaintiff-appellant a Continuing Suretyship Agreement, in which he
jointly and severally unconditionally guaranteed the full,
faithful and prompt payment and discharge of any and all
indebtedness of Fortune Motors Corporation to BA Finance
Corporation (Folder of Exhibits, pp. 21-22).

On February 3, 1983, Palawan Lumber Manufacturing

Corporation represented by Joseph L.G. Chua, George D. Tan,
Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor of
plaintiff-appellant a Continuing Suretyship Agreement in which,
said corporation jointly and severally unconditionally
guaranteed the full, faithful and prompt payment and discharge
of any and all indebtedness of Fortune Motors Corporation to BA
Finance Corporation (Folder of Exhibits, pp. 19-20). On the same
date, South City Homes, Inc. represented by Edgar C. Rodrigueza
and Aurelio F. Tablante, likewise executed a Continuing Suretyship
Agreement in which said corporation jointly and severally
unconditionally guaranteed the full, faithful and prompt
payment and discharge of any and all indebtedness of Fortune
Motors Corporation to BA Finance Corporation (Folder of Exhibits,
pp. 17-18).

Subsequently, Canlubang Automotive Resources Corporation

(CARCO) drew six (6) Drafts in its own favor, payable thirty (30)
days after sight, charged to the account of Fortune Motors
Corporation, as follows:

Date of Draft Amount

July 26, 1983 P 244,269.00

July 27, 1983 967,765.50

July 28, 1983 1,138,941.00

August 2, 1983 244,269.00

August 5, 1983 275,079.00

August 8, 1983 475,046.10

(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).

Fortune Motors Corporation thereafter executed trust receipts

covering the motor vehicles delivered to it by CARCO under which
it agreed to remit to the Entruster (CARCO) the proceeds of any
sale and immediately surrender the remaining unsold vehicles
(Folder of Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and
trust receipts were assigned to plaintiff-appellant, under Deeds of
Assignment executed by CARCO (Folder of Exhibits, pp. 3, 6, 7-B,
10, 13 and 16).

Upon failure of the defendant-appellant Fortune Motors

Corporation to pay the amounts due under the drafts and to remit
the proceeds of motor vehicles sold or to return those remaining
unsold in accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand letter to Edgar
C. Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan
Lumber Manufacturing Corporation, Joseph L. G. Chua, George D.
Tan and Joselito C. Baltazar (Folder of Exhibits, pp. 29-37). Since
the defendants-appellants failed to settle their outstanding
account with plaintiff-appellant, the latter filed on December 22,
1983 a complaint for a sum of money with prayer for preliminary
attachment, with the Regional Trial Court of Manila, Branch 1,
which was docketed as Civil Case No. 83-21944 (Record, pp. 1-
12). Plaintiff-appellant filed a surety bond in the amount of
P3,391,546.56 and accordingly, Judge Rosalio C. Segundo ordered
the issuance of a writ of preliminary attachment on January 3,
1984 (Record, pp. 37-47). Defendants Fortune Motors Corporation,
South City Homes, Inc., Edgar C. Rodrigueza, Aurelio F. Tablante,
Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua,
George D. Tan and Joselito C. Baltazar filed a Motion to Discharge
Attachment, which was opposed by plaintiff-appellant (Record, pp.
49-56). In an Order dated January 11, 1984, Judge Segundo
dissolved the writ of attachment except as against defendant
Fortune Motors Corporation and set the said incident for hearing
(Record, p. 57). On January 19, 1984, the defendants filed a
Motion to Dismiss. Therein, they alleged that conventional
subrogation effected a novation without the consent of the debtor
(Fortune Motors Corporation) and thereby extinguished the
latters liability; that pursuant to the trust receipt transaction, it
was premature under P. D. No. 115 to immediately file a complaint
for a sum of money as the remedy of the entruster is an action for
specific performance; that the suretyship agreements are null and
void for having been entered into without an existing principal
obligation; and that being such sureties does not make them
solidary debtors (Record, pp. 58-64).

After due hearing, the court denied the motion to discharge

attachment with respect to defendant Fortune Motors Corporation
as well as the motion to dismiss by the defendants (Record, pp.
68 and 87). In their Answer, defendants stressed that their
obligations to the creditor (CARCO) was extinguished by the
assignment of the drafts and trust receipts to plaintiff-appellant
without their knowledge and consent, and pursuant to legal
provision on conventional subrogation a novation was effected,
thereby extinguishing the liability of the sureties; that plaintiff-
appellant failed to immediately demand the return of the goods
under the trust receipt agreements or exercise the courses of
action by the entruster as provided for under P. D. No. 115; and
that at the time the suretyship agreements were entered into,
there were no principal obligations, thus rendering them null and
void. A counterclaim for the award of actual, moral and
exemplary damages was prayed for by defendants (Record, pp.
91-110).

During the pre-trial, efforts to reach a compromise was not

successful, and in view of the retirement of Judge Rosalio C.
Segundo of RTC Manila, Branch 1, the case was-re-raffled off to
Branch XXXIII, presided over by Judge Felix V. Barbers (Record, pp.
155-160).

Fortune Motors Corporation filed a motion to lift the writ of

attachment covering three (3) vehicles described in the Third-
Party Claim filed with the Office of Deputy Sheriff Jorge C.
Victorino (RTC, Branch 1) by Fortune Equipment, Inc. which was
opposed by plaintiff-appellant (Record, pp. 173-181). On June 15,
1984, Deputy Sheriff Jorge C. Victorino issued a Notice of Levy
Upon Personal Properties Pursuant to Order of Attachment which
was duly served on defendant Fortune Motors Corporation
(Record, pp. 191-199). In an Order dated April 28, 1986, the court
a quo denied the motion to lift the writ of attachment on three (3)
vehicles described in the Third-Party Claim filed by Fortune
Equipment Inc. (Record, p. 207). On motion of their respective
counsel, the trial court granted the parties time to sit down and
appraise the machineries and spare parts owned by defendant
Fortune Motors Corporation which are now in the possession of
plaintiff corporation by virtue of the attachment. A series of
conferences was allowed by the court, as means toward possible
compromise agreement. In an Order dated June 2, 1987, the case
was returned to Branch I, now presided over by Judge Rebecca G.
Salvador (Record, p. 237). The pre-trial period was terminated
and the case was set for trial on the merits (Record, p. 259).
Acting on the motion to sell levied properties filed by defendant
George D. Tan, the trial court ordered the public sale of the
attached properties (Record, p. 406). The court likewise allowed
the complaint-in-intervention filed by Fortune Equipment Inc. and
South Fortune Motors Corporation who claimed ownership of four
(4) vehicles earlier seized and attached (Record, p. 471-475).
Plaintiff corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so
attached but denied the rest of intervenors allegations (Record,
pp. 479-482). Thereafter, the parties submitted their respective
pre-trial briefs on the complaint-in-intervention, and after the
submission of evidence thereon, the case was submitted for
decision (Record, pp. 573-577).

On November 25, 1991, the lower court rendered its judgment,

the dispositive portion of which reads as follows:

WHEREFORE, judgment is hereby rendered:

1. Ordering defendants Fortune Motors, Palawan Lumber

Manufacturing Corporation and Joseph Chua, jointly and severally
to pay the plaintiff on the July 27, 1983 Draft, the sum of
P324,767.41 with the interest thereon at the legal rate from the
date of filing of this case, December 21, 1983 until the amount
shall have been fully paid;

2. Ordering defendants Fortune Motors, Palawan Manufacturing

Corporation and Joseph Chua jointly and severally to pay to the
plaintiff on the July 26, 1983 Draft, the sum of P198,659.52 with
interest thereon at the legal rate from the date of filing of this
case, until the amount shall have been fully paid;

3. Ordering defendant Fortune Motors, Palawan Manufacturing

Corporation and Joseph Chua jointly and severally to pay to the
plaintiff on the July 28, 1983 Draft the sum of P1,138,941.00 with
interest thereon at the legal rate from the date of filing of this
case, until the amount shall have been fully paid;

4. Ordering defendants Fortune Motors, Palawan Lumber

Manufacturing Corporation and Joseph Chua jointly and severally
to pay to the plaintiff on the August 2, 1983 Draft, the sum of
P244,269.00 with interest thereon at the legal rate from the date
of filing of this case, until the amount shall have been fully paid;

5. Ordering defendants Fortune Motors, Palawan Lumber

Manufacturing Corporation and Joseph Chua jointly and severally
to pay to the plaintiff on the August 5, 1983 Draft the sum of
P275,079.60 with interest thereon at the legal rate from the date
of the filing of this case, until the amount shall have been fully
paid;

6. Ordering defendants Fortune Motors, Palawan Lumber

Manufacturing Corporation and Joseph Chua jointly and severally
to pay to the plaintiff on the August 8, 1983 Draft the sum of
P475,046.10 with interest thereon at legal rate from the date of
the filing of this case, until the amount shall been fully paid;

7. Ordering defendant Fortune Motors, Palawan Lumber

Manufacturing Corporation and Joseph Chua jointly and severally
to pay the sum of P300,000.00 as attorneys fees and the costs of
this suit;

8. Dismissing plaintiffs complaint against South City Homes,

Aurelio Tablante, Joselito Baltazar, George Tan and Edgar
Rodrigueza and the latters counterclaim for lack of basis;

9. Ordering Deputy Sheriff Jorge Victorino to return to Intervenor

Fortune Equipment the Mitsubishi Truck Canter with Motor No.
310913 and Chassis No. 513234;

10. Dismissing the complaint-in-intervention in so far as the

three other vehicles mentioned in the complaint-in- intervention
are concerned for lack of cause of action;

11. Dismissing the complaint-in-intervention against Fortune

Motor for lack of basis; and

12. Ordering the parties-in-intervention to bear their respective

damages, attorneys fees and the costs of the suit.
Upon execution, the sheriff may cause the judgment to be
satisfied out of the properties attached with the exception of one
(1) unit Mitsubishi Truck Canter with Motor No. 310913 and
Chassis No. 513234, if they be sufficient for that purpose. The
officer shall make a return in writing to the court of his
proceedings. Whenever the judgment shall have been paid, the
officer, upon reasonable demand must return to the judgment
debtor the attached properties remaining in his hand, and any of
the proceeds of the properties not applied to the judgment.

SO ORDERED.

On two (2) separate motions for reconsideration, one filed by

plaintiffs-intervenors dated December 18, 1991 and the other by
plaintiff dated December 26, 1991, the trial court issued an Order
dated July 22, 1992 amending its Decision dated November 25,
1991. Specifically, said Order amended paragraphs 9 and 10
thereof and deleted the last paragraph of the said Decision.

Paragraphs 9 and 10 now read:

9. Ordering Deputy Sheriff Jorge C. Victorino to return to

Intervenor Fortune Equipment, Inc. the Mitsubishi Truck Canter
with Motor No. 310913 and Chassis No. 513234; Mitsubishi Truck
Canter with Motor No. 4D30-313012 and Chassis No. 513696, and
Fuso Truck with Motor No. 006769 and Chassis No. 20756, and to
Intervenor South Fortune Motors Corporation the Cimaron Jeepney
with Plate No. NET-849;

10. Ordering the plaintiff, in the event the motor vehicles could
no longer be returned to pay the estimated value thereof, i.e.,
P750,000.00 for the three trucks, and P5,000.00 for the Cimaron
Jeepney, to the plaintiffs-intervenors.

x x x (Records, pp. 664-665)

Plaintiffs BA Finance Corporation, defendants Fortune Motors

Corp. (Phils.) and Palawan Lumber Manufacturing Corporation,
and intervenors Fortune Equipment and South Fortune Motors,
interposed the present appeal and filed their respective
Briefs.iii[3]

On September 8, 1998, the Court of Appeals promulgated a

decision, the dispositive portion of which is quoted in the opening
paragraph of this decision.

Hence, this appeal.iv[4]

The Issues

The issues presented are: (1) whether the suretyship agreement

is valid; (2) whether there was a novation of the obligation so as
to extinguish the liability of the sureties; and (3) whether
respondent BAFC has a valid cause of action for a sum of money
following the drafts and trust receipts transactions. v[5]

The Courts Ruling

On the first issue, petitioners assert that the suretyship

agreement they signed is void because there was no principal
obligation at the time of signing as the principal obligation was
signed six (6) months later. The Civil Code, however, allows a
suretyship agreement to secure future loans even if the amount is
not yet known.

Article 2053 of the Civil Code provides that:

Art. 2053 A guaranty may also be given as security for future

debts, the amount of which is not yet known. x x x

In Fortune Motors (Phils.) Corporation v. Court of Appeals, vi[6] we

held:

To fund their acquisition of new vehicles (which are later retailed

or resold to the general public), car dealers normally enter into
wholesale automotive financing schemes whereby vehicles are
delivered by the manufacturer or assembler on the strength of
trust receipts or drafts executed by the car dealers, which are
backed up by sureties. These trust receipts or drafts are then
assigned and/or discounted by the manufacturer to/with financing
companies, which assume payment of the vehicles but with the
corresponding right to collect such payment from the car dealers
and/or the sureties. In this manner, car dealers are able to
secure delivery of their stock-in-trade without having to pay cash
therefor; manufacturers get paid without any
receivables/collection problems; and financing companies earn
their margins with the assurance of payment not only from the
dealers but also from the sureties. When the vehicles are
eventually resold, the car dealers are supposed to pay the
financing companies -- and the business goes merrily on.
However, in the event the car dealer defaults in paying the
financing company, may the surety escape liability on the legal
ground that the obligations were incurred subsequent to the
execution of the surety contract?

x x x Of course, a surety is not bound under any particular

principal obligation until that principal obligation is born. But
there is no theoretical or doctrinal difficulty inherent in saying that
the suretyship agreement itself is valid and binding even before
the principal obligation intended to be secured thereby is born,
any more than there would be in saying that obligations which are
subject to a condition precedent are valid and binding before the
occurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact

quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering
into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor;
with such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor.

Petitioners next posit (second issue) that a novation, as a result of

the assignment of the drafts and trust receipts by the creditor
(CARCO) in favor of respondent BAFC without the consent of the
principal debtor (Fortune Motors), extinguished their liabilities.
An assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause, such
as sale, dacion en pago, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power to
enforce it to the same extent as the assignor could enforce it
against the debtor.vii[7] As a consequence, the third party steps
into the shoes of the original creditor as subrogee of the latter.
Petitioners obligations were not extinguished. Thus:

x x x Moreover, in assignment, the debtors consent is not

essential for the validity of the assignment (Art. 1624 in relation
to Art. 1475, Civil Code), his knowledge thereof affecting only the
validity of the payment he might make (Article 1626, Civil Code).

Article 1626 also shows that payment of an obligation which is

already existing does not depend on the consent of the debtor.
It, in effect, mandates that such payment of the existing
obligation shall already be made to the new creditor from the
time the debtor acquires knowledge of the assignment of the
obligation.

The law is clear that the debtor had the obligation to pay and
should have paid from the date of notice whether or not he
consented.

We have ruled in Sison & Sison vs. Yap Tico and Avancea, 37
Phil. 587 [1918] that definitely, consent is not necessary in order
that assignment may fully produce legal effects. Hence, the duty
to pay does not depend on the consent of the debtor. Otherwise,
all creditors would be prevented from assigning their credits
because of the possibility of the debtors refusal to give consent.

What the law requires in an assignment of credit is not the

consent of the debtor but merely notice to him. A creditor may,
therefore, validly assign his credit and its accessories without the
debtors consent (National Investment and Development Co. v. De
Los Angeles, 40 SCRA 489 [1971]. The purpose of the notice is
only to inform that debtor from the date of the assignment,
payment should be made to the assignee and not to the original
creditor.viii[8]

Petitioners finally posit (third issue) that as an entruster,

respondent BAFC must first demand the return of the unsold
vehicles from Fortune Motors Corporation, pursuant to the terms
of the trust receipts. Having failed to do so, petitioners had no
cause of action whatsoever against Fortune Motors Corporation
and the action for collection of sum of money was, therefore,
premature. A trust receipt is a security transaction intended to
aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of the merchandise
imported or purchased.ix[9] In the event of default by the
entrustee on his obligations under the trust receipt agreement, it
is not absolutely necessary that the entruster cancel the trust and
take possession of the goods to be able to enforce his rights
thereunder. We ruled:

x x x Significantly, the law uses the word may in granting to

the entruster the right to cancel the trust and take possession of
the goods. Consequently, petitioner has the discretion to avail of
such right or seek any alternative action, such as a third party
claim or a separate civil action which it deems best to protect its
right, at any time upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust
agreement.x[10]

The Judgment

WHEREFORE, the appealed decision is hereby AFFIRMED.

However, the award of attorneys fees is deleted.

No costs.

Palmares v. CA GR. No. 126490, March 31, 1998

Contracts; suretyship; Art. 2047, NCC
PALMARES vs. CA
GR # 126490, March 31, 1998
FACTS: Pursuant to a promissory note (PN), private respondent
MB Lending Corp. (MB) extended a loan to the spouses Azarraga
together with petitioner amounting to P30k but debtors were able
to pay only P16, 300. Consequently, on the basis of petitioners
solidary liability under the PN, MB filed a complaint against
petitioner as the lone party defendant to the exclusion of the
principal debtors, allegedly due to the latters insolvency.
Petitioner claimed that while she agreed to be liable on the note
upon default of the principal debtor, MB acted in bad faith in suing
her alone without including the Azarragas when they were the
only ones who benefited from the loans
proceeds. HELD: Petitioner expressly bound herself to be jointly
and severally liable with the principal maker of the note. The
terms of the contract are clear, explicit and unequivocal that
petitioners liability is that of a surety. A surety is an insurer of
the debt, a suretyship is an undertaking that the debtor
shall pay. A surety promises to pay the principals debt. If
the principal will not pay, he binds himself to perform if
the principal does not, w/o regard to his ability to do so. In
fine, a surety undertakes directly for the payment and is
so responsible at once if the principal debtor makes
default. It has not been shown, either in the contract or the
pleadings that MB agreed to proceed against petitioner only if and
when the defaulting principal has become insolvent

Estate of KH Hemady v. Luzon Surety Co, Inc, GR. No. L-

8437, November 28, 1956
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY
CO., INC., claimant-Appellant. [GR L-8437. Nov. 28,
1956.] J. REYES en banc

Luzon Surety Co. filed a claim against the Estate based on 20

different indemnity agreements, or counter bonds, each
subscribed by a distinct principal and by the deceased K. H.
Hemady, a surety solidary guarantor.
Luzon Surety Co., prayed for allowance, as a contingent claim, of
the value of the 20 bonds it executed in consideration of the
counterbonds, and asked for judgment for the unpaid premiums
and documentary stamps affixed to the bonds, with 12 % interest
thereon. CFI dismissed the claims of Luzon Surety Co., on failure
to state the cause of action.

ISSUE : what obligations are transmissible upon the death of the

decedent? Are contingent claims chargeable against the estate?

Under the present Civil Code (Art. 1311), Contracts take effect
only as between the parties, their assigns and heirs, except in the
case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by
provision of law.

While in our successional system the responsibility of the heirs for

the debts of their decedent cannot exceed the value of the
inheritance they receive from him, the principle remains intact
that these heirs succeed not only to the rights of the deceased
but also to his obligations. Articles 774 & 776,NCC, provides,
thereby confirming Art. 1311. ART. 774. Succession is a
mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a
person are transmitted through his death to another or others
either by his will or by operation of law. ART. 776. The
inheritance includes all the property, rights and obligations of a
person which are not extinguished by his death.

The binding effect of contracts upon the heirs of the deceased

party is not altered by the provision in our Rules of Court that
money debts of a deceased must be liquidated and paid from his
estate before the residue is distributed among said heirs (Rule
89). The reason is that whatever payment is made from the
estate is ultimately a payment by the heirs and distributees, since
the amount of the paid claim in fact diminishes or reduces the
shares that the heirs would have been entitled to receive.
The general rule is that a partys contractual rights and
obligations are transmissible to the successors. The rule is a
consequence of the progressive depersonalization of
patrimonial rights and duties.

Of the 3 exceptions fixed by Art 1311, the nature of obligation of

the surety or guarantor does not warrant the conclusion that his
peculiar individual qualities are contemplated as a principal
inducement for the contract.
Creditor Luzon Surety Co. expects from Hemady when it accepted
the latter as surety in the counterbonds was the reimbursement
of the moneys that the Luzon Surety Co. might have to disburse
on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting from an
obligation to give; and to the Luzon Surety Co., it was indifferent
that the reimbursement should be made by Hemady himself or by
some one else in his behalf, so long as the money was paid to it.

The 2nd exception of Art. 1311, is intransmissibility by stipulation

of the parties. Being exceptional and contrary to the general rule,
this intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable from
the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are non-
transferable.

The 3rd exception to the transmissibility of obligations under Art.

1311 exists when they are not transmissible by operation of
law. The provision makes reference to those cases where the law
expresses that the rights or obligations are extinguished by
death: legal support, parental authority, usufruct, contracts for a
piece of work, partnership & agency. By contract, the articles of
the Civil Code that regulate guaranty or suretyship (Art 2047 to
2084) contain no provision that the guaranty is extinguished upon
the death of the guarantor or the surety.
The contracts of suretyship entered into by Hemady in favor of
Luzon Surety Co. not being rendered intransmissible due to the
nature of the undertaking, nor by the stipulations of the contracts
themselves, nor by provision of law, his eventual liability
thereunder necessarily passed upon his death to his heirs. The
contracts give rise to contingent claims provable against his
estate under sec. 5, Rule 87.

The most common example of the contigent claim is that which

arises when a person is bound as surety or guarantor for a
principal who is insolvent or dead. Under the ordinary contract of
suretyship the surety has no claim whatever against his principal
until he himself pays something by way of satisfaction upon the
obligation which is secured. When he does this, there instantly
arises in favor of the surety the right to compel the principal to
exonerate the surety. But until the surety has contributed
something to the payment of the debt, or has performed the
secured obligation in whole or in part, he has no right of action
against anybody no claim that could be reduced to judgment.

Our conclusion is that the solidary guarantors liability is not

extinguished by his death, and that in such event, the Luzon
Surety Co., had the right to file against the estate a contingent
claim for reimbursement.

Wherefore, the order appealed from is reversed, and the records

are ordered remanded to the court of origin. Costs against the
Administratrix- Appellee.

General Insurance & Surety Corp. v. Republic GR. No. L-

13873, January 3, 1963
Republic of the Philippines
SUPREME COURT
Manila
 EN BANC

G.R. No. L-13873 January 31, 1963

GENERAL INSURANCE and SURETY

CORPORATION, petitioner,
vs.
REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC., respondents.

Guido Advincula for petitioner.

Office of the Solicitor General for respondents.

REGALA, J.:

On May 15, 1954, the Central Luzon Educational Foundation, Inc.

and the General Insurance and Surety Corporation posted in favor
of the Department of Education a bond, the terms of which read
as follows:

KNOW ALL MEN BY THESE PRESENTS:

WHEREAS, the Department of Education has required the

Central Luzon Educational Foundation, Inc., operating the
Sison & Aruego Colleges, of Urdaneta, Pangasinan,
Philippines, an institution of learning to file a bond to
guarantee the adequate and efficient administration of said
school or college and the observance of all regulations
prescribed by the Secretary of Education and compliance
with all obligations, including the payment of the salaries of
all its teachers and employees, past, present, and future,
and the payment of all other obligations incurred by, or in
behalf of said school.

NOW, THEREFORE, in compliance with said requirement, we,

CENTRAL LUZON EDUCATIONAL FOUNDATION, INC.,
operating the Sison and Aruego Colleges, represented Dr.
Jose Aruego, its Vice-Chairman, as principal, and the
 GENERAL INSURANCE AND SURETY CORPORATION, a
corporation duly organized and existing under and by virtue
the laws of the Philippines, as surety, are held and firmly
bound, jointly and firmly, unto the Department of Education
of the Republic of the Philippines in the sum of TEN
THOUSAND PESOS (P10,000.00) Philippine currency, for the
payment thereof we bind ourselves, our heirs, executors,
administrators, successors, and assigns, jointly and severally
firmly by these presents;

WHEN the Secretary of Education is satisfied that said

institution of learning had defaulted in any of the foregoing
particulars, this bond may immediately thereafter be
declared forfeited and for the payment of the amount above-
specified, we bind ourselves, our heirs, executors,
successors, administrators, and assigns, jointly and severally.

We further bind ourselves, by these presents, to give the

Department of Education at least sixty (60) days notice of
the intended withdrawal or cancellation of this bond, in order
that the Department can take such action as may be
necessary to protect the interests of such teachers,
employees or creditors of the school and of the Government.

LIABILITY of Surety under this bond will expire on June 15,

1955, unless sooner revoked.

IN WITNESS WHEREOF, we signed this present guarranty at

the City of Manila, Philippines, this 15th day of May, 1954.

On the same day, May 15, 1954, the Central Luzon Educational
Foundation, Inc., Teofilo Sison and Jose M. Aruego executed an
indemnity agreement binding themselves jointly and severally to
indemnify the surety of "any damages, prejudices, loss, costs,
payments, advances and expenses of whatever kind and nature,
including attorney's fees and legal costs, which the COMPANY
may, at any time sustain or incur, as well as to reimburse to said
COMPANY all sums and amounts of money which the COMPANY or
its representatives shall or may pay or cause to be paid or
become liable to pay, on account of or arising from the execution
of the above mentioned Bond."

On June 25, 1954, the surety advised the Secretary of Education

that it was withdrawing and cancelling its bond. Copies of the
letter were sent to the Bureau of Private Schools and to the
Central Luzon Educational Foundation, Inc.

It appears that on the date of execution of the bond, the

Foundation was indebted to two of its teachers for salaries, to wit:
to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in
the sum of P820.00, or a total of P1,505.64.

Demand for the above amount having been refused, the Solicitor
General, in behalf of the Republic of the Philippines, filed a
complaint for the forfeiture of the bond, in the Court of First
Instance of Manila on July 11, 1956.

In due time, the surety filed its answer in which it set up special
defenses and a cross-claim against the Foundation and prayed
that the complaint be dismissed and that it be indemnified by the
Foundation of any amount it might be required to pay the
Government, plus attorney's fees.

For its part, the Foundation denied the cross-claim and contended
that, because Remedios Laoag owed Fr. Cinense the amount of
P820.65, there was no basis for the action; that the bond is illegal
and that the Government has no capacity to sue.

The surety also filed a third-party complaint against Teofilo Sison

and Jose M. Aruego on the basis of the indemnity agreement.
While admitting the allegations of the third-party complaint, Sison
and Aruego claimed that because of the cancellation and
withdrawal of the bond, the indemnity agreement ceased to be of
force and effect.
Hearing was held and on December 18, 1956, the Court of First
Instance rendered judgment holding the principal and the surety
jointly and severally liable to the Government in the sum of
P10,000.00 with legal interest from the date of filing of the
complaint, until the sum is fully paid and ordering the principal to
reimburse the surety whatever amount it may be compelled to
pay to the Government by reason of the judgment, with costs
against both principal and the surety.

The surety filed a motion for reconsideration and a request to

decide the third-party complaint which the trial court denied.

On appeal, the Court of Appeals rendered a decision, the

dispositive portion of which reads:

WHEREFORE, the appealed judgment is hereby modified in

the following manner:

(a) Ordering Central Luzon Educational Foundation, Inc., and

General Insurance and Surety Corporation to pay jointly and
severally the Republic of the Philippines the sum of
P10,000.00, plus costs and legal interests from July 11, 1956
until fully paid; and

(b) Ordering Central Luzon Educational Foundation, Inc.,

Teofilo Sison and Jose M. Aruego to reimburse, jointly an
severally, the General Insurance and Surety Corporation of
all amounts it may be forced to pay the Republic of the
Philippines by virtue of this judgment, plus costs and
P2,000.00 for counsel's fees.

From this decision, the surety appealed to this Court by way

of certiorari, raising questions of law.1

In its first four assignments of error, the surety contends that it

was no longer liable on its bond after August 24, 1954 (when the
60-day notice of cancellation and withdrawal ended), or, at the
latest, after June 15, 1955. For support, the surety invokes the
following provisions of the bond:

WE, further bind ourselves, by these presents to give the

Department of Education at least sixty (60) days notice of
the intended withdrawal or cancellation of this bond, in order
that the Department can take such action as may be
necessary to protect the interest of such teachers,
employees, Creditors to the government.

LIABILITY of the Surety under this bond will expire on June

15, 1955, unless sooner revoked.

On the other hand, the Government contends that since the

salaries of the teachers were due and payable when the bond was
still in force, the surety has become liable on its bond from the
moment of its execution on May 15,1954.

We agree with this contention of the Government.

It must be remembered that, by the terms of the bond the surety

guaranteed to the Government "compliance (by the Foundation)
with all obligations, including the payment of the salaries of its
teachers and employees, past, present and future, and the
payment of all other obligations incurred by, or in behalf of said
school." Now, it is not disputed that even before the execution of
the bond the Foundation was already indebted to two of its
teachers for past salaries. From the moment, therefore, the bond
was executed, the right of the Government to proceed against the
bond accrued because since then, there has been violation of the
terms of the bond regarding payment of past salaries of teachers
at the Sison and Aruego Colleges. The fact that the action was
filed only on July 11, 1956 does not militate against this position
because actions based on written contracts prescribe in ten years.
(Art. 1144, par. 1, Civil Code). The surety also cites our decision in
the case of Jollye v. Barcelon and Luzon Surety Co., Inc., 68 Phil.
164 and National Rice & Corn Corp. (NARIC) v. Rivera, et al., G.R.
No. L-4023, February 29, 1952. But there is nothing in these cases
that supports the proposition that the liability of a surety for
obligations arising during the life of a bond ceases upon the
expiration of the bond.

In the Jollye case, the bond provided:

Whereas, the above bounded principal, on 13th day of

February, 1933 entered into an agreement with H. P. L. Jollye
of Manila, P. I., to fully and faithfully refund to said Mr. H. P. L.
Jollye the above stated sum of P7,500 representing the
purchase price of the 74 shares of the capital stock of the
North Electric Company (certificate No. 38) paid by said Mr.
H. P. L. Jollye to the undersigned principal, Mr. Emeterio
Barcelon, in the event ofthe title thereto of said Mr. Barcelon
is invalidated by any judgement which may be rendered by
the court of Cavite against Vicente Diosomito or in the event
that any of the warranties contained in that certain deed of
sale executed by the undersigned principal on this 13th day
of February, 1933,be invalidated, a copy of which is hereto
attached and made an integralpart hereof, market Exhibit A.

Wherefore, the parties respectfully pray that the foregoing

stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t

According to the bond, "the liability of Luzon Surety Company, Inc.

under this bond will expire (12) months from date hereof." The
date referred to was February 13, 1933. This Court absolved the
surety of liability because the acts for which the bond was posted
happened after its expiration. Thus, We held in that case:

... The acts provided therein by reason of which the contract

of suretyship was executed could have taken place within
the stipulated period twelve months. Hence, the parties fixed
that period exactly at twelve months, limiting thereby the
obligation of the appellee to answer for the payment to the
 appellant of the aforesaid sum of P7,500.00 to not more than
the stipulated period. . . .

Here, on the other hand, the right of the Government to collect on

the bond arose while the bond was in force, because, as earlier
noted, even before the execution of the bond, the principal had
already been indebted to its teachers.

Neither does the NARIC case support the surety's position. In that
case, the bond provided that

This bond expires on March 20th, 1949 and will be cancelled

TEN DAYS after the expiration, unless the surety is notified of
any existing obligation thereunder, or unless the surety
renews or extends it in writing for another term.

and We held that giving notice of existing obligation was a

condition precedent to further liability of the surety and that in
default of such notice, liability on the bond automatically ceased.

Similarly, in the case of Santos, et. al. v. Mejia, et al., G.R. No. L-
6383, December 29, 1953, the bond provided that

Liability of the surety on this bond will expire in THIRTEEN

DAYS and said bond will be cancelled 10 DAYS after its
expiration unless surety is notified of any existing obligation
thereunder.

and We held that the surety could not be held liable because the
bond was cancelled when no notice of existing obligations was
given within ten days.

In the present case, there is no provision that the bond will be

cancelled unless the surety is notified of any claim and so no
condition precedent has to be complied with by the Government
before it can bring an action. Indeed, the provision of the bond in
the NARIC and Santos cases that it would be cancelled ten days
after its expiration unless notice of claim was given was inserted
precisely because, without such a provision, the surety's liability
for obligations arising while the bond was in force would subsist
even after its expiration.

Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No. 11, 3490, We

held that under a provision that the surety "will not be liable for
any claim not discovered and presented to the company within
three months from the expiration of this bond and that the
obligee hereby waives his right to file any court action against the
surety after the termination of the period of three months above
mentioned," the giving of notice is a condition precedent to be
complied with.

And suppose this action were filed while the bond was in force, as
the surety would have the Government do, but the same
remained pending after June 15, 1955, would the surety suggest
that the judgment that may be rendered in such action could no
longer be enforced against it because the bond says that its
liability under it has expired?

And what of the provision on 60-day notice? The surety urges that
all actions on the bond must be brought within that period or they
would all be barred. The surety misread the provision. The 60-day
notice is not a period of prescription of action. The provision
merely means that the surety can withdraw as in fact it did in
this case even before June 15, 1955 provided it gave notice of
its intention to do so at least 60 days in advance. If at all, the
condition is a limitation on the right of the surety to withdraw
rather than a limitation of action on the bond. This is clear also
from the Manual of Information for Private Schools 2 which states
that "The bond furnished by a school may not be withdrawn by
either or both the bondsmen except by giving the Director of
Private Schools sixty days notice."

In its fifth assignment of error, the surety contends:

1. That the bond is void for being contrary to public policy insofar
as it requires the surety to pay P10,000.00 regardless of the
amount of the salaries of the teachers. 3 It is claimed that to
enforce forfeiture of the bond for the full amount would be to
allow the Government to enrich itself since the unpaid salaries of
the teachers amount to P1,318.84 only.

2. That, under Article 1311 of the Civil Code, 4 since teachers of

Sison and Aruego Colleges are not parties to the bond, "the bond
is not effective, and binding upon the obligors (principal and
surety) as far as it guarantees payment of the 'past salaries' of
the teachers of said school." This is the same as saying that the
surety is not liable to teachers of Sison and Aruego Colleges
because the latter are not parties to the bond nor are they
beneficiaries of a stipulation pour autrui. But this argument is
based on the false premise that the teachers are trying to enforce
the obligation of the bond, which is not the case here. This is not
an action filed by the teachers against the surety. This is an action
brought by the Government, of which the Department of
Education is an instrumentality, to hold the surety liable on its
bond for the same has been violated when the principal failed to
comply "with all obligations, including the payment of salaries of
its teachers, past, present and future."

There is nothing against public policy in forfeiting the bond for the
amount. The bond is penal in nature. Article 1226 of the Code
states that in obligation with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to
the contrary, and the party to whom payment is to be made is
entitled to recover the sum stipulated without need of proving
damages because one of the primary purposes of a penalty
clause is to avoid such necessity. (Art. 1228, Civil Code; Lambert
v. Fox, 26 Phil. 588; Palacios v. Municipality of Cavite, 12 Phil. 140;
Manila Racing Club v. Manila Jockey Club, 69 Phil. 55). The mere
non-performance of the principal obligation gives rise to the right
to the penalty, (IV Tolentino, Civil Code of the Philippines, p. 247.)
In its first and second "alternative assignments of error," the
surety contends that it was released from its obligation under the
bond when on February 4, 1955, Remedios Laoag and the
Foundation agreed that the latter would pay the former's salaries,
which were then already due, on March 1, 1955. In support of this
proposition, the surety cites Article 2079 of the Code which
provides as follows:

An extension granted to the debtor by the creditor without

the consent of the guarantor extinguishes the guaranty. . . .

But the above provision does not apply to this case. The supposed
extension of time was granted not by the Department of
Education or the Government but by the teachers. As already
stated, the creditors on the bond are not the teachers but the
Department of Education or the Government.

Even granting that an extension of time was granted without the

consent of the surety, still that fact would not help the surety,
because as earlier pointed out, the Foundation was also arrears in
the payment of the salaries of H. B. Arandia. The case of Arandia
alone would be enough basis for the Government to proceed
against the bond.

Lastly, in its third and fourth "alternative assignments of error,"

the surety contends that it cannot be made answer for more than
the unpaid salaries of H. B. Arandia, which it claimed amounted to
P720.00 only, because Article 2054 states that

A guarantor may bind himself for less, but not for more than
the principal debtor, both as regards the amount and the
onerous nature of the conditions.

Should he have bound himself for more, his obligations shall

be reduced to the limits of that of the debtor.

What We said about the penal nature of the bond would suffice to
dispose of this claim. For whatever may be the amount of salaries
due the teachers, the fact remains that the condition of the bond
was violated and so the surety became liable for the penalty
provided for therein.

WHEREFORE, the decision of the Court of Appeals is hereby

affirmed, with costs against the surety.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, Barrera,

Parades, Dizon and Makalintal, JJ., concur.
Bengzon, C.J., took no part.

Footnotes
1
Central Luzon Educational Foundation, Inc., Teofilo Sison and
Jose M. Aruego also appealed to this Court but we dismissed
their appeal in G.R. No. L-14119 for having been filed out of
time.

Prepared by the Department of Education pursuant to Act

2

No. 2706.
3
Article 1183 states that impossible conditions, those
contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends
upon them.
4
Contracts take effect only between the parties, their assigns
and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from
the decedent.

If a contract should contain some stipulation in favor of

a third person, he may demand its fulfillment provided
he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must
 have clearly and deliberately conferred a favor upon a
third person.

Hong Kong & Shanghai Bank v. Aldecoa & Co, GR. No. L-
8437, March 23, 1915

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-8437 March 23, 1915

THE HONGKONG & SHANGHAI BANKING

CORPORATION, plaintiff-appellee,
vs.
ALDECOA & CO., in liquidation, JOAQUIN IBAEZ DE
ALDECOA Y PALET, ZOILO IBAEZ DE ALDECOA Y PALET,
CECILIA IBAEZ DE ALDECOA Y PALET, and ISABEL PALET
DE GABARRO, defendants-appellants.
WILLIAM URQUHART, intervener-appellant.

Antonio Sanz and Chicote and Miranda for appellants.

Hausermann, Cohn and Fisher for appellee.

TRENT, J.:

This action was brought on January 31, 1911, by the plaintiff bank
against the above-named defendants for the purpose of
recovering from the principal defendant, Aldecoa & Co., an
amount due from the latter as the balance to its debit in an
account current with the plaintiff, and to enforce the subsidiary
liability of the other defendants for the payment of this
indebtedness, as partners of Aldecoa & Co., and to foreclose
certain mortgages executed by the defendants to secure the
indebtedness sued upon.
Judgment was entered on the 10th of August, 1912, in favor of the
plaintiff and against the defendants for the sum of P344,924.23,
together with interest thereon at the rate of 7 per cent per annum
from the date of the judgment until paid, and for costs, and for
the foreclosure of the mortgages. The court decreed that in the
event of there being a deficiency, after the foreclosure of the
mortgages, the plaintiff must resort to and exhaust the property
of the principal defendant before taking out execution against the
individual defendants held to be liable in solidum with the
principal defendant, but subsidiarily. Judgment was also entered
denying the relief sought by the intervener. All of the defendants
and the intervener have appealed.

The defendants, Joaquin Ibaez de Alcoa, Zoilo Ibaez de Alcoa,

and Cecilia Ibaez de Alcoa, were born in the Philippine Islands on
March 27, 1884, July 4, 1885, and . . . , 1887, respectively, the
legitimate children of Zoilo Ibaez de Alcoa and the defendant,
Isabel Palet. Both parents were native of Spain. The father's
domicile was in Manila, and he died here on October 4, 1895. The
widow, still retaining her Manila domicile, left the Philippine
Islands and went to Spain in 1897 because of her health, and did
not return until the latter part of 1902. the firm of Aldecoa & Co.,
of which Zoilo Ibaez de Aldecoa, deceased, had been a member
and managing director, was reorganized in December, 1896, and
the widow became one of the general or "capitalistic" partners of
the firm. The three children, above mentioned, appear in the
articles of agreement as industrial partners.

On July 31, 1903, Isabel Palet, the widowed mother of Joaquin

Ibaez de Aldecoa and Zoilo Ibaez de Aldecoa, who were then
over the age of 18 years, went before a notary public and
executed two instruments (Exhibits T and U), wherein and
whereby she emancipated her two sons, with their consent and
acceptance. No guardian of the person or property of these two
sons had ever been applied for or appointed under or by virtue of
the provisions of the Code of Civil Procedure since the
promulgation of the Code in 1901. After the execution of Exhibit T
and U, both Joaquin Ibaez de Aldecoa and Zoilo Ibaez de
Aldecoa participated in the management of Aldecoa and Co, as
partners by being present and voting at meetings of the partners
of the company upon matters connected with its affairs.

On the 23rd of February, 1906, the defendant firm of Aldeco and

Co. obtained from the bank a credit in account current up to the
sum of P450,000 upon the terms and conditions set forth in the
instrument executed on that date (Exhibit A). Later it was agreed
that the defendants, Isabel Palet and her two sons, Joaquin and
Zoilo, should mortgage, in addition to certain securities of Aldecoa
and Co., as set forth in Exhibit A, certain of their real properties as
additional security for the obligations of Aldecoa and Co. So, on
March 23, 1906, the mortgage, Exhibit B, was executed wherein
certain corrections in the description of some of the real property
mortgaged to the bank by Exhibit A were made and the amount
for which each of the mortgaged properties should be liable was
set forth. These two mortgages, Exhibits A and B, were duly
recorded in the registry of property of the city of Manila on March
23, 1906.

On the 31st day of December, 1906, the firm of Aldecoa and Co.
went into liquidation on account of the expiration of the term for
which it had been organized, and the intervener, Urquhart, was
duly elected by the parties as liquidator, and be resolution dated
January 24, 1907, he was granted the authority expressed in that
resolution (Exhibit G).

On June 30, 1907, Aldeco and Co. in liquidation, for the purposes
of certain litigation about to be commenced in its behalf, required
an injunction bond in the sum of P50,000, which was furnished by
the bank upon the condition that any liability incurred on the part
of the bank upon this injunction bond would be covered by the
mortgage of February 23, 1906. An agreement to this effect was
executed by Aldecoa and Co. in liquidation, by Isabel Palet, by
Joaquin Ibaez de Aldecoa, who had then attained his full
majority, and by Zoilo Ibaez de Aldecoa, who was not yet
twenty-three years of age. In 1908, Joaquin Ibaez de Aldecoa,
Zoilo Ibaez de Aldecoa, and Cecilia Ibaez de Aldecoa
commenced an action against their mother, Isabel Palet, and
Aldecoa and Co., in which the bank was not a party, and in
September of that year procured a judgment of the Court of First
Instance annulling the articles of copartnership of Aldecoa and
Co., in so far as they were concerned, and decreeing that they
were creditors and not partners of that firm.

The real property of the defendant Isabel Palet, mortgaged to the

plaintiff, corporation by the instrument of March 23, 1906 (Exhibit
B), was, at the instance of the defendant, registered under the
provisions of the Land Registration Act, subject to the mortgage
thereon in favor of the plaintiff, by decree, of the land court dated
March 8, 1907.

On the 6th of November, 1906, the defendants, Isabel Palet and

her three children, Joaquin Ibaez de Aldecoa, Zoilo Ibaez de
Aldecoa, and Cecilia Ibaez de Aldecoa, applied to the land court
for the registration of their title to the real property described in
paragraph 4 of the instrument of March 23, 1906 (Exhibit B), in
which application they stated that the undivided three-fourths of
said properties belonging to the defendants, Isabel Palet, Joaquin
Ibaez de Aldecoa, and Zoilo Ibaez de Aldecoa, were subject to
the mortgage in favor of the plaintiff to secure the sum of
P203,985.97 under the terms of the instrument dated March 22,
1906. Pursuant to this petition the Court of Land Registration, by
decree dated September 8, 1907, registered the title to the
undivided three-fourths interest therein pertaining to the
defendants, Isabel Palet and her two sons, Joaquin and Zoilo, to
the mortgage in favor of the plaintiff to secure the sun of
P203,985.97.

On December 22, 1906, Aldecoa and Co., by a public instrument

executed before a notary public, as additional security for the
performance of the obligations in favor of the plaintiff under the
terms of the contracts Exhibits A and B, mortgaged to the bank
the right of mortgage pertaining to Aldecoa and Co. upon certain
real property in the Province of Albay, mortgaged to said
company by one Zubeldia to secure an indebtedness to that firm.
Subsequent to the execution of this instrument, Zubeldia caused
his title to the mortgaged property to be registered under the
provisions of the Land Registration Act, subject to a mortgage of
Aldecoa and Co. to secure the sum of P103,943.84 and to the
mortgage of the mortgage right of Aldecoa and Co. to the
plaintiff.

As the result of the litigation Aldecoa and Co. and A. S. Macleod,

wherein the injunction bond for P50,000 was made by the bank in
the manner and for the purpose above set forth, Aldecoa and Co.
became the owner, through a compromise agreement executed in
Manila on the 14th of August, 1907, of the shares of the Pasay
Estate Company Limited (referred to in the contract of March 13,
1907, Exhibit V), and on the 30th day of August of that year
Urquhart, as liquidator, under the authority vested in him as such,
and in compliance with the terms of the contract of June 13, 1907,
mortgaged to the plaintiff, by way of additional security for the
performance of the obligations set forth in Exhibits A and B, the
312 shares of the Pasay Estate Company, Limited, acquired by
Aldecoa and Co.

On the 31st day of March, 1907, Aldecoa and Co. mortgaged, as

additional security for the performance of those obligations, to
the plaintiff the right of mortgage, pertaining to the firm of
Aldecoa and Co., upon certain real estate in that Province of
Ambos Camarines, mortgaged to Aldecoa and Co. by one Andres
Garchitorena to secure a balance of indebtedness to that firm of
the sum of P20,280.19. The mortgage thus created in favor of the
bank was duly recorded in the registry of deeds f that province.
On the 31st day of March, 1907, Aldecoa and Co. mortgaged as
further additional security for the performance of the obligations
set forth in Exhibits A and B, the right of mortgage pertaining to
the firm of Aldecoa and Co. upon other real property in the same
province, mortgaged by the firm of Tremoya Hermanos and
Liborio Tremoya, to secure the indebtedness of that firm to the
firm of Aldecoa and Co. of P43,117.40 and the personal debt of
the latter of P75,463.54. the mortgage thus created in favor of
the bank was filed for record with the registrar of deeds of that
province.

On the 30th day of January, 1907, Aldecoa and Co. duly

authorized the bank to collect from certain persons and firms,
named in the instrument granting this authority, any and all debts
owing by them to Aldecoa and Co. and to apply all amounts so
collected to the satisfaction, pro tanto, of any indebtedness of
Aldecoa and Co. to the bank.

By a public instrument dated February 18, 1907, Aldecoa and Co.

acknowledged as indebtedness to Joaquin Ibaez de Aldecoa in
the sum of P154,589.20, a like indebtedness to Zoilo Ibaez de
Aldecoa in the sum of P89,177.07. On September 30, 1908,
Joaquin, Zoilo, and Cecilia recovered a judgment in the Court of
First Instance of Manila for the payment to them f the sum of
P155,127.31, as the balance due them upon the indebtedness
acknowledged in the public instrument dated February 18, 1907.

On November 30, 1907, Joaquin, Zoilo, and Cecilia instituted an

action in the Court of First Instance of the city of the Manila
against the plaintiff bank for the purpose of obtaining a judicial
declaration to the effect that the contract whereby Aldecoa and
Co. mortgaged to the bank the shares of the Pasay Estate
Company recovered from Alejandro S. Macleod, was null and void,
and for a judgment of that these shares be sold and applied to the
satisfaction of their judgment obtained on September 30, 1908.
Judgment was rendered by the lower court in favor of the plaintiffs
in that action in accordance with their prayer, but upon appeal
this court reversed that judgment and declared that the mortgage
of the shares of stock in the Pasay Estate Co. to the bank was
valid.

In October, 1908, Joaquin and Zoilo Ibaez de Aldecoa instituted

an action against the plaintiff bank for the purpose of obtaining a
judgment annulling the mortgages created by them upon their
interest in the properties described in Exhibits A and B, upon the
ground that the emancipation buy their mother was void and of
no effect, and that, therefore, they were minors incapable of
creating a valid mortgage upon their real property. The Court of
First Instance dismissed the complaint as to Joaquin upon the
ground that he had ratified those mortgages after becoming of
age, but entered a judgment annulling said mortgages with
respect to Zoilo. Both parties appealed from this decision and the
case was given registry No. 6889 in the Supreme Court. 1
On the 31st day of December, 1906, on which date the defendant
Aldecoa and Co. went into liquidation, the amount of
indebtedness to the bank upon the overdraft created by the terms
of the contract, Exhibit A, was P516,517.98. Neither the
defendant Aldecoa and Co., nor any of the defendants herein,
have paid or caused to be paid to the bank the yearly partial
payments due under the terms of the contract, Exhibit A. But from
time to time the bank has collected and received from provincial
debtors of Aldecoa and Co. the various sums shown in Exhibit Q,
all of which sums so received have been placed to the credit of
Aldecoa and Co. and notice duty given. Also, the bank, from time
to time, since the date upon which Aldecoa and Co. went into
liquidation, has received various other sums from, or for the
account of, Aldecoa and Co., all of which have been duly placed to
the credit of that firm, including the sum of P22,552.63, the
amount of the credit against one Achaval, assigned to the bank by
Aldecoa and Co. The balance to the credit of the bank on the 31st
day of December, 1911, as shown on the books of Aldecoa and
Co., was for the sum of P416.853.46. It appeared that an error
had been committed by the bank in liquidating the interest
charged to Aldecoa and Co., and this error was corrected so that
the actual amount of the indebtedness of Aldecoa and Co. to the
plaintiff on the 15th of February, 1912, with interest to December
10, 1912, the date of the judgment, the amount was P344,924.23.

The trial court found that there was no competent evidence that
the bank induced, or attempted to induce, any customer of
Aldecoa and Co. to discontinue business relations with that
company. The court further found that Urquhart had failed to
show that he had any legal interest in the matter in litigation
between plaintiff and defendants, or in the success of either of
the parties, or an interest against both, as required by section 121
of the Code of Civil Procedure. No further findings, with respect to
the facts alleged in the complaint of the intervener, were made.

Aldecoa and Co. insist that the court erred:

1. In overruling the defendant's demurrer based upon the

alleged ambiguity and vagueness of the complaint.
 2. In ruling that there was no competent evidence that the
plaintiff had induced Aldecoa and Co.'s provincial debtors to
cease making consignments to that firm.

3. In rendering a judgment in a special proceeding for the

foreclosure of a mortgage, Aldecoa and Co. not having
mortgaged any real estate of any kind within the jurisdiction
of the trial court, and the obligation of the persons who had
signed the contract of suretyship in favor of the bank having
been extinguished by operation of law.

The argument on behalf of the defendant in support of its first

assignment of error from the complaint that Aldecoa and Co.
authorized the plaintiff bank, by the instrument Exhibit G, to make
collections on behalf of this defendant, and that the complaint
failed to specify the amount obtained by the bank in the exercise
of the authority conferred upon it, the complaint was thereby
rendered vague and indefinite. Upon this point it is sufficient to
say that the complaint alleges that a certain specific amount was
due from the defendant firm as a balance of its indebtedness to
the plaintiff, and this necessarily implies that there were no
credits in favor of the defendant firm of any kind whatsoever
which had not already been deducted from the original obligation.

With respect to the contention set forth in the second assignment

of error to the effect that the bank has prejudiced Aldecoa and Co.
by having induced customers of the latter to cease their
commercial relations with this defendant, the ruling of the court
that there is no evidence to show that there was any such
inducement is fully supported by the record. It may be possible
that some of Aldecoa and Co.'s customers ceased doing business
with that firm after it went into liquidation. This is the ordinary
effect of a commercial firm going consideration, for the reason
that it was a well known fact that Aldecoa and Co. was insolvent.
It is hardly probable that the bank, with so large a claim against
Aldecoa and Co. and with unsatisfactory security for the payment
of its claim, would have taken any action whatever which might
have had the effect of diminishing Aldecoa and Co.'s ability to
discharge their claim. The contention that the customers of
Aldecoa and Co. included in the list of debtors ceased to make
consignments to the firm because they had been advised by the
bank that Aldecoa and Co. had authorized the bank to collect
these credits from the defendant's provincial customers and apply
the amounts so collected to the partial discharge of the
indebtedness of the defendant to the bank. Furthermore, the bank
was expressly empowered to take any steps which might be
necessary, judicially or extrajudicially, for the collection of these
credits. The real reason which caused the defendant's provincial
customers to cease making shipments was due to the fact that
the defendant, being out of funds, could not give its customers
any further credit. It is therefore clear that the bank, having
exercised the authority conferred upon it by the company in a
legal manner, is not responsible for any damages which might
have resulted from the failure of the defendant's provincial
customers to continue doing business with that firm.

In the third assignments of errors two propositions are insisted

upon: (1) that in these foreclosure proceedings the court was
without jurisdiction to render judgment against Aldecoa and Co.
for the reason that firm had mortgaged no real property within
the city of Manila to the plaintiff; and (2) that the mortgages given
by this defendant have been extinguished by reason of the fact
that the bank extended the time within which the defendant's
provincial debtors might make their payments.

We understand that the bank is not seeking to exercise its

mortgages rights upon the mortgages which the defendant firm
holds upon certain real properties in the Provinces of Albay and
Ambros Camarines and to sell these properties at public auction
in these proceedings. Nor do we understand that the judgment of
the trial courts directs that this be done. Before that property can
be sold the original mortgagors will have to be made parties. The
banks is not trying to foreclose, in this section, any mortgages on
real property executed by Aldecoa and Co. It is true that the bank
sought and obtained a money judgment against that firm, and at
the same time and in the same action obtained a foreclosure
judgment against the other defendants. If two or more persons
are in solidum the debtors mortgage any of their real property
situate in the jurisdiction of the court, the creditor, in case of the
solidary debtors in the same suit and secure a joint and several
judgment against them, as well as judgments of foreclosure upon
the respective mortgages.

The contention that the extensions granted to Aldecoa and Co.'s

debtors, with the consent and authority of that firm itself, has
resulted in extinguishment of the mortgages created by Aldecoa
and Co. or of the mortgages created by partners of that company
to secure its liabilities to the bank, is not tenable. The record
shows that all the sureties were represented by Urquhart, the
person elected by them as liquidator of the firm, when he agreed
with the bank upon the extensions granted to those debtors. The
authority to grant these extensions was conferred upon the bank
by the liquidator, and he was given authority by all the sureties to
authorized the bank to proceed in this manner.

With respect to the contention that the bank should be required to

render an account of collections made under authority of Exhibit
G, it is sufficient to say that the bank has properly accounted for
all amounts collected from the defendant's debtors, and has
applied all such amounts to the partial liquidation of the
defendant's debt die to the bank. It is true that the sum for which
judgment was rendered against Aldecoa and Co. is less than the
amount originally demanded in the complaint, but this difference
is due to the fact that certain amounts which had been collected
from Aldecoa and Co.'s provincial debtors by the bank were
credited to the latter between the date on which the complaint
was filed and the date when the case came on for trial, and the
further fact that it was necessary to correct an entry concerning
one of the claims inasmuch as it appears that this claim had been
assigned to the bank absolutely, and not merely for the purposes
of collection, as the bookkeeper of the bank supposed, the result
being that instead of crediting Aldecoa and Co. with the full face
value of this claim, the bookkeeper had merely credited from time
to time the amounts collected from this debtor. We, therefore, find
no error prejudicial to the rights of this defendant.

Doa Isabel Palt makes the following assignment of errors:

 1. That the court erred in failing to hold that her obligation as
surety had been extinguished in accordance with the
provisions of article 1851 of the Civil Code.

2. That the court erred in refusing to order for the benefit of

this appellant that the property of Aldecoa and Co. should be
exhausted before the plaintiff firm should be entitled to have
recourse to the property of this defendant and appellant for
the satisfaction of its judgment.

This appellant does not contend that she is not personally

liable in solidum with Aldecoa and Co. for the liability of the latter
firm to the plaintiff in the event that the appeal taken by Aldecoa
and Co. should unsuccessful. We have just held that the judgment
appealed from by Aldecoa and Co. should be affirmed. But Doa
Isabel Palet does not contend that her liability as a partner for the
obligations of Aldecoa and Co., although solidary, is subsidiary,
and that she is entitled to insist that the property of Aldecoa and
Co. be first applied in its entirety to the satisfaction of the firm's
obligations before the bank shall proceed against her in the
execution of its judgment.

The trial court directed that the mortgaged properties, including

the properties mortgaged in the event that Aldecoa and Co.
should fail to pay into court the amount of the judgment within
the time designated for that purpose. the court recognized the
subsidiary character of the personal liability of Doa Isabel Palet
as a member of the firm of Aldecoa and Co. and decreed that as
to any deficiency which might result after the sale of the
mortgaged properties, execution should not issue against the
properties of Doa Isabel Palet until all the property of Aldecoa
and Co. shall have been exhausted. The properties mortgaged by
Doa Isabel Palet were so mortgaged not merely as security for
the performance of her own solidary subsidiary obligation as a
partner bound for all the debts of Aldecoa and Co., but for the
purpose of securing the direct obligation of the firm itself to the
bank. We are, therefore, of the opinion that the trial court
committed no error upon this point.
It is urged on behalf of Doa Isabel Palet that the mortgages
executed by her upon her individual property have been canceled.
The ground for this contention is that Aldecoa and Co. undertook
by the contract of February 23, 1906, to discharge its liability to
the plaintiff bank at the rate of not less than P50,000 per annum,
and that therefore it was the duty of the bank to sue Aldecoa and
Co. as soon as that firm failed to pay at maturity any one of the
partial payments which it had promised to make, and to apply the
proceeds, from the sale of the property of Aldecoa and Co. to the
satisfaction of this indebtedness, and that the fact that the bank
failed to do so is equivalent to an extension of the term of the
principal debtor, and that the effect of this extension has been to
extinguish the obligation of this defendant as a surety of Aldecoa
and Co. It is also contended that the bank expressly extended the
term within which Aldecoa and Co. was to satisfy its obligation by
allowing Aldecoa and Co. to furnish additional security. Doa
Isabel Palet alleges that all these acts were done without her
knowledge or consent.

The extension of the term which, in accordance with the

provisions of article 1851 of the Civil Code produces the extinction
of the liability of the surety must of necessity be based on some
new agreement between the creditor and principal debtor, by
virtue of which the creditor deprives himself of his right to
immediately bring an action for the enforcement of his claim. The
mere failure to bring an action upon a credit, as soon as the same
or any part of its matures, does not constitute an extension of the
term of the obligation.

Doa Isabel Palet is a personal debtor jointly and severally with

Aldecoa and Co. for the whole indebtedness of the latter firm to
the bank, and not a mere surety of the performance of the
obligations of Aldecoa and Co. without any solidary liability. It is
true that certain additional deeds of mortgage and pledge were
executed by Aldecoa and Co. in favor of the bank as additional
security after Aldecoa and Co. had failed to meet its obligation to
pay the first installment due under the agreement of February 23,
1906, but there is no stipulation whatever in any of these
documents or deeds which can in any way be interpreted in the
sense of constituting an extension which would bind the bank to
waiter for the expiration of any new term before suing upon its
claim against Aldecoa and Co. We find nothing in the record
showing either directly or indirectly that the bank at any time has
granted any extension in favor of Aldecoa and Co. for the
performance of its obligations. The liquidator of Aldecoa and Co.
authorized the bank to grant certain extensions to some of the
provincial debtors of Aldecoa and Co. whose debts were to be
paid to the bank under the authority conferred upon the bank by
Aldecoa and Co. There is a marked difference between the
extension of time within which Aldecoa and Co.'s debtors might
pay their respective debts, and the extension of time for the
payment of Aldecoa and Co.'s own obligations to the bank. If the
bank was had brought suit on its credit against Aldecoa and Co.,
for the amount then due, on the day following the extension of
the time of Aldecoa and Co.'s debtors for the payments of their
debts, it is evident that the fact of such extension having been
granted could not served in any sense as a defense in favor of
Aldecoa and Co. against the bank's action, although this
extension would have been available to Aldecoa and Co.'s debtors
if suit had been brought to enforce their liabilities to Aldecoa and
Co. We must, therefore, conclude that the judgment appealed
from, in so far as it relates to Doa Isabel Palet, must likewise be
affirmed.

The intervener, William Urquhart, assigns these errors:

1. The court erred in holding that the proof fails to show a

case for intervention within the meaning of section 121 of
the Code of Civil Procedure.

2. The court erred in failing to give preference to the credit

of the liquidator Urquhart for his salary.

The trial court found, as we have said, that Urquhart had failed to
show that he had any legal interest in the matter in litigation
between the plaintiffs and the defendants, or in the success of
any of the parties, or any interest against both. The proof upon
this branch of the case consists of the following agreed statement
of facts:
 Mr. Urquhart is a creditor of Aldecoa and Co. in the sum of
P21,000 due him for money loaned by him to Aldecoa and
Co. before they went into liquidation.

Aldecoa and Co., in liquidation, owe Mr. Urquhart the

liquidator P14,000 as salary.

Section 121 of the Code of civil Procedure provides that:

A person may, at any period of a trial, upon motion, be

permitted by the court to intervene in an action or
proceeding, if he has legal interest in the matter in litigation,
or in the success of either of the parties, or an interest
against both.

The intervener is seeking to have himself declared a preferred

creditor over the bank. According to the above- quoted agreed
statement of facts, he is a mere creditor of Aldecoa and Co. for
the sum of P21,000, loaned that firm before it went into
liquidation. This amount is not evidenced by a public document,
or any document for that matter, nor secured by pledge or
mortgage, while the amount due the bank appears in a public
instrument and is also secured by pledges and mortgages on the
property of Aldecoa and Co., out of which the intervener seeks to
have his indebtedness satisfied. It is, therefore, clear that the
intervener is not entitled to the relief sought, in so far as the
P21,000 is concerned.

The bank insists that, as the intervener had been in the employ of
Aldecoa and Co. for several years prior to the time that the latter
went into liquidation, it cannot be determined what part of the
P14,000 is for salary as such employee and what part is for salary
as liquidator. We find no trouble in reaching the conclusion that all
of the P14,000 represents Urquhart's salary as liquidator of the
firm of Aldecoa and Co. The agreed statement of facts clearly
supports this view. It is there stated that Aldecoa and Co. in
liquidation owed the liquidator P14,000 as salary. The agreement
does not say, nor can it be even inferred from the same, that
Aldecoa and Co. owed Urquhart P14,000, or any other sum for
salary as an employee of that firm before it went into liquidation.
Under these facts, is the intervener a preferred creditor over the
bank for this amount?

In support of his contention that he should be declared a

preferred creditor over the bank for the P14,000, the appellant
cites the decision of the supreme court of Spain of March 16,
1897, and quotes the following from the syllabus of that case:

That the expense of maintenance of property is bound to

affect such persons as have an interest therein, whether
they be the owners or creditors of the property; therefore
payment for this object has preference over any other debt,
since such other debts are recoverable to the extent that the
property is preserved and maintained.

There can be no question about the correctness of this ruling of

the supreme court of Spain to the effect that the fees of a
receiver, appointed by the court to preserve property in litigation,
must be paid in preference to the claims of creditors. But this is
not at all the case under consideration, for the reason that
Urquhart was elected liquidator by the members of the firm of
Aldecoa and Co. Neither do we believe that the contention of the
appellant can be sustained under article 1922 of the Civil Code,
which provides that, with regard to specified personal property of
the debtor, the following are preferred:

1. Credits for the construction, repair, preservation, or for the

amount of the sale of personal property which may be in the
possession of the debtor to the extent of the value of the
same.

The only personal property of Aldecoa and Co. is 16 shares of the

stock of the Banco-Espaol-Filipino; 450 shares of the stock of the
Compaia Maritima; 330 shares of the stock of the Pasay Estate
Co., Ltd; and certain claims against debtors of Aldecoa and Co.,
mentioned in Exhibit G.

The shares of stock in the Banco Espaol-Filipino and the

Compaia Maritima were pledged to the bank before Aldecoa and
Co. went into liquidation, so Urquhart had nothing to do with the
preservation of these. The stock of the Pasay Estate co., Ltd., was
pledged to the bank on August 30, 1907, on the same day that it
came into the possession of Aldecoa and Co. and by the terms of
the pledge the bank was authorized to collect all dividends on the
stock and apply the proceeds to the satisfaction of its claim
against Aldecoa and Co. The credits set forth in Exhibit G were
assigned to the bank on January 30, 1907, so, it will be seen, that
the Pasay Estate shares were in the possession of Aldecoa and
Co., or its liquidator, only one day. Urquhart had been liquidator
twenty-eight days when the credits, mentioned in Exhibit G, were
assigned to the bank. If it could be held that these two items
bring him within the above quoted provisions of article 1922, he
could not be declared a preferred creditor over the bank for the
P14,000 salary for the reason that, according to his own showing,
he had been paid for his services as liquidator up to January,
1910. It is the salary since that date which is now in question. The
only property of Aldecoa and Co. which the liquidator had
anything to do with after 1910 was the real estate mortgages on
real property cannot be regarded as personal property, and it is
only of personal property that article 1922 speaks.

The judgment appealed from, in so far as it relates to Urquhart,

being in accordance with the law and the merits of the case, is
hereby affirmed.

The appellants, Joaquin and Zoilo Ibaez de Aldecoa, make the

following assignments of error:

1. The court erred in not sustaining the plea of lis

pendens with respect to the validity of mortgages claimed by
the plaintiff, which plea was set up as a special defense by
the defendants Joaquin and Zoilo Ibaez de Aldecoa, and in
taking jurisdiction of the case and in deciding therein a
matter already submitted for adjudication and not yet finally
disposed of.

2. The court erred in hot sustaining the plea of res

adjudicata set up as a special defense by these defendants
with respect to the contention of plaintiff that these
 defendants are industrial and general partners of the firm of
Aldecoa and Co.

3. The court erred in holding that the defendants Joaquin and

Zoilo Ibaez de Aldecoa were general partners (socios
colectivos) of the firm of Aldecoa and Co., and is rendering
judgment against them subsidiarily for the payment of the
amount claimed in the complaint.

The basis of the first alleged error is the pendency of an action

instituted by the appellants, Joaquin and Zoilo, in 1908, to have
the mortgages which the bank seeks to foreclose in the present
action annulled in so far as their liability thereon is concerned.
That action was pending in this Supreme Court on appeal when
the present action was instituted (1911), tried, and decided in the
court below.

The principle upon which plea of another action pending is

sustained is that the latter action is deemed unnecessary and
vexatious. (Williams vs. Gaston, 148 Ala., 214; 42 Sou., 552; 1
Cyc. 21; 1 R. C. L., sec. 1.) A statement of the rule to which the
litigant to its benefits, and which has often met with approval, is
found in Watson vs. Jones (13 Wall., 679, 715; 20 L. ed., 666):

But when the pendency of such a suit is set up to defeat

another, the case must be the same. There must be the
same parties, or at least such as represent the same
interest, there must be the same rights asserted, and the
same relief prayed for. This relief must be founded on the
same facts, and the title or essential basis of the relief
sought must be the same. The identity in these particulars
should be such that if the pending case has already been
disposed of, it could be pleaded in bar as a former
adjudication of the same matter between the same parties.

It will be noted that the cases must be identical in a number of

ways. It will be conceded that in so far as the plea is concerned,
the parties are the same in the case at bar as they were in the
action to have the mortgages annulled. Their position is simple
reversed, the defendants there being the plaintiffs here, and vice
versa. This fact does not affect the application of the rule. The
inquiry must therefore proceed to the other requisites demanded
by the rule. Are the same rights asserted? Is the same relief
prayed for?

The test of identity in these respects is thus stated in 1 Cyc., 28:

A plea of the pendency of a prior action is not available

unless the prior action is of such a character that, had a
judgment been rendered therein on the merits, such a
judgment would be conclusive between the parties and could
be pleaded in bar of the second action.

This test has been approved, citing the quotation, in Williams vs.
Gaston (148 Ala., 214; 42 Sou., 552); Van Vleck vs. Anderson (136
Iowa, 366; 113 N. W., 853); Wetzstein vs. Mining Co. (28 Mont.,
451; 72 P., 865). It seems to us that unless the pending action,
which the appellants refer to, can be shown to approach the
action at bar to this extent, the plea ought to fail.

The former suit is one to annul the mortgages. The present suit is
one for the foreclosure of the mortgages. It may be conceded that
if the final judgment in the former action is that the mortgages be
annulled, such an adjudication will deny the right of the bank to
foreclose the mortgages. But will a decree holding them valid
prevent the bank from foreclosing them. Most certainly not. In
such an event, the judgment would not be a bar to the
prosecution of the present action. The rule is not predicated upon
such a contingency. It is applicable, between the same parties,
only when the judgment to be rendered in the action first
instituted will be such that, regardless of which party is
successful, it will amount to res adjudicata against the second
action. It has often been held that a pending action upon an
insurance policy to recover its value is not a bar to the
commencement of an action to have the policy reformed. The
effect is quite different after final judgment has been rendered in
an action upon the policy. Such a judgment may be pleaded in bar
to an action seeking to reform the policy. The case are collected in
the note to National Fire Insurance Co. vs. Hughes (12 L. R. A., [N.
S.], 907). So, it was held in the famous case of Sharon vs. Hill (26
Fed., 337), that the action brought by Miss hill for the purpose of
establishing the genuineness of a writing purporting to be a
declaration of marriage and thereby establishing the relation of
husband and wife between the parties could not be pleaded in
abatement of Senator Sharon's action seeking to have the writing
declared false and forged. The court said:

This suit and the action of Sharon vs. Sharon are not brought
on the same claim or demand. The subject matter and the
relief sought are not identical. This suit is brought to cancel
and annul an alleged false and forged writing, and enjoin the
use of it by the defendant to the prejudice and injury of the
plaintiff, while the other is brought to establish the validity of
said writing as a declaration of marriage, as well as the
marriage itself, and also to procure a dissolution thereof, and
for a division of the common property, and for alimony.

Incidentally, it was held in this case that a judgment of the trial

court declaring the writing genuine was not res adjudicata after
an appeal had been taken from the judgment of the Supreme
Court. So, in the case ta bar, the fact that the trial court in the
former action holds the mortgages invalid as to one of the herein
appellants is not final by reason of the appeal entered by the
bank from that judgment.

Cases are also numerous in which an action for separation has

been held not to be a bar to an action for divorce or vice versa.
(Cook vs. Cook, [N. C.], 40 L. R. S., [N. S.], 83, and cases collected
in the note.) In Cook vs. Cook it was held that a pending action for
absolute divorce was not a bar to the commencement of an action
for separation. The above authorities are so analogous in principle
to the case at bar that we deem the conclusion irresistible, that
the pending action to annul the liability of the two appellant
children on the mortgages cannot operates as a plea in
abatement in the case in hand which seeks to foreclose these
mortgages. The subject matter and the relief asked for are
entirely different. The facts do not conform to the rule and it is
therefore not applicable.
With reference to the second alleged error, it appears that a
certified copy of the judgment entered in the former case,
wherein it was declared that these two appellants, together with
their sister Cecilia, were creditors and partners of Aldecoa and
Co., was offered in evidence and marked Exhibit 5. This evidence
was objected to by the plaintiff on the ground that it was res inter
alios acta and not competent evidence against the plaintiff or
binding upon it in any way because it was not a party to that
action. This objection was sustained and the proffered evidence
excluded. If the evidence had been admitted, what would be its
legal effect? That was an action in personam and the bank was
not a party. The judgment is, therefore, binding only upon the
parties to the suit and their successors in interest (sec. 306, Code
of Civil Procedure, No. 2).

The question raised by the third assignment of errors will be dealt

with in a separate opinion wherein the appeal of Cecilia Ibaez de
Aldecoa will be disposed of.

The appellants whose appeals are herein determined will pay

their respective portions of the cost. So ordered.

Arellano, C. J., Torres and Araullo, JJ., concur.

Moreland, J.. concurs in the result.
Johnson, J., dissents.

TRENT, J.:

In Hongkong and Shanghai Banking Corporation vs. Aldecoa and

Co. et al., R. G. No. 8437, just decided, we said that the
correctness of the judgment declaring that the defendants,
Joaquin, Zoilo, and Cecilia Ibaez de Aldecoa, are subsidiarily
liable to the bank as industrial partners of Aldecoa and Co. for the
debts of the latter, would be determined in a separate opinion.

The facts are these: Joaquin, Zoilo, and Cecilia Ibaez de Aldecoa
were born in the Philippine Islands, being the legitimate children
of Zoilo Ibaez de Aldecoa and Isabel Palet. Both parent were
native of Spain, but domiciled in Manila, where the father died in
1895. At the time of his death the father was a member and
managing director of an ordinary general mercantile partnership
known as Adecoa and Co. In December, 1896, Isabel Palet, for
herself and as the parent of her above-named three children,
exercising the patria potestad, entered into a new contract with
various persons whereby the property and good will, together
with the liabilities of the firm of which her husband was a partner,
were taken over. The new firm was also an ordinary general
mercantile partnership and likewise denominated Aldecoa and Co.
Although having the same name, the new firm was entirely
distinct from the old one and was, in fact, a new enterprise. The
widow entered into the new partnership as a capitalistic partner
and caused her three children to appear in the articles of
partnership as industrial partners. At the time of the execution of
this new contract Joaquin was twelve years of age, Zoilo eleven,
and Cecilia nine.

Clauses 9 and 12 of the new contract of partnership read:

9. The industrial partners shall bear in proportion to the

shares the losses which may result to the partnership from
bad business, but only from the reserve fund which shall be
established, as set forth in the 12th clause, and if the loss
suffered shall exhaust said fund the balance shall fall
exclusively upon the partners furnishing the capital.

12. The industrial partner shall likewise contribute 50 per

cent of his net profits to the formation of said reserve fund,
but may freely dispose of the other 50 per cent.

The question is presented, Could the mother of the three children

legally bind them as industrial partners of the firm of Aldecoa and
Co. under the above facts? If so, are they liable jointly and
severally with all their property, both real and personal, for the
debts of the firm? That all industrial partners of an ordinary
general mercantile partnership are liable with all their property,
both personal and real, for all the debts of the firm owing to third
parties precisely as a capitalistic partner has long since been
definitely settled in this jurisdiction, notwithstanding provisions to
the contrary in the articles of agreement. (Compaia Maritima vs.
Muoz, 9 Phil. Re., 326.)

There are various provisions of law, in force in 1896, which must

be considered in determining whether or not the mother had the
power to make her children industrial partners of the new firm
Aldecoa and Co.

Article 5 of the Code of Commerce reads:

Persons under twenty-one years of age and incapacitated

persons may continue, through their guardians, the
commerce which their parents or persons from whom the
right is derived may have been engaged in. If the guardians
do not have legal capacity to trade, or have some
incompatibility, they shall be under the obligation to appoint
one or more factors who possess the legal qualifications, and
we shall take their places in the trade.

As the firm of which it is claimed the children are industrial

partners was not a continuation of the firm of which their
deceased father was a member, but was a new partnership
operating under its own articles of agreement, it is clear that
article 5, supra, does not sustain the mother's power to bind her
children as industrial partners of the new firm.

Article 4 of the Code of Commerce reads:

The persons having the following conditions shall have legal

capacity to customarily engage in commerce:

1. Those who have reached the age of twenty-one years.

2. Those who are not subject to the authority of a father or

mother or to a marital authority.

3. Those who have the free disposition of their property.

The appellant children had not a single one of these qualifications
in 1896 when the mother attempted to enter them as industrial
partners of the firm of Aldecoa and Co.

It is claimed that the power of the mother to bind her children as

industrial partners is within her parental authority as defined by
the Civil Code. Articles 159 to 166 which compose chapter 3 of
the Civil Code, entitled "Effect of parental authority with regard to
the property of the children," defined the extent of the parental
authority over the property of minor children. Article 159 provides
that the father, or, in his absence, the mother, is the legal
administrator of the property of this children who are under their
authority. Article 160 gives to such parent the administration and
usufruct of property acquired by the child by its work or industry
or for any good consideration. We take it that all the property
possessed by the children at the time the contract of partnership
was entered into in 1896 had been acquired by them either by
their work or industry or for a good consideration. The children
were at that time under the authority of their mother.

Article 164 reads:

The father, or the mother in a proper case, cannot alienate

the real property of the child, the usufruct or administration
of which belongs to them, nor encumber the same, except
for sufficient reasons of utility or necessity, and after
authorization from the judge of the domicile, upon hearing
by the department of public prosecution, excepting the
provisions which, with regard to the effects of transfers, the
mortgage law establishes.

The mother did not secure judicial approval to enter into the
contract of partnership on behalf of her children. Does member
ship in an ordinary general mercantile partnership alienate or
encumber the real property of an industrial partner? Clearly a
partner alienates what he contributes to the firm as capital by
transferring its ownership to the firm. But this, in the case of an
industrial partner, is nothing. An industrial partner does not
alienate any portion of his property by becoming a member of
such a firm. Therefore, the mother did not violate this prohibition
of article 164 in attempting to make her children industrial
partners. But the article in question also prohibited her
from encumbering their real property. This undoubtedly prohibits
formal encumbrances such as mortgages, voluntary easements,
usufructuary rights, and others which create specific liens upon
specific real property. it has been held to prohibit the creation of
real rights, and especially registrable leases in favor of third
persons. (Res., Aug. 30, 1893.) The same word is used in article
317 of the Civil Code in placing restrictions upon the capacity of a
child emancipated by the concession of the parent to deal with his
own property. In commenting on this latter article, Manresa asks
the question, "To what encumbrances does the code in speaking
of emancipated children?" and answers it as follows:

The prohibition against encumbering real property is so

explicit . . . that we consider it unnecessary to enumerate
what are the incumbrances to which the law refers. All that
signifies a limitation upon property, such as the creation,
modification, or extinction of the right of usufruct, use,
habituation, emphyteusis, mortgages, annuities, easements,
pensions affecting real property, bonds, etc., is, in an
express consent of the persons who are mentioned in the
said article 317. (Vol. 2, p. 689.)

In commenting upon the same article, Sanchez Roan says

practically the same thing. (Vol. 5, p. 1179.) Neither of these
commentators refers to the right of an emancipated child to enter
into a contract of partnership without the parent's consent. The
question, in so far as we have been able to ascertain, does not
appear to have ever been discussed, either by the courts or the
commentators. It is significant, however, that a contract of surety
is placed by both the above mentioned commentators among the
prohibited contracts. The encumbrance placed upon the real
property of a surety is precisely the same as the encumbrance
placed upon the real property of an industrial partner. That is,
prior to judgment on the principal obligation or judgment against
the partnership, the property is not specifically liable, and the
creditor has n preferred lien thereon or right thereto by reason of
the bond or partnership contract, as the case may be. After
judgment, the property of the surety or of the industrial partner,
both real and personal, is subsidiarily subject to execution. The
evident purpose of both article 164, prohibiting the parent from
encumbering the real property of his child without judicial
approval, and of article 317, placing the same prohibition upon
the emancipated child in the absence of the parent's approval, is
the same. It is desired that the child's real property shall be
frittered away by hasty and ill-advised contracts entered into by
the one having the administration thereof. Both articles would fail
of their purpose if the parent or the child, as the case might be,
could do indirectly what could not be done directly. In other
words, there would be little purpose in prohibiting a formal
encumbrance by means of a mortgage, for instance, when a
subsidiary liability by means of a bond or membership in a
partnership could as effectually deprive the child of its real
property. This proposition rests upon the theory that the mother
could have freely disposed of the child's personal property in
1896 and that the only recourse open to them would have been
an action against their mother for the value of such property. If
this theory be true, the result would not be changed for the
reason that children were either industrial partners or they were
not. If they were, they are liable to the extent of both their real
and personal property for the debts of the firm. If they were not,
they are in no way liable. There can be only two kinds or classes
of partners in a firm of this kind, capitalistic and industrial. Both
are personally liable to third persons for the debts of such a firm.
To say that the children are industrial partners, but liable only to
the extent of their personal property, would be to place them in a
different class of partners. As the mother did not secure judicial
approval, the contract wherein she attempted to make her
children industrial partners, with all the consequences flowing
therefrom, was, therefore, defective and that act of itself in no
way made the children liable for the debts of the new firm.

The question remains, Did any of the children validly ratify the
contract after acquiring capacity to do so? Cecilia was never
emancipated and there is no evidence indicating that she has
ever ratified the contract by word or deed. She is, therefore,
completely exonerated from liability for the debts of Aldecoa and
Co.
The other two children, Joaquin and Zoilo, were emancipated by
their mother after they had reached the age of eighteen and prior
to seeking annullment of the contract of partnership had
participated by vote and otherwise in the management of the
firm, as is evidenced by Exhibits W, Y, and Z. These various acts
sufficiently show a ratification of the partnership contract and
would have the effect of making the two children industrial
partners if they had been of age at that time. Ratification is in the
nature of the contract. It is the adoption of, and assent to be
bound by, the act of another. (Words and Phrases, vol. 7, p. 5930.)
From the effect of emancipation it cannot be doubted that the two
children had capacity, with their mother's consent, to enter into a
contract of partnership, and, by so doing, make themselves
industrial partners, thereby encumbering their property.
Conceding that the children under these circumstances could
enter into such a contract with their mother, her express consent
to the ratification of the contract by the two children does not
appear of record. The result flowing from the ratification being the
encumbrance of their property, their mother's express consent
was necessary.

For the foregoing reasons the judgment appealed from, in so far

as it holds the three children liable as industrial partners, is
reversed, without costs in so far as this branch of the case is
concerned. So ordered.

Arellano, C. J., Torres and Araullo, JJ., concur.

Moreland, J., concurs in the result.
Johnson, J., dissents.

Footnotes
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