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G.R. No. 89775 November 26, 1992

JACINTO UY DIÑO and NORBERTO UY, petitioners, vs.HON.COURT OF APPEALS and METROPOLITAN BANK AND TRUSTCOMPANY, respondents.

DAVIDE, JR., J.:

Continuing Suretyship Agreements signed by the petitioners set off this present controversy.

Petitioners assail the 22 June 1989 Decision of the Court in CA-G.R.CV No. 17724 1 which reversed the 2 December 1987 Decision of Branch 45 of the Regional Trial Court (RTC) of Manila in a collectionsuit entitled "Metropolitan Bank and Trust Company vs. Uy Tiam,doing business under the name of "UY TIAM ENTERPRISES &FREIGHT SERVICES," Jacinto Uy Diño and Norberto Uy" anddocketed as Civil Case No. 82-9303. They likewise challenge publicrespondent's Resolution of 21 August 1989 2 denying their motion for the reconsideration of the former.

The impugned Decision of the Court summarizes the antecedent

facts as follows:It appears that in 1977, Uy Tiam Enterprises and Freight Services(hereinafter referred to as UTEFS), thru its representative Uy Tiam,applied for and obtained credit accommodations (letter of credit andtrust receipt accommodations) from the Metropolitan Bank and TrustCompany (hereinafter referred to as METROBANK) in the sum of P700,000.00 (Original Records, p. 333). To secure theaforementioned credit accommodations Norberto Uy and Jacinto UyDiño executed separate Continuing Suretyships (Exhibits "E" and "F"

respectively), dated 25 February 1977, in favor of the latter. Under the aforesaid agreements, Norberto Uy agreed to pay METROBANKany indebtedness of UTEFS up to the aggregate sum of P300,000.00while Jacinto Uy Diño agreed to be bound up to the aggregate sum of P800,000.00.

Having paid the obligation under the above letter of credit in 1977,



UTEFS, through Uy Tiam, obtained another credit accommodationfrom METROBANK in 1978, which credit accommodation was fullysettled before an irrevocable letter of credit was applied for andobtained by the abovementioned business entity in 1979 (September 8, 1987, tsn, pp. 14-15).

The Irrevocable Letter of Credit No. SN-Loc-309, dated March 30,1979, in the sum of P815, 600.00, covered UTEFS' purchase of "8,000 Bags Planters Urea and 4,000 Bags Planters 21-0-0." It wasapplied for and obtain by UTEFS without the participation of NorbertoUy and Jacinto Uy Diño as they did not sign the documentdenominated as "Commercial Letter of Credit and Application." Also,they were not asked to execute any suretyship to guarantee itspayment. Neither did METROBANK nor UTEFS inform them that the

1979 Letter of Credit has been opened and the ContinuingSuretyships separately executed in February, 1977 shall guaranteeits payment (Appellees brief, pp. 2-3; rollo, p. 28).

The 1979 letter of credit (Exhibit "B") was negotiated. METROBANKpaid Planters Products the amount of P815,600.00 which paymentwas covered by a Bill of Exchange (Exhibit "C"), dated 4 June 1979,in favor of (Original Records, p. 331).

Pursuant to the above commercial transaction, UTEFS executed and

delivered to METROBANK and Trust Receipt (Exh. "D"), dated 4June 1979, whereby the former acknowledged receipt in trust fromthe latter of the aforementioned goods from Planters Products whichamounted to P815, 600.00. Being the entrusted, the former agreed todeliver to METROBANK the entrusted goods in the event of non-saleor, if sold, the proceeds of the sale thereof, on or before September 2, 1979.

However, UTEFS did not acquiesce to the obligatory stipulations inthe trust receipt. As a consequence, METROBANK sent letters to thesaid principal obligor and its sureties, Norberto Uy and Jacinto UyDiño, demanding payment of the amount due. Informed of theamount due, UTEFS made partial payments to the Bank which wereaccepted by the latter.

Answering one of the demand letters, Diño, thru counsel, denied his



liability for the amount demanded and requested METROBANK tosend him copies of documents showing the source of his liability. Inits reply, the bank informed him that the source of his liability is theContinuing Suretyship which he executed on February 25, 1977.

As a rejoinder, Diño maintained that he cannot be held liable for the1979 credit accommodation because it is a new obligation contractedwithout his participation. Besides, the 1977 credit accommodationwhich he guaranteed has been fully paid.

Having sent the last demand letter to UTEFS, Diño and Uy andfinding resort to extrajudicial remedies to be futile, METROBANK fileda complaint for collection of a sum of money (P613,339.32, as of January 31, 1982, inclusive of interest, commission penalty and bank

charges) with a prayer for the issuance of a writ of preliminaryattachment, against Uy Tiam, representative of UTEFS andimpleaded Diño and Uy as parties-defendants.

The court issued an order, dated 29 July 1983, granting theattachment writ, which writ was returned unserved and unsatisfied asdefendant Uy Tiam was nowhere to be found at his given addressand his commercial enterprise was already non-operational (OriginalRecords, p. 37).

On April 11, 1984, Norberto Uy and Jacinto Uy Diño (sureties-defendant herein) filed a motion to dismiss the complaint on theground of lack of cause of action. They maintained that the obligationwhich they guaranteed in 1977 has been extinguished since it hasalready been paid in the same year. Accordingly, the ContinuingSuretyships executed in 1977 cannot be availed of to secure UyTiam's Letter of Credit obtained in 1979 because a guaranty cannotexist without a valid obligation. It was further argued that they can notbe held liable for the obligation contracted in 1979 because they arenot privies thereto as it was contracted without their participation(Records, pp. 42-46).

On April 24, 1984, METROBANK filed its opposition to the motion todismiss. Invoking the terms and conditions embodied in thecomprehensive suretyships separately executed by sureties-defendants, the bank argued that sureties-movants bound



themselves as solidary obligors of defendant Uy Tiam to both existingobligations and future ones. It relied on Article 2053 of the new CivilCode which provides: "A guaranty may also be given as security for future debts, the amount of which is not yet known; . . . ." It wasfurther asserted that the agreement was in full force and effect at thetime the letter of credit was obtained in 1979 as sureties-defendantsdid not exercise their right to revoke it by giving notice to the bank.(Ibid ., pp. 51-54).

Meanwhile, the resolution of the aforecited motion to dismiss washeld in abeyance pending the introduction of evidence by the partiesas per order dated February 21, 1986 (Ibid ., p. 71).

Having been granted a period of fifteen (15) days from receipt of the

order dated March 7, 1986 within which to file the answer, sureties-defendants filed their responsive pleading which merely rehashed thearguments in their motion to dismiss and maintained that they areentitled to the benefit of excussion (Original Records, pp. 88-93).

On February 23, 1987, plaintiff filed a motion to dismiss the complaintagainst defendant Uy Tiam on the ground that it has no informationas to the heirs or legal representatives of the latter who diedsometime in December, 1986, which motion was granted on thefollowing day (Ibid ., pp. 180-182).

After trial, . . . the court a quo, on December 2, 198, rendered its judgment, a portion of which reads:

The evidence and the pleadings, thus, pose the querry (sic ):

Are the defendants Jacinto Uy Diñoand Norberto Uy liable for theobligation contracted by Uy Tiam under the Letter of Credit (Exh. B)issued on March 30, 1987 by virtue of the Continuing Suretyshipsthey executed on February 25, 1977?

Under the admitted proven facts, the Court finds that they are not.

a) When Uy and Diño executed the continuing suretyships, exhibits Eand F, on February 25, 1977, Uy Tiam was obligated to the plaintiff inthe amount of P700,000.00 — and this was the obligation which bothobligation which both defendants guaranteed to pay. Uy Tiam paid



this 1977 obligation –– and such payment extinguished the obligationthey assumed as guarantors/sureties.

b) The 1979 Letter of Credit (Exh. B) is different from the 1977 Letter of Credit which covered the 1977 account of Uy Tiam. Thus, theobligation under either is apart and distinct from the obligationcreated in the other — as evidenced by the fact that Uy Tiam had toapply anew for the 1979 transaction (Exh. A). And Diño and Uy, beingstrangers thereto, cannot be answerable thereunder.

c) The plaintiff did not serve notice to the defendants Diño and Uywhen it extended to Credit — at least to inform them that thecontinuing suretyships they executed on February 25, 1977 will beconsidered by the plaintiff to secure the 1979 transaction of Uy Tiam.

d) There is no sufficient and credible showing that Diño and Uy were fullyinformed of the import of the Continuing Suretyships when they affixedtheir signatures thereon –– that they are thereby securing all futureobligations which Uy Tiam may contract the plaintiff. On the contrary, Diñoand Uy categorically testified that they signed the blank forms in the officeof Uy Tiam at 623 Asuncion Street, Binondo, Manila, in obedience to theinstruction of Uy Tiam, their former employer. They denied having gone tothe office of the plaintiff to subscribe to the documents (October 1, 1987,tsn, pp. 5-7, 14; October 15, 1987, tsn, pp. 3-8, 13-16). (Records, pp. 333-334). 3

xxx xxx xxx

In its Decision, the trial court decreed as follows:

PREMISES CONSIDERED, judgment is hereby rendered:

a) dismissing the COMPLAINT against JACINTO UY DIÑO andNORBERTO UY;

b) ordering the plaintiff to pay to Diño and Uy the amount of P6,000.00 as attorney's fees and expenses of litigation; and

c) denying all other claims of the parties for want of legal and/or factual basis.

SO ORDERED. (Records, p. 336) 4



From the said Decision, the private respondent appealed to the Courtof Appeals. The case was docketed as CA-G.R. CV No. 17724. Insupport thereof, it made the following assignment of errors in its Brief:

I. THE LOWER COURT SERIOUSLY ERRED IN NOT FINDING ANDHOLDING THAT DEFENDANTS-APPELLEES JACINTO UY DIÑO

AND NORBERTO UY ARE SOLIDARILY LIABLE TO PLAINTIFF- APPELLANT FOR THE OBLIGATION OF DEFENDANT UY TIAMUNDER THE LETTER OF CREDIT ISSUED ON MARCH 30, 1979BY VIRTUE OF THE CONTINUING SURETYSHIPS THEYEXECUTED ON FEBRUARY 25, 1977.

II. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF- APPELLANT IS ANSWERABLE TO DEFENDANTS-APPELLEES

JACINTO UY DIÑO AND NORBERTO UY FOR ATTORNEY'S FEES ANDEXPENSES OF LITIGATION. 5

On 22 June 1989, public respondent promulgated the assailedDecision the dispositive portion of which reads:

WHEREFORE, premises considered, the judgment appealed from ishereby REVERSED AND SET, ASIDE. In lieu thereof, another one isrendered:

1) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy topay, jointly and severally, to appellant METROBANK the amount of P2,397,883.68 which represents the amount due as of July 17, 1987inclusive of principal, interest and charges;

2) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy topay, jointly and severally, appellant METROBANK the accruinginterest, fees and charges thereon from July 18, 1987 until the wholemonetary obligation is paid; and

3) Ordering sureties-appellees Jacinto Uy Diño and Norberto Uy topay, jointly and severally, to plaintiff P20,000.00 as attorney's fees.

With costs against appellees.

SO ORDERED. 6



In ruling for the herein private respondent (hereinafter METROBANK), public respondent held that the ContinuingSuretyship Agreements separately executed by the petitioners in1977 were intended to guarantee payment of Uy Tiam's outstandingas well as future obligations; each suretyship arrangement wasintended to remain in full force and effect until METROBANK wouldhave been notified of its revocation. Since no such notice was givenby the petitioners, the suretyships are deemed outstanding andhence, cover even the 1979 letter of credit issued by METROBANK infavor of Uy Tiam.

Petitioners filed a motion to reconsider the foregoing Decision. Theyquestioned the public respondent's construction of the suretyshipagreements and its ruling with respect to the extent of their liability

thereunder. They argued the even if the agreements were in full forceand effect when METROBANK granted Uy Tiam's application for aletter of credit in 1979, the public respondent nonetheless seriouslyerred in holding them liable for an amount over and above their respective face values.

In its Resolution of 21 August 1989, public respondent denied themotion:

. . . considering that the issues raised were substantially the same grounds

utilized by the lower court in rendering judgment for defendants-appelleeswhich We upon appeal found and resolved to be untenable, therebyreversing and setting aside said judgment and rendering another in favor of plaintiff, and no new or fresh issues have been posited to justify reversalof Our decision herein, . . . . 7

Hence, the instant petition which hinges on the issue of whether or not the petitioners may be held liable as sureties for the obligationcontracted by Uy Tiam with METROBANK on 30 May 1979 under and by virtue of the Continuing Suretyship Agreements signed on 25

February 1977.

Petitioners vehemently deny such liability on the ground that theContinuing Suretyship Agreements were automatically extinguishedupon payment of the principal obligation secured thereby, i.e., theletter of credit obtained by Uy Tiam in 1977. They further claim thatthey were not advised by either METROBANK or Uy Tiam that the



Continuing Suretyship Agreements would stand as security for the1979 obligation. Moreover, it is posited that to extend the applicationof such agreements to the 1979 obligation would amount to aviolation of Article 2052 of the Civil Code which expressly providesthat a guaranty cannot exist without a valid obligation. Petitionersfurther argue that even granting, for the sake of argument, that theContinuing Suretyship Agreements still subsisted and thereby alsosecured the 1979 obligations incurred by Uy Tiam, they cannot beheld liable for more than what they guaranteed to pay because it saxiomatic that the obligations of a surety cannot extend beyond whatis stipulated in the agreement.

On 12 February 1990, this Court resolved to give due course to thepetition after considering the allegations, issues and arguments

adduced therein, the Comment thereon by the private respondentand the Reply thereto by the petitioners; the parties were required tosubmit their respective Memoranda.

The issues presented for determination are quite simple:

1. Whether petitioners are liable as sureties for the 1979 obligationsof Uy Tiam to METROBANK by virtue of the Continuing Suretyship

Agreements they separately signed in 1977; and

2. On the assumption that they are, what is the extent of their liabilities for said 1979 obligations.

Under the Civil Code, a guaranty may be given to secure even futuredebts, the amount of which may not known at the time the guaranty isexecuted. 8 This is the basis for contracts denominated as continuingguaranty or suretyship. A continuing guaranty is one which is notlimited to a single transaction, but which contemplates a future courseof dealing, covering a series of transactions, generally for anindefinite time or until revoked. It is prospective in its operation and isgenerally intended to provide security with respect to futuretransactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. 9

Otherwise stated, a continuing guaranty is one which covers alltransactions, including those arising in the future, which are within thedescription or contemplation of the contract, of guaranty, until the



expiration or termination thereof. 10 A guaranty shall be construed ascontinuing when by the terms thereof it is evident that the object is togive a standing credit to the principal debtor to be used from time totime either indefinitely or until a certain period, especially if the right torecall the guaranty is expressly reserved. Hence, where the contractof guaranty states that the same is to secure advances to be made"from time to time" the guaranty will be construed to be a continuingone. 11

In other jurisdictions, it has been held that the use of particular wordsand expressions such as payment of "any debt," "any indebtedness,""any deficiency," or "any sum," or the guaranty of "any transaction" or money to be furnished the principal debtor "at any time," or "on suchtime" that the principal debtor may require, have been construed to

indicate a continuing guaranty.12

In the case at bar, the pertinent portion of paragraph I of thesuretyship agreement executed by petitioner Uy provides thus:

I. For and in consideration of any existing indebtedness to the BANK of UYTIAM (hereinafter called the "Borrower"), for the payment of which theSURETY is now obligated to the BANK, either as guarantor or otherwise,and/or in order to induce the BANK, in its discretion, at any time or fromtime to time hereafter, to make loans or advances or to extend credit in

any other manner to, or at the request, or for the account of the Borrower,either with or without security, and/or to purchase or discount, or to makeany loans or advances evidence or secured by any notes, bills,receivables, drafts, acceptances, checks, or other instruments or evidences of indebtedness (all hereinafter called "instruments") uponwhich the Borrower is or may become liable as maker, endorser, acceptor,or otherwise, the SURETY agrees to guarantee, and does hereby guarantee, the punctual payment at maturity to the loans, advances creditsand/or other obligations hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter become

due or owing to the BANK by the Borrower , together with any and allexpenses which may be incurred by the BANK in collecting all or any suchinstruments or other indebtedness or obligations herein before referred to,and/or in enforcing any rights hereunder, and the SURETY also agreesthat the BANK may make or cause any and all such payments to be madestrictly in accordance with the terms and provisions of any agreement(s)express or implied, which has (have) been or may hereafter be made or entered into by the Borrow in reference thereto, regardless of any law,



regulation or decree, unless the same is mandatory and non-waivable incharacter, nor or hereafter in effect, which might in any manner affect anyof the terms or provisions of any such agreement(s) or the Bank's rightswith respect thereto as against the Borrower, or cause or permit to beinvoked any alteration in the time, amount or manner of payment by the

Borrower of any such instruments, obligations or indebtedness; provided,however, that the liability of the SURETY hereunder shall not exceed atany one time the aggregate principal sum of PESOS: THREE HUNDREDTHOUSAND ONLY (P300,000.00) (irrespective of the currenc(ies) in whichthe obligations hereby guaranteed are payable), and such interest as mayaccrue thereon either before or after any maturity(ies) thereof and suchexpenses as may be incurred by the BANK as referred to above. 13

Paragraph I of the Continuing Suretyship Agreement executed bypetitioner Diño contains identical provisions except with respect to the

guaranteed aggregate principal amount which is EIGHT THOUSANDPESOS (P800,000.00). 14

Paragraph IV of both agreements stipulate that:

VI. This is a continuing guaranty and shall remain in full force and effect until written notice shall have been received by the BANK that it has beenrevoked by the SURETY, but any such notice shall not release theSURETY, from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by the BANK, or in

which the BANK may have any interest at the time of the receipt ( sic ) of such notice. No act or omission of any kind on the BANK'S part in thepremises shall in any event affect or impair this guaranty, nor shall same(sic ) be affected by any change which may arise by reason of the death of the SURETY, or of any partner(s) of the SURETY, or of the Borrower, or of the accession to any such partnership of any one or more new partners. 15

The foregoing stipulations unequivocally reveal that the suretyshipagreement in the case at bar are continuing in nature. Petitioners donot deny this; in fact, they candidly admitted it. Neither have they

denied the fact that they had not revoked the suretyship agreements. Accordingly, as correctly held by the public respondent:

Undoubtedly, the purpose of the execution of the ContinuingSuretyships was to induce appellant to grant any application for creditaccommodation (letter of credit/trust receipt) UTEFS may desire toobtain from appellant bank. By its terms, each suretyship is a



continuing one which shall remain in full force and effect until thebank is notified of its revocation.

xxx xxx xxx

When the Irrevocable Letter of Credit No. SN-Loc-309 was obtained fromappellant bank, for the purpose of obtaining goods (covered by a trustreceipt) from Planters Products, the continuing suretyships were in fullforce and effect. Hence, even if sureties-appellees did not sign the"Commercial Letter of Credit and Application, they are still liable as thecredit accommodation (letter of credit/trust receipt) was covered by thesaid suretyships. What makes them liable thereunder is the conditionwhich provides that the Borrower "is or may become liable as maker,endorser, acceptor or otherwise." And since UTEFS which (sic ) was liableas principal obligor for having failed to fulfill the obligatory stipulations in

the trust receipt, they as insurers of its obligation, are liable thereunder. 16

Petitioners maintain, however, that their Continuing Suretyship Agreements cannot be made applicable to the 1979 obligationbecause the latter was not yet in existence when the agreementswere executed in 1977; under Article 2052 of the Civil Code, aguaranty "cannot exist without a valid obligation." We cannot agree.First of all, the succeeding article provides that "[a] guaranty may alsobe given as security for future debts, the amount of which is not yetknown." Secondly, Article 2052 speaks about a valid obligation, asdistinguished from a void obligation, and not an existing or current obligation. This distinction is made clearer in the second paragraph of

Article 2052 which reads:

Nevertheless, a guaranty may be constituted to guarantee theperformance of a voidable or an unenforceable contract. It may alsoguarantee a natural obligation.

As to the amount of their liability under the Continuing Suretyship

Agreements, petitioners contend that the public respondent gravelyerred in finding them liable for more than the amount specified in their respective agreements, to wit: (a) P800,000.00 for petitioner Diño and(b) P300,000.00 for petitioner Uy.

The limit of the petitioners respective liabilities must be determinedfrom the suretyship agreement each had signed. It is undoubtedly



true that the law looks upon the contract of suretyship with a jealouseye, and the rule is settled that the obligation of the surety cannot beextended by implication beyond its specified limits. To the extent, andin the manner, and under the circumstances pointed out in hisobligation, he is bound, and no farther. 17

Indeed, the Continuing Suretyship Agreements signed by petitioner Diño and petitioner Uy fix the aggregate amount of their liability, atany given time, at P800,000.00 and P300,000.00, respectively. Thelaw is clear that a guarantor may bond himself for less, but not for more than the principal debtor, both as regards the amount and theonerous nature of the conditions. 18 In the case at bar, bothagreements provide for liability for interest and expenses, to wit:

. . . and such interest as may accrue thereon either before or after anymaturity(ies) thereof and such expenses as may be incurred by the BANKreferred to above. 19

They further provide that:

In the event of judicial proceedings being instituted by the BANK againstthe SURETY to enforce any of the terms and conditions of thisundertaking, the SURETY further agrees to pay the BANK a reasonablecompensation for and as attorney's fees and costs of collection, whichshall not in any event be less than ten per cent (10%) of the amount due(the same to be due and payable irrespective of whether the case issettled judicially or extrajudicially). 20

Thus, by express mandate of the Continuing Suretyship Agreementswhich they had signed, petitioners separately bound themselves topay interest, expenses, attorney's fees and costs. The last two itemsare pegged at not less than ten percent (10%) of the amount due.

Even without such stipulations, the petitioners would, nevertheless,

be liable for the interest and judicial costs. Article 2055 of the CivilCode provides: 21

Art. 2055. A guaranty is not presumed; it must be express and cannotextend to more than what is stipulated therein.

If it be simple or indefinite, it shall comprise not only the principal



obligation, but also all its accessories, including the judicial costs,provided with respect to the latter, that the guarantor shall only beliable for those costs incurred after he has been judicially required topay.

Interest and damages are included in the term accessories. However,such interest should run only from the date when the complaint wasfiled in court. Even attorney's fees may be imposed whenever appropriate, pursuant to Article 2208 of the Civil Code. Thus, inPlaridel Surety & Insurance Co., Inc . vs. P .L. Galang Machinery Co.,Inc ., 22 this Court held:

Petitioner objects to the payment of interest and attorney's feesbecause: (1) they were not mentioned in the bond; and (2) the surety

would become liable for more than the amount stated in the contractof suretyship.

xxx xxx xxx

The objection has to be overruled, because as far back as the year 1922 this Court held in Tagawa vs. Aldanese, 43 Phil. 852, thatcreditors suing on a suretyship bond may recover from the surety aspart of their damages, interest at the legal rate even if the suretywould thereby become liable to pay more than the total amount

stipulated in the bond. The theory is that interest is allowed only byway of damages for delay upon the part of the sureties in makingpayment after they should have done so. In some states, the interesthas been charged from the date of the interest has been chargedfrom the date of the judgment of the appellate court. In this

jurisdiction, we rather prefer to follow the general practice, which is toorder that interest begin to run from the date when the complaint wasfiled in court, . . .

Such theory aligned with sec. 510 of the Code of Civil Procedurewhich was subsequently recognized in the Rules of Court (Rule 53,section 6) and with Article 1108 of the Civil Code (now Art. 2209 of the New Civil Code).

In other words the surety is made to pay interest, not by reason of thecontract, but by reason of its failure to pay when demanded and for having compelled the plaintiff to resort to the courts to obtain



payment. It should be observed that interest does not run from thetime the obligation became due, but from the filing of the complaint.

As to attorney's fees. Before the enactment of the New Civil Code,successful litigants could not recover attorney's fees as part of thedamages they suffered by reason of the litigation. Even if the partypaid thousands of pesos to his lawyers, he could not charge theamount to his opponent (Tan Ti vs. Alvear, 26 Phil. 566).

However the New Civil Code permits recovery of attorney's fees ineleven cases enumerated in Article 2208, among them, "where thecourt deems it just and equitable that attorney's (sic ) fees andexpenses of litigation should be recovered" or "when the defendantacted in gross and evident bad faith in refusing to satisfy the plaintiff's

plainly valid, just and demandable claim." This gives the courtsdiscretion in apportioning attorney's fees.

The records do not reveal the exact amount of the unpaid portion of the principal obligation of Uy Tiam to MERTOBANK under IrrevocableLetter of Credit No. SN-Loc-309 dated 30 March 1979. In referring tothe last demand letter to Mr. Uy Tiam and the complaint filed in CivilCase No. 82-9303, the public respondent mentions the amount of "P613,339.32, as of January 31, 1982, inclusive of interestcommission penalty and bank charges." 23 This is the same amount

stated by METROBANK in its Memorandum. 24 However, insummarizing Uy Tiam's outstanding obligation as of 17 July 1987,public respondent states:

Hence, they are jointly and severally liable to appellant METROBANK of UTEFS' outstanding obligation in the sum of P2,397,883.68 (as of July 17,1987) — P651,092.82 representing the principal amount, P825,133.54, for past due interest (5-31-82 to 7-17-87) and P921,657.32, for penaltycharges at 12% per annum (5-31-82 to 7-17-87) as shown in theStatement of Account (Exhibit I). 25

Since the complaint was filed on 18 May 1982, it is obvious that onthat date, the outstanding principal obligation of Uy Tiam, secured bythe petitioners' Continuing Suretyship Agreements, was less thanP613,339.32. Such amount may be fully covered by the ContinuingSuretyship Agreement executed by petitioner Diño which stipulatesan aggregate principal sum of not exceeding P800,000.00, and partly



covered by that of petitioner Uy which pegs his maximum liability atP300,000.00.

Consequently, the judgment of the public respondent shall have to bemodified to conform to the foregoing exposition, to which extent theinstant petition is impressed with partial merit.

WHEREFORE, the petition is partly GRANTED, but only insofar asthe challenged decision has to be modified with respect to the extendof petitioners' liability. As modified, petitioners JACINTO UY DIÑOand NORBERTO UY are hereby declared liable for and are orderedto pay, up to the maximum limit only of their respective ContinuingSuretyship Agreement, the remaining unpaid balance of the principalobligation of UY TIAM or UY TIAM ENTERPRISES & FREIGHT

SERVICES under Irrevocable Letter of Credit No. SN-Loc-309, dated30 March 1979, together with the interest due thereon at the legalrate commencing from the date of the filing of the complaint in CivilCase No. 82-9303 with Branch 45 of the Regional Trial Court of Manila, as well as the adjudged attorney's fees and costs.

All other dispositions in the dispositive portion of the challengeddecision not inconsistent with the above are affirmed.

SO ORDERED.

[G.R. No. 109941. August 17, 1999]

PACIONARIA C. BAYLON, petitioner, vs. THE

HONORABLE COURT OF APPEALS

(Former Ninth Division) and LEONILA



TOMACRUZ, respondents.

D E C I S I O N

GONZAGA-REYES, J .:

This is a petition for review by way of certiorari under Rule

45 of the Revised Rules of Court of the decision of the Court of

Appeals[1] dated November 29, 1991 in CA-G.R. CV No. 27779 affirming the

decision[2] of the Regional Trial Court of Quezon City, Branch 88,

dated June 14, 1990 in Civil Case No. Q-89-2483 and the

Resolution of the Court of Appeals dated April 27, 1993 denying

petitioner's Motion for Reconsideration.

The pertinent facts, as found by the trial court and affirmed by

respondent court, are briefly narrated as follows:

Sometime in 1986, petitioner Pacionaria C. Baylon introduced

private respondent Leonila Tomacruz, the co-manager of her

husband at PLDT, to Rosita B. Luanzon.[3] Petitioner told private

respondent that Luanzon has been engaged in business as a

contractor for twenty years and she invited private respondent to

lend Luanzon money at a monthly interest rate of five percent(5%), to be used as capital for the latter's business. Private

respondent, persuaded by the assurances of petitioner that

Luanzon's business was stable and by the high interest rate, agreed

to lend Luanzon money in the amount of P150,000. On June 22,

1987, Luanzon issued and signed a promissory note

acknowledging receipt of the P150,000 from private respondent

and obliging herself to pay the former the said amount on or before

August 22, 1987.[4] Petitioner signed the promissory note, affixing

her signature under the word "guarantor." Luanzon also issued a

postdated Solidbank check no. CA418437 dated August 22, 1987

payable to Leonila Tomacruz in the amount of P150,000.[5]

Subsequently, Luanzon replaced this check with another postdated

Solidbank check no. 432945 dated December 22, 1987, in favor of

the same payee and covering the same amount.[6] Several checks



in the amount of P7,500 each were also issued by Luanzon and

made payable to private respondent.[7]

Private respondent made a written demand upon petitioner for

payment, which petitioner did not heed. Thus, on May 8, 1989, private respondent filed a case for the collection of a sum of money

with the Regional Trial Court (RTC) of Quezon City, Branch 88,

against Luanzon and petitioner herein, impleading Mariano

Baylon, husband of petitioner, as an additional defendant.

However, summons was never served upon Luanzon.

In her answer, petitioner denied having guaranteed the

payment of the promissory note issued by Luanzon. She claimed

that private respondent gave Luanzon the money, not as a loan, butrather as an investment in Art Enterprises and Construction, Inc. -

the construction business of Luanzon. Furthermore, petitioner

avers that, granting arguendo that there was a loan and petitioner

guaranteed the same, private respondent has not exhausted the

property of the principal debtor nor has she resorted to all the legal

remedies against the principal debtor as required by law. Finally,

petitioner claims that there was an extension of the maturity date of

the loan without her consent, thus releasing her from her

obligation.[8]

After trial on the merits, the lower court ruled in favor of

private respondent. In its Decision dated June 14, 1990, it stated

that -

The evidence and the testimonies on record clearly established a

(sic) fact that the transaction between the plaintiff and defendants

was a loan with five percent (5%) monthly interest and not an

investment. In fact they all admitted in their testimonies that they

are not given any stock certificate but only promissory notes

similar to Exhibit “B” wherein it was clearly stated that defendant

Luanzon would pay the amount of indebtedness on the date due.

Postdated checks were issued simultaneously with the promissory



notes to enable the plaintiff and others to withdraw their money on

a certain fixed time. This shows that they were never participants

in the business transaction of defendant Luanzon but were

creditors.

The evidences presented likewise show that plaintiff and others

loan their money to defendant Luanzon because of the assurance of

the monthly income of five percent (5%) of their money and that

they could withdraw it anytime after the due date add to it the fact

that their friend, Pacionaria Baylon, expresses her unequivocal

gurarantee to the payment of the amount loaned.

xxx xx xxx

WHEREFORE, premises considered, judgment is hereby rendered

against the defendants Pacionaria C. Baylon and Mariano Baylon,

to pay the plaintiff the sum of P150,000.00, with interest at the

legal rate from the filing of this complaint until full payment

thereof, to pay the total sum of P21,000.00 as attorney’s fees and

costs of suit.[9]

On appeal, the trial court's decision was affirmed by the Court

of Appeals. Hence, this present case wherein petitioner makes the

following assignment of errors -

I. RESPONDENT COURT ERRED IN HOLDING THAT THE

PRIVATE RESPONDENT TOMACRUZ WAS A CREDITOR

OF DEFENDANT LUANZON AND NOT AN INVESTOR IN

THE CONSTRUCTION BUSINESS OF ART ENTERPRISES &

CONSTRUCTION, INC.

II. GRANTING, WITHOUT ADMITTING, THAT PETITIONER-

APPELLANT BAYLON WAS A "GUARANTOR" AS

APPEARING IN THE NOTE (EXH. "A") THE RESPONDENT

COURT ERRED IN RULING THAT PETITIONER-



APPELLANT BAYLON IS LIABLE TO THE PRIVATE

RESPONDENT BECAUSE THE LATTER HAS NOT TAKEN

STEPS TO EXHAUST THE PROPERTY OF THE PRINCIPAL

DEBTOR AND HAS NOT RESORTED TO ALL THE LEGAL

REMEDIES PROVIDED BY LAW AGAINST THE DEBTOR,

DEFENDANT LUANZON.

III. GRANTING, WITHOUT ADMITTING THAT

PETITIONER-APPELLANT BAYLON WAS A GUARANTOR

UNDER THAT NOTE (EXHIBIT "A") DATED JUNE 22, 1987,

THE LOWER COURT ERRED IN RESOLVING THAT SHE

WAS NOT RELEASED FROM HER GUARANTY BY THE

SUBSEQUENT TRANSACTIONS BETWEEN THERESPONDENT-APPELLANT AND DEFENDANT LUANZON.

At the outset, we note that petitioner’s claim that the factual

findings of the lower court, which were affirmed by the Court of

Appeals, were based on a misapprehension of facts and

contradicted by the evidence on records[10] is a bare allegation and

devoid of merit. As a rule, the conclusions of fact of the trial

court, especially when affirmed by the Court of Appeals, are finaland conclusive and cannot be reviewed on appeal by the Supreme

Court.[11] Although this rule admits of several exceptions,[12] none

of the exceptions are in point in the present case. The factual

findings of the respondent court are borne out by the record and are

based on substantial evidence.

Petitioner claims that there is no loan to begin with; that

private respondent gave Luanzon the amount of P150,000, not as a

loan, but rather as an investment in the construction project of thelatter.[13] In support of her claim, petitioner cites the use by private

respondent of the words “investment,” “dividends,” and

“commission” in her testimony before the lower court; the fact that

private respondent received monthly checks from Luanzon in the

amount of P7,500 from July to December, 1987, representing



dividends on her investment; and the fact that other employees of

the Development Bank of the Philippines made similar investments

in Luanzon’s construction business.[14]

However, all the circumstances mentioned by petitioner cannot override the clear and unequivocal terms of the June 22,

1987 promissory note whereby Luanzon promised to pay private

respondent the amount of P150,000 on or before August 22, 1987.

The promissory note states as follows:

June 22, 1987

To Whom It May Concern:

For value received, I hereby promise to pay Mrs. LEONILA

TOMACRUZ the amount of ONE HUNDRED FIFTY

THOUSAND PESOS ONLY (P150,000.00) on or before August

22, 1987.

The above amount is covered by _____ Check No. _____ dated

August 22, 1987.

(signed)

ROSITA B. LUANZON

G U R A R A N T O R :

(signed)

PACIONARIA O. BAYLON

Tel. No. 801-28-00

18 P. Mapa St., DBP Village



Almanza, Las Pinas, M.M.[15]

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

intention of the contracting parties, the literal meaning of its

stipulation shall control.[16] Resort to extrinsic aids and other extraneous sources are not necessary in order to ascertain the

parties' intent when there is no ambiguity in the terms of the

agreement.[17] Both petitioner and private respondent do not deny

the due execution and authenticity of the June 22, 1987 promissory

note. All of petitioner's arguments are directed at uncovering the

real intention of the parties in executing the promissory note, but

no amount of argumentation will change the plain import of the

terms thereof, and accordingly, no attempt to read into it anyalleged intention of the parties thereto may be justified. [18] The

clear terms of the promissory note establish a creditor-debtor

relationship between Luanzon and private respondent. The

transaction at bench is therefore a loan, not an investment.

It is petitioner's contention that, even though she is held to be a

guarantor under the terms of the promissory note, she is not liable

because private respondent did not exhaust the property of the

principal debtor and has not resorted to all the legal remedies provided by the law against the debtor.[19] Petitioner is invoking

the benefit of excussion pursuant to article 2058 of the Civil Code,

which provides that -

The guarantor cannot be compelled to pay the creditor unless the

latter has exhausted all the property of the debtor, and has resorted

to all the legal remedies against the debtor.

It is axiomatic that the liability of the guarantor is onlysubsidiary.[20] All the properties of the principal debtor must first

be exhausted before his own is levied upon. Thus, the creditor

may hold the guarantor liable only after judgment has been

obtained against the principal debtor and the latter is unable to pay,

“for obviously the ‘exhaustion of the principal’s property’ - the



benefit of which the guarantor claims - cannot even begin to take

place before judgment has been obtained.”[21] This rule is

embodied in article 2062 of the Civil Code which provides that the

action brought by the creditor must be filed against the principal

debtor alone, except in some instances when the action may be brought against both the debtor and the principal debtor.[22]

Under the circumstances availing in the present case, we hold

that it is premature for this Court to even determine whether or not

petitioner is liable as a guarantor and whether she is entitled to the

concomitant rights as such, like the benefit of excussion, since the

most basic prerequisite is wanting - that is, no judgment was first

obtained against the principal debtor Rosita B. Luanzon. It is

useless to speak of a guarantor when no debtor has been held liable

for the obligation which is allegedly secured by such guarantee.

Although the principal debtor Luanzon was impleaded as

defendant, there is nothing in the records to show that summons

was served upon her. Thus, the trial court never even acquired

jurisdiction over the principal debtor. We hold that private

respondent must first obtain a judgment against the principal

debtor before assuming to run after the alleged guarantor.

IN VIEW OF THE FOREGOING, the petition is granted

and the questioned Decision of the Court of Appeals dated

November 29, 1991 and Resolution dated April 27, 1993 are SET

ASIDE. No pronouncement as to costs.

SO ORDERED.

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

TOWERS ASSURANCE CORPORATION, petitioner, vs.ORORAMASUPERMART, ITS OWNER-PROPRIETOR, SEE HONG and



JUDGE BENJAMIN K. GOROSPE, Presiding Judge, Court of FirstInstance of Misamis Oriental, Branch I, respondents.

Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

AQUINO, J .:

This case is about the liability of a surety in a counterbond for thelifting 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 Ongand Conching Ong in the Court of First Instance of Misamis Orientalfor the collection of the sum of P 58,400 plus litigation expenses andattorney's fees (Civil Case No. 4930).

See Hong asked for a writ of preliminary attachment. On March 5,1976, the lower court issued an order of attachment. The deputysheriff 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 acounterbond in 'the amount of P 58,400 with Towers AssuranceCorporation as surety. In that undertaking, the Ong spouses andTowers Assurance Corporation bound themselves to pay solidarity toSee Hong the sum of P 58,400.

On March 24, 1976 the Ong spouses filed an answer with acounterclaim. For non-appearance at the pre- trial, the Ong spouseswere declared in default.

On October 25, 1976, the lower court rendered a decision, orderingnot only the Ong spouses but also their surety, Towers AssuranceCorporation, to pay solidarily to See Hong the sum of P 58,400. Thecourt also ordered the Ong spouses to pay P 10,000 as litigationexpenses and attorney's fees.



Ernesto Ong manifested that he did not want to appeal. On March 8,1977, Ororama Supermart filed a motion for execution. The lower court granted that motion. The writ of execution was issued on March14 against the judgment debtors and their surety. On March 29, 1977,Towers Assurance Corporation filed the instant petition for certiorariwhere it assails the decision and writ of execution.

We hold that the lower court acted with grave abuse of discretion inissuing a writ of execution against the surety without first giving it anopportunity to be heard as required in Rule 57 of tie Rules of Courtwhich provides:

SEC. 17. When execution returned unsatisfied, recovery had uponbound . — If the execution be returned unsatisfied in whole or in part,

the surety or sureties on any counterbound given pursuant to theprovisions of this rule to secure the payment of the judgment shallbecome charged on such counterbound, and bound to pay to the

judgment creditor upon demand, the amount due under the judgment,which amount may be recovered from such surety or sureties after notice and summary hearing in the same action .

Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary (1) that executionbe first issued against the principal debtor and that such execution

was returned unsatisfied in whole or in part; (2) that the creditor madea demand upon the surety for the satisfaction of the judgment, and(3) that the surety be given notice and a summary hearing in thesame action as to his liability for the judgment under his counterbond.

The first requisite mentioned above is not applicable to this casebecause Towers Assurance Corporation assumed a solidary liabilityfor the satisfaction of the judgment. A surety is not entitled to theexhaustion of the properties of the principal debtor (Art. 2959, CivilCode; Luzon Steel Corporation vs. Sia, L-26449, May 15, 1969, 28SCRA 58, 63).

But certainly, the surety is entitled to be heard before an executioncan be issued against him since he is not a party in the case involvinghis principal. Notice and hearing constitute the essence of proceduraldue process. (Martinez vs. Villacete 116 Phil. 326; Insurance &



Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon SuretyCo., Inc. vs. Beson, L-26865-66, January 30. 1970. 31 SCRA 313).

WHEREFORE, the order and writ of execution, insofar as theyconcern Towers Corporation, are set aside. The lower court isdirected to conduct a summary hearing on the surety's liability on itscounterbound. No costs.

SO ORDERED.

G.R. No. L-49401 July 30, 1982

RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs.HON. JOSE P. ARRO, Judge of the Court of First instance of Davao, and RESIDORO CHUA, respondents.

Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.

DE CASTRO, J.:

Petition for certiorari to annul the orders of respondent judge datedOctober 6, 1978 and November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of Davao, which granted the motion filedby private respondent to dismiss the complaint of petitioner for a sumof money, on the ground that the complaint states no cause of actionas against private respondent.

After the petition had been filed, petitioner, on December 14, 1978mailed a manifestation and motion requesting the special civil actionfor certiorari be treated as a petition for review. 1 Said manifestationand motion was noted in the resolution of January 10, 1979. 2

It appears that on October 19, 1976 Residoro Chua and Enrique Go,Sr. executed a comprehensive surety agreements 3 to guaranty



among others, any existing indebtedness of Davao AgriculturalIndustries Corporation (referred to therein as Borrower, and as Daicor in this decision), and/or induce the bank at any time or from time totime thereafter, to make loans or advances or to extend credit in other manner to, or at the request, or for the account of the Borrower, either with or without security, and/or to purchase on discount, or to makeany loans or advances evidenced or secured by any notes, bills,receivables, drafts, acceptances, checks or other evidences of indebtedness (all hereinafter called "instruments") upon which theBorrower is or may become liable, provided that the liability shall notexceed at any one time the aggregate principal sum of P100,000.00.

On April 29, 1977 a promissory note 4 in the amount of P100,000.00was issued in favor of petitioner payable on June 13, 1977. Said note

was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor. The promissory note was not fully paid despite repeateddemands; hence, on June 30, 1978, petitioner filed a complaint for asum of money against Daicor, Enrique Go, Sr. and Residoro Chua. Amotion to dismiss dated September 23, 1978 was filed by respondentResidoro Chua on the ground that the complaint states no cause of action as against him. 5 It was alleged in the motion that he can notbe held liable under the promissory note because it was only EnriqueGo, Sr. who signed the same in behalf of Daicor and in his ownpersonal capacity.

In an opposition dated September 26, 1978 6 petitioner alleged thatby virtue of the execution of the comprehensive surety agreement,private respondent is liable because said agreement covers notmerely the promissory note subject of the complaint, but iscontinuing; and it encompasses every other indebtedness theBorrower may, from time to time incur with petitioner bank.

On October 6, 1978 respondent court rendered a decision granting

private respondent's motion to dismiss the complaint.7

Petitioner fileda motion for reconsideration dated October 12, 1978 and onNovember 7, 1978 respondent court issued an order denying the saidmotion. 8

The sole issue resolved by respondent court was the interpretation of the comprehensive surety agreement, particularly in reference to the



indebtedness evidenced by the promissory note involved in theinstant case, said comprehensive surety agreement having beensigned by Enrique Go, Sr. and private respondent, bindingthemselves as solidary debtors of said corporation not only to existingobligations but to future ones. Respondent court said that corollary tothat agreement must be another instrument evidencing the obligationin a form of a promissory note or any other evidence of indebtednesswithout which the said agreement serves no purpose; that since thepromissory notes, which is primarily the basis of the cause of actionof petitioner, is not signed by private respondent, the latter can not beliable thereon.

Contesting the aforecited decision and order of respondent judge, thepresent petition was filed before this Court assigning the following as

errors committed by respondent court:

1. That the respondent court erred in dismissing the complaintagainst Chua simply on the reasons that 'Chua is not a signatory tothe promissory note" of April 29, 1977, or that Chua could not be heldliable on the note under the provisions of the comprehensive suretyagreement of October 29, 1976; and/or

2. That the respondent court erred in interpreting the provisions of theComprehensive Surety Agreement towards the conclusion that

respondent Chua is not liable on the promissory note because saidnote is not conformable to the Comprehensive Surety Agreement;and/or

3. That the respondent court erred in ordering that there is no causeof action against respondent Chua in the petitioner's complaint.

The main issue involved in this case is whether private respondent isliable to pay the obligation evidence by the promissory note dated

April 29,1977 which he did not sign, in the light of the provisions of the comprehensive surety agreement which petitioner and privaterespondent had earlier executed on October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed by Residoro Chua and Enrique Go, Sr., Presidentand General Manager, respectively of Daicor, on October 19, 1976 tocover existing as well as future obligations which Daicor may incur



with the petitioner bank, subject only to the proviso that their liabilityshall not exceed at any one time the aggregate principal sum of P100,000.00. Thus, paragraph I of the agreement provides:

For and in consideration of any existing indebtedness to you of Davao Agricultural Industries Corporation with principal place of business and postal address at 530 J. P. Cabaguio Ave., Davao City(hereinafter called the "Borrower), and/or in order to induce, you inyour discretion, at any time or from time to time hereafter, to makeloans or advances or to extend credit in any other manner to, or at herequest or for the account of the Borrower, either with or withoutsecurity, and/or to purchase or discount or to make any loans or advances evidenced or secured by any notes, bills, receivables,drafts, acceptances, checks or other instruments or evidences of

indebtedness (all hereinafter called "instruments") upon which theBorrower is or may become liable as maker, endorser, acceptor, or otherwise) the undersigned agrees to guarantee, and does herebyguarantee in joint and several capacity, the punctual payment atmaturity to you of any and all such instruments, loans, advances,credits and/or other obligations herein before referred to, and alsoany and all other indebtedness of every kind which is now or mayhereafter become due or owing to you by the Borrower, together withany and all expenses which may be incurred by you in collecting ansuch instruments or other indebtedness or obligations hereinbeforereferred to ..., provided, however, that the liability of the undersignedshag not exceed at any one time the aggregate principal sum of P100,000.00 ...

The agreement was executed obviously to induce petitioner to grantany application for a loan Daicor may desire to obtain from petitioner bank. The guaranty is a continuing one which shall remain in full forceand effect until the bank is notified of its termination.

This is a continuing guaranty and shall remain in fun force and effect untilwritten notice shall have been received by you that it has been revoked bythe undersigned, ... 9

At the time the loan of P100,000.00 was obtained from petitioner byDaicor, for the purpose of having an additional capital for buying andselling coco-shell charcoal and importation of activated carbon, 10 the



comprehensive surety agreement was admittedly in full force andeffect. The loan was, therefore, covered by the said agreement, andprivate respondent, even if he did not sign the promisory note, isliable by virtue of the surety agreement. The only condition that wouldmake him liable thereunder is that the Borrower "is or may becomeliable as maker, endorser, acceptor or otherwise". There is no doubtthat Daicor is liable on the promissory note evidencing theindebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr.and private respondent, is an accessory obligation, it beingdependent upon a principal one which, in this case is the loanobtained by Daicor as evidenced by a promissory note. Whatobviously induced petitioner bank to grant the loan was the surety

agreement whereby Go and Chua bound themselves solidarily toguaranty the punctual payment of the loan at maturity. By terms thatare unequivocal, it can be clearly seen that the surety agreement wasexecuted to guarantee future debts which Daicor may incur withpetitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guaranty may also be given as security for futuredebts, the amount of which is not yet known; there can be no claimagainst the guarantor until the debt is liquidated. A conditionalobligation may also be secured.

In view of the foregoing, the decision (which should have been amere "order"), dismissing the complaint is reversed and set side. Thecase is remanded to the court of origin with instructions to set asidethe motion to dismiss, and to require defendant Residoro Chua toanswer the complaint after which the case shall proceed as providedby the Rules of Court. No costs.

SO ORDERED.

G.R. No. L-30554 February 28, 1983

PLARIDEL SURETY & INSURANCE COMPANY, petitioner, vs.ARTEX DEVELOPMENT COMPANY, INC., and HON. JESUS P.MORFE, Presiding Judge, Branch XIII, Court of First Instance of



Manila, respondents.

Bonifacio L. Hilario and Arturo Topacio, Jr., for petitioner.

Norberto Quisumbing for respondents.

GUTIERREZ, JR., J.:

This is a petition for review on certiorari of the orders of therespondent judge dismissing the complaint in Civil Case No. 73904and denying a motion for reconsideration of the dismissal order. Thepetitioner filed with the Court of First Instance of Manila a complaintfor a sum of money against respondent Artex Development Co. Inc.,wherein it prayed that judgment be rendered in its favor as follows:

a) Ordering the respondent (defendant) Artex Development Co. Inc.to pay plaintiff the sum of P20,570.24, plus interest thereon at therate of 12% per annum computed monthly and automaticallyaccumulated to the outstanding capital and shall bear the sameinterests as said capital until fully paid;

b) Ordering the defendant to pay plaintiff, the sum equivalent to 15%

per centum of the amount due as and for attorneys fees; andc) For costs of suit.

The action was brought by the petitioner to recover from therespondent company P20,570.24 worth of renewal premiums andcosts of documentary stamps on various surety bonds posted bypetitioner Plaridel Surety and Insurance Co., in behalf of respondent

Artex Development Co. Inc., as principal in favor of the Republic of the Philippines through the Bureau of Customs and the Board of

Industries.

These surety bonds were posted pursuant to Republic Act No. 4086and its implementing Rules and Regulations No. 1-64 particularlyparagraph 9, which provides:

Par. 9. Withdrawal Under Bond . – Persons or firms who or which



have pending applications for tax exemption privileges under the Actand whose imported raw materials, chemicals, dyestuffs and spareparts are actually within the Bureau of Customs jurisdiction, maywithdraw such raw materials chemicals, dyestuffs and spare partsfrom the customs house upon the posting of a bond equivalent to thecustoms duties and taxes due thereon in accordance with the rulesand regulations of the Department of Finance and the Bureau of Customs.

Consequently, the respondent withdrew from the Bureau of Customs'custody shipments of imported raw materials, chemicals, dyestuffsand spare parts which were then subject to customs duties, specialimport taxes, sales and/or compensating taxes because therespondent's applications for tax exemption of these items were not

then approved by the Board of Industries.

In consideration of the obligation assumed by the petitioner, theprivate respondent agreed to pay the premiums and cost of documentary stamps due thereon as per stipulations contained in theseparate agreement of counter-guaranty:

(a) PREMIUM – To pay to the Surety Company at its principal officesin the sum of ... in advance as premiums of same for each period of (12) mos. beginning March 1965 or fraction thereof, to be computed

from this date until said bonds and its renewals, extensions or substitutions be cancelled in full by the person or entity guaranteedthereby, or by a court of competent jurisdiction.

It is an admitted fact that the premiums due and costs of documentary stamps for the first year duration of the undertakingunder these surety bonds, which was from March 1965 to March1966, were paid in accordance with the agreements of counter-guaranty.

On December 19, 1966, respondent Artex Development Co. Inc., wasgranted tax exemption by the Board of Industries (BOI Certificate No.22). Thereafter, the respondent stopped paying premiums and costsof documentary stamps to the petitioner.

On September 11, 1968, the private respondent filed its motion todismiss petitioner's complaint on the ground that it states no cause of



action and/or that the claim or demand setforth therein has beenextinguished. The petitioner filed its opposition to the motion todismiss followed by the respondent's filing its reply to the opposition.

Acting on the motion to dismiss, the respondent judge issued one of the assailed orders which reads as follows:

After careful consideration of defendant's motion to dismiss, dated 9September, 1968, plaintiff's opposition thereto, dated September 12,1968, and movant's closing written arguments (Reply to Opposition,dated 20 September 1968), this Court finds said motion to dismiss tobe well taken.

WHEREFORE, said motion to dismiss, dated 9 September, 1968 is

hereby granted, and plaintiff's action or complaint is herebydismissed, without pronouncement as to costs.

The respondent judge later issued the other assailed order denyingpetitioner's motion for reconsideration.

The private respondent contents that the grant of tax exemption bythe Board of Industries on December 19, 1966 rendered null and voidand extinguished the surety bonds and agreement of counter guaranty. It argues that guaranty and suretyship are accessory to and

dependent upon the principal obligation guaranteed or secured bythem and cannot exist without a valid obligation. Therefore, as anecessary consequence, the obligation of defendant to pay premiumsand cost of documentary stamps allegedly due on the extinguishedagreements of counter guaranty has likewise been rendered of noforce and effect.

Petitioner, on the other hand, maintains that, granting arguendo thatthe grant of tax exemption in favor of respondent corporation had theeffect of releasing the surety bonds involved, still the petitioner had

the valid and subsisting right to claim unpaid renewal premiums andcosts of documentary stamps that had accrued in its favor prior to thegrant of tax exemptions. Petitioner maintains that it had renewed thesurety bonds in March 1966, more or less eight months before theapplication for tax exemption was granted by the Board of Industries.

With respect to accrued premiums and costs of documentary stamps



on renewals of the surety bonds made after the grant of taxexemptions to the respondent corporation, the petitioner maintainsthat the surety bonds which were renewed subsequent thereto shouldcontinue in full force and effect until the Chairman of the Board of Industries shall order their cancellation.

Petitioner submits that the mere grant of tax exemptions would notdischarge the surety bonds because it is possible that the granteemay have violated some of the terms and conditions imposed by theBoard of Industries in connection with authority granted to it towithdraw the items from customs' custody under bond.

We agree with the private respondents. We note that Condition No. 2of the original surety bonds reads:

2. That in case the application (of respondent Artex Development Co.Inc. for tax exemption) is approved by the Board of Industries. thenthis bond shall be null and void and of no force and effect.

The petitioner could not possibly be liable for any violation under theoriginal surety bonds which were already void and of no force andeffect. Suretyship cannot exist without a valid obligation, (Municipalityof Gasan v. Marasigan, et al., 63 Phil. 510). As stated in VisayanSurety and Insurance corporation v. Laperal (69 Phil. 688):

Segun el articulo 1822 del Codigo Civil la fianza es un contratoaccesorio y la responsabilidad que contrae el fiador essubsidiaria.Por ella el fiador se obliga a pagar o a cumplir por untercero, solamente en el caso de no hacerlo este. Explicando lanaturaleza y efectos de la fianza Manresa en sus comentarios alCodigo Civil, Tomo XII, paginas 137, 138 y 140, dice:

Dos son las acepciones que en el tecnicismo juridico tiene la palabrafianza uno, lato, amplio y extenso que comprende, dentro de sus

terminos todos los contratos de garantia; y otro restringido y estricto,que es lo que constituye la fianza propiamente dicha. En ambossentidos, denota el aseguramiento por medios subsidiarios de unaobligacion principal, que es la caracteristica de su esencia pues sindicha obligacion principal no se concibe la existencia de la fianza, ypor eso es siempre un contrato accesorio, dependiente de otro paracuya seguridad se constituye.



En este concepto puede definirse la fianza, diciendo que es uncontrato mediante el cual uno de los contratantes da su garantiapersonal para asegurar el cumplimento de una obligacion contraidapor otra distinta persona, comprometiendose a cumplirla por ella, siesta no lo hiciere en el tiempo y en la forma en que se obligo aIlevarla a efecto.

Recordando las indicaciones consignadas en la introduccion alpresente titulo, facil es precisar la naturaleza y aun la extension de lafianza en el concepto en que ha de ser objects de nuestro estudio.En cuanto a la primera, tres son los caracteres que la distinguen ydiferencian determinando la razon de su especialidad, drivada delobjeto mismo de dicho contrato. Esos caracteres, son: 1º , lacualidad accesoria y subsidiara de la obligacion contraida 2 º, la

condicion unilateral de la misma y 3º, la circumstancia de haber ser el fiador persona distinta del principal obligado.

Es accesoria la obligacion contraida, porque careceria de objeto sinotro principal cuyo cumplimiento asegure y garantice, hasta el puntode que sin esta no se concibe su existencia. Ha de vivir pues, unida ala convencion a que debe su nacimiento y no puede asumir loscaracteres de una obligacion principal, independiente y con vidapropia ...

Insofar as the complaint seeks recovery of the payment for one year renewed premiums and costs of documentary stamps from March1966 to March 1967, petitioner cannot recover for the simple reasonthat private respondent had already paid them in advance. Petitioner never disputed the payment made by private respondent.Consequently, whatever obligation of private respondent to remitpremiums and costs of documentary stamps from March 1966 toMarch 1967 had already been extinguished.

As to the alleged obligation to remit the premiums for the periodMarch 1967 to March 1969, the purported renewals were without anyconsideration at all Petitioner incurred no risk from the timerespondent's tax exemption application was approved. Any renewalswere void from the beginning because the cause or object of saidrenewals did not exist at the time of the purported transaction (Arts,1409, 1352, and 1353, Civil Code).



The lower court correctly ruled that "upon approval of defendant's(respondent's) application for tax exemption on December 19, 1966,any purported renewal of the original bond after that was, therefore,without consideration and will not warrant the collection of premiumsand the payment of cost of documentary stamps."

We also see no need for a formal release of the surety bonds by theBoard of Industries or the Bureau of Customs. By express stipulationof the parties themselves, the surety bonds became null and voidupon the grant of tax exemption.

The complaint was correctly dismissed by the respondent judge.

WHEREFORE, the petition for review on certiorari is dismissed for

lack of merit. The questioned orders of the respondent judge areaffirmed. Costs against the petitioner.

G.R. No. 72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner, vs.HONINTERMEDIATE APPELLATE COURT AND ROBERTO REGALA,JR., respondents.

Ocampo, Dizon & Domingo for petitioner.

Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J.: p

This is a petition for review on certiorari of the decision (pp 21-31,Rollo) of the Intermediate Appellate Court (now Court of Appeals) in

AC-G.R. C.V. No. 02753, 1 which modified the decision of the trialcourt against herein private respondent Roberto Regala, Jr., one of the defendants in the case for sum of money filed by Pacific Banking



Corporation.

The facts of the case as adopted by the respondent appellant courtfrom herein petitioner's brief before said court are as follows:

On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala for brevity), applied for and obtained fromthe plaintiff the issuance and use of Pacificard credit card (Exhs. "A","A-l",), under the Terms and Conditions Governing the Issuance andUse of Pacificard (Exh. "B" and hereinafter referred to as Terms andConditions), a copy of which was issued to and received by the saiddefendant on the date of the application and expressly agreed thatthe use of the Pacificard is governed by said Terms and Conditions.On the same date, the defendant-appelant Robert Regala, Jr.,

spouse of defendant Celia Regala, executed a "Guarantor'sUndertaking" (Exh. "A-1-a") in favor of the appellee Bank, wherebythe latter agreed "jointly and severally of Celia Aurora Syjuco Regala,to pay the Pacific Banking Corporation upon demand, any and allindebtedness, obligations, charges or liabilities due and incurred bysaid Celia Aurora Syjuco Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific BankingCorporation". It was also agreed that "any changes of or novation inthe terms and conditions in connection with the issuance or use of thePacificard, or any extension of time to pay such obligations, charges

or liabilities shall not in any manner release me/us from responsibilityhereunder, it being understood that I fully agree to such charges,novation or extension, and that this understanding is a continuing oneand shall subsist and bind me until the liabilities of the said CeliaSyjuco Regala have been fully satisfied or paid.

Plaintiff-appellee Pacific Banking Corporation has contracted withaccredited business establishments to honor purchases of goodsand/or services by Pacificard holders and the cost thereof to be

advanced by the plaintiff-appellee for the account of the defendantcardholder, and the latter undertook to pay any statements of accountrendered by the plaintiff-appellee for the advances thus made withinthirty (30) days from the date of the statement, provided that anyoverdue account shall earn interest at the rate of 14% per annumfrom date of default.



The defendant Celia Regala, as such Pacificard holder, hadpurchased goods and/or services on credit (Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff advanced the costamounting to P92,803.98 at the time of the filing of the complaint.

In view of defendant Celia Regala's failure to settle her account for the purchases made thru the use of the Pacificard, a written demand(Exh. "D") was sent to the latter and also to the defendant RobertoRegala, Jr. (Exh. " ") under his "Guarantor's Undertaking."

A complaint was subsequently filed in Court for defendant's (sic )repeated failure to settle their obligation. Defendant Celia Regala wasdeclared in default for her failure to file her answer within thereglementary period. Defendant-appellant Roberto Regala, Jr., on the

other hand, filed his Answer with Counterclaim admitting hisexecution of the "Guarantor's Understanding", "but with theunderstanding that his liability would be limited to P2,000.00 per month."

In view of the solidary nature of the liability of the parties, thepresentation of evidence ex-parte as against the defendant CeliaRegala was jointly held with the trial of the case as against defendantRoberto Regala.

After the presentation of plaintiff's testimonial and documentaryevidence, fire struck the City Hall of Manila, including the court wherethe instant case was pending, as well as all its records.

Upon plaintiff-appellee's petition for reconstitution, the records of theinstant case were duly reconstituted. Thereafter, the case was set for pre-trial conference with respect to the defendant-appellant RobertoRegala on plaintiff-appellee's motion, after furnishing the latter a copyof the same. No opposition thereto having been interposed bydefendant-appellant, the trial court set the case for pre-trialconference. Neither did said defendant-appellant nor his counselappear on the date scheduled by the trial court for said conferencedespite due notice. Consequently, plaintiff-appellee moved that thedefendant-appellant Roberto Regala he declared as in default andthat it be allowed to present its evidence ex-parte, which motion wasgranted. On July 21, 1983, plaintiff-appellee presented its evidence



ex-parte. (pp. 23-26, Rollo)

After trial, the court a quo rendered judgment on December 5, 1983,the dispositive portion of which reads:

WHEREFORE, the Court renders judgment for the plaintiff andagainst the defendants condemning the latter, jointly and severally, topay said plaintiff the amount of P92,803.98, with interest thereon at14% per annum, compounded annually, from the time of demand onNovember 17, 1978 until said principal amount is fully paid; plus 15%of the principal obligation as and for attorney's fees and expense of suit; and the costs.

The counterclaim of defendant Roberto Regala, Jr. is dismissed for

lack of merit.SO ORDERED. (pp. 22-23, Rollo)

The defendants appealed from the decision of the court a quo to theIntermediate Appellate Court.

On August 12, 1985, respondent appellate court rendered judgmentmodifying the decision of the trial court. Private respondent RobertoRegala, Jr. was made liable only to the extent of the monthly credit

limit granted to Celia Regala, i .e., at P2,000.00 a month and only for the advances made during the one year period of the card's effectivitycounted from October 29, 1975 up to October 29, 1976. Thedispositive portion of the decision states:

WHEREFORE, the judgment of the trial court dated December 5,1983 is modified only as to appellant Roberto Regala, Jr., so as tomake him liable only for the purchases made by defendant Celia

Aurora Syjuco Regala with the use of the Pacificard from October 29,1975 up to October 29, 1976 up to the amount of P2,000.00 per

month only, with interest from the filing of the complaint up to thepayment at the rate of 14% per annum without pronouncement as tocosts. (p. 32, Rollo)

A motion for reconsideration was filed by Pacific Banking Corporationwhich the respondent appellate court denied for lack of merit onSeptember 19, 1985 (p. 33, Rollo).



On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the appellate court correctly recognized CeliaRegala's obligation to Pacific Banking Corp. for the purchases of goods and services with the use of a Pacificard credit card in the totalamount of P92,803.98 with 14% interest per annum, it erred inlimiting private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card fromOctober 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14% interest from the filing of thecomplaint.

There is merit in this petition.

The pertinent portion of the "Guarantor's Undertaking" which private

respondent Roberto Regala, Jr. signed in favor of Pacific BankingCorporation provides:

I/We, the undersigned, hereby agree, jointly and severally with CeliaSyjuco Regala to pay the Pacific Banking Corporation upon demandany and all indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or renewals thereof issued in his favor by the Pacific Banking Corporation. Any changes of or Novation in the terms and conditionsin connection with the issuance or use of said Pacificard, or any

extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia SyjucoRegala have been fully satisfied or paid . (p. 12, Rollo)

The undertaking signed by Roberto Regala, Jr. althoughdenominated "Guarantor's Undertaking," was in substance a contractof surety. As distinguished from a contract of guaranty where theguarantor binds himself to the creditor to fulfill the obligation of theprincipal debtor only in case the latter should fail to do so, in acontract of suretyship, the surety binds himself solidarily with theprincipal debtor (Art. 2047, Civil Code of the Philippines).

We need not look elsewhere to determine the nature and extent of private respondent Roberto Regala, Jr.'s undertaking. As a surety he



bound himself jointly and severally with the debtor Celia Regala "topay the Pacific Banking Corporation upon demand, any and allindebtedness, obligations, charges or liabilities due and incurred bysaid Celia Syjuco Regala with the use of Pacificard or renewalsthereof issued in (her) favor by Pacific Banking Corporation." Thisundertaking was also provided as a condition in the issuance of thePacificard to Celia Regala, thus:

5. A Pacificard is issued to a Pacificard-holder against the joint andseveral signature of a third party and as such, the Pacificard holder and the guarantor assume joint and several liabilities for any and allamount arising out of the use of the Pacificard. (p. 14, Rollo)

The respondent appellate court held that "all the other rights of the

guarantor are not thereby lost by the guarantor becoming liablesolidarily and therefore a surety." It further ruled that although thesurety's liability is like that of a joint and several debtor, it does notmake him the debtor but still the guarantor (or the surety), relying onthe case of Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently, Article 2054of the Civil Code providing for a limited liability on the part of theguarantor or debtor still applies.

It is true that under Article 2054 of the Civil Code, "(A) guarantor may

bind himself for less, but not for more than the principal debtor, bothas regards the amount and the onerous nature of the conditions. 2 Itis likewise not disputed by the parties that the credit limit granted toCelia Regala was P2,000.00 per month and that Celia Regalasucceeded in using the card beyond the original period of itseffectivity, October 29, 1979. We do not agree however, that RobertoJr.'s liability should be limited to that extent. Private respondentRoberto Regala, Jr., as surety of his wife, expressly bound himself upto the extent of the debtor's (Celia) indebtedness likewise expressly

waiving any "discharge in case of any change or novation of theterms and conditions in connection with the issuance of thePacificard credit card." Roberto, in fact, made his commitment as asurety a continuing one, binding upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear under the"Guarantor's Undertaking" Roberto signed, thus:



. . . Any changes of or novation in the terms and conditions inconnection with the issuance or use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities shall not in any manner release me/us from the responsibility hereunder, it being understood that the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the said Celia SyjucoRegala have been fully satisfied or paid. (p. 12, supra; emphasissupplied)

Private respondent Roberto Regala, Jr. had been made aware by theterms of the undertaking of future changes in the terms andconditions governing the issuance of the credit card to his wife andthat, notwithstanding, he voluntarily agreed to be bound as a surety.

As in guaranty, a surety may secure additional and future debts of the

principal debtor the amount of which is not yet known (see Article2053, supra).

The application by respondent court of the ruling in Government v.Tizon, supra is misplaced. It was held in that case that:

. . . although the defendants bound themselves in solidum, the liabilityof the Surety under its bond would arise only if its co-defendants, theprincipal obligor, should fail to comply with the contract. Toparaphrase the ruling in the case of Municipality of Orion vs. Concha,

the liability of the Surety is "consequent upon the liability" of Tizon, or "so dependent on that of the principal debtor" that the Surety "isconsidered in law as being the same party as the debtor in relation towhatever is adjudged, touching the obligation of the latter"; or theliabilities of the two defendants herein "are so interwoven anddependent as to be inseparable." Changing the expression, if thedefendants are held liable, their liability to pay the plaintiff would besolidary, but the nature of the Surety's undertaking is such that itdoes not incur liability unless and until the principal debtor is held

liable. A guarantor or surety does not incur liability unless the principaldebtor is held liable. It is in this sense that a surety, althoughsolidarily liable with the principal debtor, is different from the debtor. Itdoes not mean, however, that the surety cannot be held liable to thesame extent as the principal debtor. The nature and extent of the



liabilities of a guarantor or a surety is determined by the clauses inthe contract of suretyship(see PCIB v. CA, L-34959, March 18, 1988,159 SCRA 24).

ACCORDINGLY, the petition is GRANTED. The questioned decisionof respondent appellate court is SET ASIDE and the decision of thetrial court is REINSTATED.

G.R. No. L-43862 January 13, 1989

MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs.FELIPE

YSMAEL, JR., & CO., INC., defendants-appellants.

Beltran, Evangelista & Cuasay for plaintiff-appellee.

Abraham F. Sarmiento Law Office for defendants-appellants.

BIDIN, J.:

This is an appeal from the decision** dated October 30, 1971 of theCourt of First Instance of Manila (now Regional Trial Court) in CivilCase No. 82168 entitled "Mercantile Insurance Co., Inc. (hereinreferred to as the plaintiff-appellee) vs. Felipe Ysmael, Jr. &. Co., Inc.,et al (hereinafter referred to as the defendant-appellant) orderingdefendants-appellants Felipe Ysmael, Jr. & Co., Inc. and FelipeYsmael, Jr., to pay jointly and severally to the plaintiff the sum of P100,000.00 plus 15% thereof as attorney's fees, and costs. Onappeal to the Court of Appeals, this case which involves only aquestion of law, was certified to this Court.

The factual milieu of this case as found by the trial court is as follows:

Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed anapplication for an overdraft line of Pl,000,000.00 and credit line of Pl,000,000.00 with the Philippine National Bank. The latter was willingto grant credit accommodation of P2,000,000.00 applied for provided



that the applicant shall have filed a bond in the sum of P140,000.00to guarantee the payment of the said amount. Accordingly, on March6, 1967, Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmaelfiled surety bond No. G(16) 007 of Mercantile Insurance Co., Inc. inthe sum of P100,000.00 (Exh. A). On December 4, 1967, FelipeYsmael Jr. & Co., Inc. as principal and the Mercantile Insurance Co.,Inc. executed another surety bond MERICO Bond No. G (16) 0030 inthe sum of P40,000.00. It is the condition in both bonds that if theprincipal Felipe Ysmael, Jr. & Co., Inc. shall perform and fulfill itsundertakings with the Philippine National Bank, then these suretybonds shall be null and void (Exh. B).

As security and in consideration of the execution of the surety bonds,exhibits A and B, Felipe Ysmael, Jr. & Co., Inc. and Magdalena

Estate, lnc. represented by Felipe Ysmael, Jr. as president and in hispersonal capacity executed with the plaintiff Mercantile InsuranceCo., Inc. an indemnity agreement (Exh. D) wherein the defendantsFelipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. boundthemselves jointly and severally to indemnify the plaintiff, hold save itharmless from and against any and all payments, damages, costs,losses, penalties, charges and expenses which said company assurety (relative to MERICO Bond No. 0007) shall incur or becomeliable to pay plus an additional amount as attorney's fees equal to20% of the amount due to the company, Paragraph 3 of the indemnityagreement expressly provides:

3) ACCRUAL OF ACTION: — Notwithstanding the provisions of thenext preceding paragraph, where the obligation involves a liquidatedamount for the payment of which the company has become legallyliable under the terms of the obligation and its suretyship undertakingor by the demand of the obligee or otherwise and the latter hasmerely allowed the COMPANY a term or extension for payment of thelatter's demand the full amount necessary to discharge the

COMPANY's aforesaid liability irrespective of whether or not paymenthas actually been made by the COMPANY, the COMPANY for theprotection of its interest may forthwith proceed against theundersigned or either of them by court action or otherwise to enforcepayment even prior to making payment to the obligee which mayhereafter be done by the COMPANY.



On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusta Torres in their official capacities and the defendantsexecuted another indemnity agreement (Exh. E) with the plaintiff inconsideration of the surety bond (referring to MERICO Bond No. G(16) 0030. In the indemnity agreement (Exh. E) the same provisionsof paragraph 3 found in exhibit D is provided for.

By agreement dated September 5, 1967 (Exh. C), the amount of theBond was reduced by P40,000.00 so that the total liability of theplaintiff to the Philippine National Bank in view of the aforesaidreduction is P100,000.00 (Exh. C), P60,000.00 on Surety Bond No.0007 plus P40,000.00 on Surety Bond No. 0030.

In view of the failure of the defendants to pay the overdraft and credit

line with the Philippine National Bank demanded from the MercantileInsurance Co., Inc. settlement of its obligation under surety bondsNo. (G-16)-0007 for P 60,000.00 which expired on March 6, 1970 andNo. G (-16)- 0030 for P 40,000.00 which expired since September 4,1968 (Exh. P) otherwise drastic measures for collection to protect theinterest of the bank would be taken. Attached to the demand letter isa statement of account.

By letter of December 17, 1970, the Legal Department of plaintiff company wrote a letter of demand to the defendants (Exhs. G and H)

inviting their attention to the letter of demand of the PhilippineNational Bank sent to the plaintiff and demanding from thedefendants the settlement of said account. These letters werereceived as shown by the registry return receipts (Exhs. G-2 and H-2). Since the defendants failed to settle their obligation with thePhilippine National Bank, on February 10, 1971, plaintiff brought thepresent action.

Instead of filing their answer, the defendants (appellants herein) fileda motion to DISMISS, which motion was subsequently denied.Thereafter, the defendants filed their answer and the case was set for pre-trial. On the date scheduled for pre-trial, the defendants and their counsel failed to appear, thus on motion of the plaintiff, they weredeclared in default and plaintiff was allowed to present its evidenceex-parte. Upon motion for reconsideration filed by the defendants, thecase was ordered re-opened and the case was scheduled for



reception of defendant's evidence. Thereafter, the parties wererequired to submit their respective memoranda and the case wassubmitted for decision. On October 30, 1971, the trial court renderedits decision, the dispositive part of which reads:

WHEREFORE, in view of the foregoing considerations, judgment isrendered for the plaintiff and the defendants are ordered to pay jointlyand severally the plaintiff the sum of P100,000.00 plus the further sum of 15% thereof in the concept of reasonable attorney's fees andthe costs.

Plaintiff upon payment of this judgment, shall deliver the sum of P100,000.00 to the Philippine National Bank in partial satisfaction of the obligation of the defendants to said Bank.

SO ORDERED. (Record on Appeal, p. 96)

Said decision was appealed to the Court of Appeals on questions of facts and law. Acting on the appeal and finding that the only questionraised therein involves a question of law, the Court of Appeals byresolution *** dated April 29, 1976, certified the same to this Court, for proper disposition (Rollo, pp. 62-63).

This Court, thru its First Division by Resolution dated May 31, 1978,

resolved to have the case docketed and declared the same submittedfor decision (Rollo, p. 65).

The defendants-appellants raised the following assignments of errorsin the Court of Appeals:

I

THE LOWER COURT ERRED IN NOT DISMISSING THE CASEFOR LACK OF CAUSE OF ACTION, THE COMPLAINT BEING

PREMATURE BECAUSE THE PLAINTIFF HAS PAID NOTHING ONTHE SURETY BONDS AND HAS SUFFERED NO ACTUALDAMAGE.

II

THE LOWER COURT ERRED IN NOT DECLARING THAT



PARAGRAPH 3 OF THE INDEMNITY AGREEMENTS IS VOID.

III

CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE

DEFENDANTS-APPELLANT'S TO PAY JOINTLY AND SEVERALLYTO THE PLAINTIFF THE SUM OF P100,000.00 PLUS THEFURTHER SUM OF 15% THEREOF IN THE CONCEPT OFREASONABLE ATTORNEY'S FEES AND THE COSTS. (Brief for Defendants-Appellants, CA, pp. 1-2).

The crux of the controversy is whether or not the surety can beallowed indemnification from the defendants-appellants, upon thelatter's default even before the former has paid to the creditor.

There is no dispute that the overdraft line of P1,000,000.00 and thecredit line of Pl,000,000.00 applied for by the defendant was grantedby the Philippine National Bank on the strength of the two suretybonds denominated as MERICO Bond No. G(16) 0007 for onehundred thousand pesos (Exh. A) and MERICO Bond No. G(16)0030 for forty thousand pesos (Exh. B), later reduced as above statedon September 5, 1967 (Exh. C) by P40,000.00 or a total amount of P100,000.00. As security and in consideration of the execution of thesurety bonds, the defendants executed with the plaintiff identical

indemnity agreements (Exhs. D and E) which provide, among othersthat payment of indemnity or compensation may be claimedirrespective of whether or not plaintiff company has actually paid thesame.

Defendants-appellants maintain that the complaint is premature andthat paragraph 3 of the indemnity agreements is void for beingcontrary to law, public policy and good morals. They argued that toallow plaintiff surety (appellee herein) to receive indemnity or compensation for something it has not paid in its capacity as suretywould constitute unjust enrichment at the expense of another. (Brief for Defendants-Appellants, CA, p.6).

To bolster their contention, defendants-appellants argue that it is anindispensable requisite for an action to prosper, that the partybringing the action must have a cause of action against the other party; and that for a cause of action to be ripe for litigation, there must



be both wrongful violation and damages; all of which are not presentin the case at bar because plaintiff-appellee has not suffered anyinjury whatsoever, notwithstanding the demand sent to it by thePhilippine National Bank, nor has plaintiff-appellee made a singleactual payment to said bank. Hence, to allow plaintiff-appellee torecover from them something which it has not paid in its capacity assurety would violate the fundamental principle which statesNEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI POTEST (Noperson should unjustly enrich himself at the expense of another).[Defendants-Appellants' Brief, pp. 7-8; 49].

The question as to whether or not under the Indemnity Agreement of the parties, the Surety can demand indemnification from the principal,upon the latter's default, even before the former has paid to the

creditor, has long been settled by this Court in the affirmative.

It has been held that:

The stipulation in the indemnity agreement allowing the surety torecover even before it paid the creditor is enforceable. In accordancetherewith, the surety may demand from the indemnitors even beforepaying the creditors. (Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz.3709 [April 30, 1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R.

No. L-5625, March 16, 1954).

Hence, appellants contention that the action of the appellee (suretycompany) is premature or that the complaint fails to state a cause of action because the surety has not paid anything to the bank, cannotbe sustained (Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact,such contention is belied not only by the allegations in the complaintbut also by the agreement entered into between the appellants andthe appellee in favor of the bank.

The records show that the cause of action is distinctly set forth in thecomplaint, the pertinent portion of which states:

6. That defendants, by virtue of the two Surety Bonds (Annexes "A"and "B") were extended by the Philippine National Bank, a creditaccommodation in the sum of TWO MILLION (P2,000,000.00)PESOS;



7. That the Philippine National Bank is demanding and collecting fromthe plaintiff the sum of ONE HUNDRED THOUSAND (P100,000.00)PESOS which is the defendants' account with the said bank that issecured and covered by the above-mentioned bonds (Annexes "A"and "B");

8. That under the terms of the Indemnity Agreements (Annexes "D"and "E") more particularly paragraph 3, plaintiff may forthwith proceedagainst the defendants to impose payment, even prior to makingpayment to the Philippine National Bank;

9. That notwithstanding series of demands made by plaintiff, thedefendants failed and refused to pay the Philippine National Bank thesum of ONE HUNDRED THOUSAND (P l00,000.00) PESOS;

10. That on account of defendants' default, plaintiff becomes liable tothe Philippine National Bank in the sum of ONE HUNDREDTHOUSAND (P100,000.00) PESOS;' (Record on Appeal, p. 2.)

Correspondingly, it is readily apparent that said cause of action wasderived from the terms of the Indemnity Agreement, paragraph 3thereof, as above quoted. By virtue of the provisions of the Indemnity

Agreement, defendants-appellants have undertaken to hold plaintiff-appellee free and harmless from any suit, damage or liability which

may be incurred by reason of non-performance by the defendants-appellants of their obligation with the Philippine National Bank. TheIndemnity Agreement is principally entered into as security of plaintiff-appellee in case of default of defendants-appellants; and the liabilityof the parties under the surety bonds is joint and several, so that theobligee PNB may proceed against either of them for the satisfactionof the obligation. (Brief for Plaintiff-Appellee, p. 7).

II

Defendants-appellants have, by virtue of the Indemnity Agreement,given the plaintiff-appellee the prerogative of filing an action evenprior to the latter's making any payment to the Philippine NationalBank.

Contracts are respected as the law between the contracting parties(Henson v. IAC, 148 SCRA 11 [1987], citing Castro v. CA, 99 SCRA



722 [1980] and Escano v. CA, 100 SCRA 197 [1980]) It is settled thatthe parties may establish such stipulations, clauses, terms andconditions as they may want to include, and as long as suchagreements are not contrary to law, morals, good customs, publicpolicy or public order, they shall have the force of law between them(Herrera v. Petrophil Corp., 146 SCRA [1986].

Contracts should be interpreted according to their literal meaning andshould not be interpreted beyond their obvious intentment (Ibid .). It isa basic and fundamental rule in the interpretation of contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of the stipulation shallcontrol.

In the case at bar, there is no dispute as to meaning of the terms of the Indemnity Agreement. The only bone of contention is whether or not such terms are null and void as defendants-appellants wouldhave this Court declare.

A careful analysis of the contract in question will show that theprovisions therein do not contravene any law or public policy muchless do they militate against the public good. In fact, as shown above,they are fully sanctioned by well-established jurisprudence. Havingvoluntarily entered into such contract, the appellants cannot now be

heard to complain. Their indemnity agreement have the force andeffect of law.

Elucidating further on the obligations of the parties in agreements of this nature, this Court ruled:

...The indemnity agreement was not executed for the benefit of thecreditors; it was rather for the benefit of the surety and if the latter thought it necessary in its own interest to impose this stipulation, andthe indemnitors voluntarily agreed to the same, the court shouldrespect the agreement of the parties and require them to abide bytheir contract. (Security Bank v. Globe Assurance, 107 Phil. 733[1960].

III

Finally, the trial court did not err in ordering defendants-appellants to



pay jointly and severally the plaintiff the sum of P100,000.00 plus15% as attorney's fees.

It must be stressed that in the case at bar, the principal debtors,defendants-appellants herein, are simultaneously the same personswho executed the Indemnity Agreement. Thus, the position occupiedby them is that of a principal debtor and indemnitor at the same time,and their liability being joint and several with the plaintiff-appellee's,the Philippine National Bank may proceed against either for fulfillmentof the obligation as covered by the surety bonds. There is, therefore,no principle of guaranty involved and, therefore, the provision of

Article 2071 of the Civil Code does not apply. Otherwise stated, thereis no more need for the plaintiff-appellee to exhaust all the propertiesof the principal debtor before it may proceed against defendants-

appellants.

As to the attorney's fees, it has been squarely ruled by this Court thatthe award of fifteen (15) per cent for cases of this nature is notunreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, supra).

WHEREFORE, the decision appealed from is hereby AFFIRMED.

SO ORDERED.

G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION, petitioner, vs.COURT OFAPPEALS, SANYU CHEMICAL CORPORATION, DANILO E.ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and

LEOPOLDO HALILI, respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.



FELICIANO, J.:

Atok Finance Corporation ("Atok Finance") asks us to review and setaside the Decision of the Court of Appeals which reversed a decisionof the trial court ordering private respondents to pay jointly andseverally to petitioner Atok Finance certain sums of money.

On 27 July 1979, private respondents Sanyu Chemical corporation("Sanyu Chemical") as principal and Sanyu Trading Corporation("Sanyu Trading") along with individual private stockholders of SanyuChemical, namely, private respondent spouses Danilo E. Halili andPablico Bermundo as sureties, executed in the continuing Suretyship

Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents

who were officers and stockholders of Sanyu Chemical did:(1) For valuable and/or other consideration . . ., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION (hereinafter called Creditor), the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical] . . . (hereinafter called Principal) to the Creditor . The word "indebtedness" is used herein inits most comprehensive sense and includes any and all advances, debts,obligations and liabilities of Principal or any one or more of them,here[to]fore, now or hereafter made, incurred or created, whether voluntaryor involuntary and however arising , whether direct or acquired by theCreditor by assignment or succession, whether due or not due, absolute or contingent, liquidated or unliquidated , determined or undetermined andwhether the Principal may be may be liable individually of jointly withothers, or whether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations, or whether such indebtednessmay be or otherwise become unenforceable. 1 (Emphasis supplied)

Other relevant provisions of the Continuing Suretyship Agreementfollow:

(2) This is a continuing suretyship relating to any indebtedness,including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it hasbeen satisfied . This suretyship is binding upon the heirs, successors,executors, administrators and assigns of the surety, and the benefitshereof shall extend to and include the successors and assigns of the



Creditor.

(3) The obligations hereunder are joint and several and independent of the obligations of the Principal . A separate action or actions maybe prosecuted against the Principal and whether or not the Principalbe joined in any such action or actions.

xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the moneys,securities or other property of the Surety given to the Creditor by law,the Creditor shall have the lien upon and a right of self-off against allmoneys, securities, and other property of the Surety now andhereafter in the possession of the Creditor; and every such lien or

right of self-off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed tohave been waived by any act, omission or conduct on the part of theCreditor, or by any neglect to exercise such right of set-off or toenforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of set-off of lien is specifically waived or released by an instrument in writingexecuted by the Creditor.

(7) Any indebtedness of the Principal now or hereafter held by the

Surety is hereby subordinated to the indebtedness of the Principal tothe Creditor; and if the Creditor so requests, such indebtedness of thePrincipal of the Surety shall be collected, enforced and shall be paidover to the Creditor and shall be paid over to the Creditor and shallbe paid over to the Creditor on account of the indebtedness of thePrincipal to the Creditor but without reducing or affecting in anymanner the liability of the Surety under the provisions of thissuretyship.

xxx xxx xxx 2

(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its tradereceivables outstanding as of 27 November 1981 with a total facevalue of P125,871.00, to Atok Finance in consideration of receiptfrom Atok Finance of the amount of P105,000.00. The assigned



receivables carried a standard term of thirty (30) days; it appeared,however, that the standard commercial practice was to grant anextension up to one hundred twenty (120) days without penalties. Therelevant portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL,TRANSFER and ASSIGN all his/its rights, title and interest in thecontracts, receivables, accounts, notes, leases, deeds of sale withreservation of title, invoices, mortgages, checks, negotiableinstruments and evidences of indebtedness listed in the scheduleforming part hereinafter called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts , the ASSIGNOR does hereby certify, warrant and represent that :

(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the herein ASSIGNEE and has theright to transfer absolute title thereto the ASSIGNEE;

(b). Each assigned Contract is bonafide and the amount owing and tobecome due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto;

(c). Each assigned Contract arises out of the sale of merchandise/s

which had been delivered and/or services which have been renderedand none of the Contract is now, nor will at any time become,contingent upon the fulfillment of any contract or conditionwhatsoever, or subject to any defense, offset or counterclaim;

(d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such asmay have been endorsed, assigned and delivered by the ASSIGNORto the ASSIGNEE simultaneously with the assignment of suchContract;

(e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as maybe specifically noted at the time of the assignment of the Contract;

(f). None of the terms or provisions of the assigned Contracts havebeen amended, modified or waived;



(g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned Contracts and/or anyinstallment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty ; and

(h). Each assigned Contract is a valid obligation of the buyer of themerchandise and/or service rendered under the Contract And that noContract is overdue.

The foregoing warranties and representations are in addition to thoseprovided for in the Negotiable Instruments Law and other applicablelaws. Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due

thereon.xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect andreceive in trust for the ASSIGNEE all payments made upon theassigned contracts and shall remit to the ASSIGNEE all collectionson the said Contracts as follows :

P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly)

until November 1, 1982.

P110,550.00 balloon payment after 12 months. 3 (Emphasis supplied)

Later, additional trade receivables were assigned by Sanyu Chemicalto Atok Finance with a total face value of P100,378.45.

On 13 January 1984, Atok Finance commenced action against SanyuChemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halilibefore the Regional Trial Court of Manila to collect the sum of

P120,240.00 plus penalty charges amounting to P0.03 for every pesodue and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect andremit the amount due under the trade receivables.

Sanyu Chemical and the individual private respondents soughtdismissal of Atok's claim upon the ground that such claim had



prescribed under Article 1629 of the Civil Code and for lack of causeof action. The private respondents contended that the ContinuingSuretyship Agreement, being an accessory contract, was null andvoid since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

At the trial, Sanyu Chemical and the individual private respondentsfailed to present any evidence on their behalf, although the individualprivate respondents submitted a memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered adecision in favor of Atok Finance. The dispositive portion of thisdecision reads as follows:

ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff

ATOK FINANCE CORPORATION; and against the defendantsSANYU CHEMICAL CORPORATION, DANILO E. ARRIETA,NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDOHALILI, ordering the said defendants, jointly and severally, to pay theplaintiff:

(1) P120,240.00 plus P0.03 for each peso for each month fromSeptember 1, 1983 until the whole amount is fully paid;

(2) P50,000.00 as attorney's fees; and

(3) To pay the costs.

SO ORDERED. 4

Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil CasesDivision of the IAC. In a resolution dated 21 March 1986, that Divisiondismissed the appeal upon the ground of abandonment, since the

private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entryof judgment was made by the Clerk of Court of the IAC. Accordingly,

Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. Thetrial court issued a writ of execution on 23 July 1986. 5 Petitioner alleged that the writ of execution was served on private respondents. 6



However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition wasraffled off to the 15th Division of the Court of Appeals. In that Petition,private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counselhad entrusted the preparation and filing of the brief to one of hisassociates, which associate, however, had unexpectedly resignedfrom the law firm without returning the records of cases he had beenhandling, including the appeal of private respondents. Atok Financeopposed the Petition for Relief arguing that no valid ground existedfor setting aside the resolution of the Third Division of the then IAC.

The 15th Division of the Court of Appeals nonetheless granted thePetition for Relief from Judgment "in the paramount interest of

justice,"7

set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a non-extendible periodof fifteen (15) days within which to file their appeal brief. Privaterespondents did file their appeal brief.

The 15th Division, on 18 August 1987, rendered a Decision on themerits of the appeal, and reversed and set aside the decision of thetrial court and entered a new judgment dismissing the complaint of

Atok Finance, ordering it to pay private respondents P3,000.00 asattorney's fees and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the resolution of the IAC'sThird Civil Cases Division of 21 March 1986 originally dismissingprivate respondent's appeal for abandonment thereof. In a resolutiondated 18 August 1987, the 15th Division denied Atok Finance'smotion stating that it had granted the Petition for Relief fromJudgment and given private respondents herein fifteen (15) dayswithin which to file an appeal brief, while Atok Finance did not file an

appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case."

In the present Petition for Review, Atok Finance assigns the followingas errors on the part of the Court of Appeals in rendering its decisionof 18 August 1987:



(1) that it had erred in ruling that a continuing suretyship agreementcannot be effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreementwas null and void for lack of consideration without any evidencewhatsoever [being] adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment whileexecution proceedings [were] on-going on the trial court. 8 (Emphasis in theoriginal)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority toconsider and grant a petition for relief from a judgment rendered byanother Division of the same court. In the case at bar, however, wemust note that an intervening event had occurred between theresolution of 21 March 1986 of the Third Civil Cases Division of theIAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting thePetition for Relief from Judgment. On 28 July 1986, the oldIntermediate Appellate Court went out of existence and a new court,the Court of Appeals, came into being, was organized andcommenced functioning. 9 This event, and the probability that some

confusion may have accompanied the period of transition from theIAC to the Court of Appeals, lead us to believe that the defect hereinvolved should be disregarded as being of secondary importance. Atthe same time, nothing in this decision should be read as impliedlyholding that a petition from relief judgment is available in respect of adecision rendered by the Court of Appeals; this issue is best reservedfor determination in some future cases where it shall have beenadequately argued by the parties.

We turn, therefore, to a consideration of the first substantive issueaddressed by the Court of Appeals in rendering its Decision on themerits of the appeal: whether the individual private respondents maybe held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreementmust be held null and void as having been executed withoutconsideration and without a pre-existing principal obligation to sustain



it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement

is null and void because it is not in consonance with the laws onguaranty and security. The said agreement was entered into by theparties two years before the Deed of Assignment was executed.Thus, allegedly, it ran counter to the provision that guaranty cannotexist independently because by nature it is merely an accessorycontract. The law on guaranty is applicable to surety to some extentManila Surety and Fidelity Co. v . Baxter Construction & Co., 53 O.G.8836; and, Arran v . Manila Fidelity & Surety Co., 53 O.G. 7247.

We find merit in this contention. Although obligations arising from contracts have the force of lawbetween the contracting parties, (Article 1159 of the Civil Code) thisdoes not mean that the law is inferior to it; the terms of the contractcould not be enforces if not valid. So, even if, as in this case, theagreement was for a continuing suretyship to include obligationsenumerated in paragraph 2 of the agreement, the same could not beenforced . First, because this contract, just like guaranty, cannot exist without a valid obligation (Art. 2052, Civil Code); and, second,

although it may be given as security for future debt (Art. 2053, C.C.),the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law .

There is no proof that when the suretyship agreement was entered into,there was a pre-existing obligation which served the principal obligationbetween the parties. Furthermore, the "future debts" alluded to in Article2053 refer to debts already existing at the time of the constitution of theagreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement . 10

(Emphasis supplied).

We consider that the Court of Appeals here was in serious error. It istrue that a serious guaranty or a suretyship agreement is anaccessory contract in the sense that it is entered into for the purposeof securing the performance of another obligation which isdenominated as the principal obligation. It is also true that Article



2052 of the Civil Code states that "a guarantee cannot exist without avalid obligation." This legal proposition is not, however, like mostlegal principles, to be read in an absolute and literal manner andcarried to the limit of its logic. This is clear from Article 2052 of theCivil Code itself:

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract . It may alsoguaranty a natural obligation." (Emphasis supplied).

Moreover, Article 2053 of the Civil Code states:

Art. 2053. A guaranty may also be given as security for future debts,the amount of which is not yet known; there can be no claim againstthe guarantor until the debt is liquidated. A conditional obligation may also be secured . (Emphasis supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. In National Rice and CornCorporation (NARIC) v . Jose A. Fojas and Alto Surety Co., Inc ., 11 theprivate respondents assailed the decision of the trial court holdingthem liable under certain surety bonds filed by private respondent

Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were nulland void "there being no principal obligation to be secured by saidbonds." In affirming the decision of the trial court, this Court, speakingthrough Mr. Justice J.B.L. Reyes, made short shrift of the privaterespondents' doctrinaire argument:

Under his third assignment of error, appellant Fojas questions thevalidity of the additional bonds (Exhs. D and D-1) on the theory that when they were executed, the principal obligation referred to in said

bonds had not yet been entered into, as no copy thereof wasattached to the deeds of suretyship. This defense is untenable,because in its complaint the NARIC averred, and the appellant didnot deny that these bonds were posted to secure the additional creditthat Fojas has applied for, and the credit increase over his originalcontract 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 Codeof 1889, in force in 1948, expressly recognized that "a guaranty may also be given as security for future debts the amount of which is notyet known." (Emphasis supplied)

In Rizal Commercial Banking Corporation v . Arro, 12 the Court wasconfronted again with the same issue, that is, whether privaterespondent was liable to pay a promissory note dated 29 April 1977executed by the principal debtor in the light of the provisions of acomprehensive surety agreement which petitioner bank and theprivate respondent had earlier entered into on 19 October 1976.Under the comprehensive surety agreement, the private respondentshad bound themselves as solidary debtors of the Diacor Corporationnot only in respect of existing obligations but also in respect of future

ones. In holding private respondent surety (Residoro Chua) liableunder the comprehensive surety agreement, the Court said:

The surety agreement which was earlier signed by Enrique Go, Sr.and private respondent, is an accessory obligation, it beingdependent upon a principal one, which, in this case is the loanobtained 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 toguaranty the punctual payment of the loan at maturity . By terms that

are unequivocal, it can be clearly seen that the surety agreement wasexecuted to guarantee future debts which Daicor may incur with

petitioner, as is legally allowable under the Civil Code. Thus —

Article 2053. — A guarantee may also be given as security for futuredebts, the amount of which is not yet known; there can be no claim againstthe guarantor until the debt is liquidated. A conditional obligation may alsobe secured. 13 (Emphasis supplied)

It is clear to us that the Rizal Commercial Banking Corporation and

the NARIC cases rejected the distinction which the Court of Appealsin the case at bar sought to make with respect to Article 2053, that is,that the "future debts" referred to in that Article relate to "debtsalready existing at the time of the constitution of the agreement butthe amount [of which] is unknown," and not to debts not yet incurredand existing at that time. Of course, a surety is not bound under anyparticular principal obligation until that principal obligation is born. But



there is no theoretical or doctrinal difficulty inherent in saying that thesuretyship agreement itself is valid and binding even before theprincipal obligation intended to be secured thereby is born, any morethat there would be in saying that obligations which are subject to acondition precedent are valid and binding before the occurrence of the condition precedent. 14

Comprehensive or continuing surety agreements are in fact quitecommonm place in present day financial and commercial practice. Abank or a financing company which anticipates entering into a seriesof credit transactions with a particular company, commonly requiresthe projected principal debtor to execute a continuing suretyagreement along with its sureties. By executing such an agreement,the principal places itself in a position to enter into the projected

series of transactions with its creditor; with such surety agreement,there would be no need to execute a separate surety contract or bondfor each financing or credit accommodation extended to the principaldebtor. As we understand it, this is precisely what happened in thecase at bar.

We turn to the second substantive issue, that is, whether privaterespondents are liable under the Deed of Assignment which they,along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

The contention of Sanyu Chemical was that Atok Finance had nocause of action under the Deed of Assignment for the reason thatSanyu Chemical's warranty of the debtors' solvency had ceased. Insubmitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows:

Art. 1629. In case the assignor in good faith should have madehimself responsible for the solvency of the debtor, and the contractingparties should not have agreed upon the duration of the liability, itshall last for one year only, from the time of the assignment if theperiod had already expired.

If the credit should be payable within a term or period which has notyet expired, the liability shall cease one year after maturity.

Once more, the Court of Appeals upheld the contention of private



respondents and held that Sanyu Chemical was free from liabilityunder the Deed of Assignment. The Court of Appeals said:

. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreedupon for the existence of such warranty, analyzing the law thus:

(1) if there is a period (or length of time) agreed upon, then for suchperiod;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment — if debt was due at the time of theassignment

(b) one year from maturity — if debt was not yet due at the time of theassignment..

The debt referred to in this law is the debt under the assignedcontract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not thedebt incurred by the assignor to the assignee as contended by theappellant.

Applying the said law to the case at bar, the records disclose thatnone of the assigned receivables had matured on November 27,1981 when the Deed of Assignment was executed. The oldest debtthen existing was that contracted on November 3, 1981 and the latestwas contracted on December 4, 1981.

Each of the invoices assigned to the assignee contained a term of 30days (Exhibits B-3-A to 5 and extended by the notation whichappeared in the "Schedule of Assigned Receivables" which statesthat the ". . . the terms stated on our invoices were normally extended

up to a period of 120 days. . ." (Exhibit B-2). Considering the terms inthe invoices plus the ordinary practice of the company, thus, theassigned debts matured between April 3, 1982 to May 4, 1982 . Theassignor's warranty for debtor's warranty, in this case, would then befrom the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.



The letter of demand executed by appellee was dated August 29,1983 (Exhibit D) and the complaint was filed on January 13, 1984.Both dates were beyond the warranty period .

In effect, therefore, company-appellant was right when it claimed that

appellee had no cause of action against it or had lost its cause ofaction. 15

(Emphasis supplied)

Once again, however, we consider that the Court of Appeals was inreversible error in so concluding. The relevant provision of the Deedof Assignment may be quoted again in this connection:

2. To induce the ASSIGNEE [Atok Finance] to purchase the abovecontracts, the ASSIGNOR [Sanyu Chemical] does hereby certify,warrant and represent that . . .

(g) the debtor/s under the assigned contract/s are solvent andhis/its/their failure to pay the assigned contract/s and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty ; and . . .

The foregoing warranties and representations are in addition to thoseprovided for in the Negotiable Instruments Law and other applicablelaws. Any violation thereof shall render the ASSIGNOR immediately

and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts duethereon.

xxx xxx xxx

(Emphasis supplied)

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical.

Assignment of receivables is a commonplace commercial transactiontoday. It is an activity or operation that permits the assignee tomonetize or realize the value of the receivables before the maturitythereof. In other words, Sanyu Chemical received from Atok Financethe value of its trade receivables it had assigned; Sanyu Chemicalobviously benefitted from the assignment. The payments due in thefirst instance from the trade debtors of Sanyu Chemical would



represent the return of the investment which Atok Finance had madewhen it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents andaccepted by the Court of Appeals is not, in the case at bar, material.The liability of Sanyu Chemical to Atok Finance rests not on thebreach of the warranty of solvency; the liability of Sanyu Chemicalwas not ex lege (ex Article 1629) but rather ex contractu. Under theDeed of Assignment, the effect of non-payment by the original tradedebtors was breach of warranty of solvency by Sanyu Chemical,resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned . In other words, the assignor SanyuChemical becomes a solidary debtor under the terms of thereceivables covered and transferred by virtue of the Deed of

Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrietaspouses, Pablito Bermundo and Leopoldo Halili), became solidarilyliable for that obligation of Sanyu Chemical, by virtue of the operationof the Continuing Suretyship Agreement. Put a little differently, theobligations of individual private respondent officers and stockholdersof Sanyu Chemical under the Continuing Suretyship Agreement, wereactivated by the resulting obligations of Sanyu Chemical as solidaryobligor under each of the assigned receivables by virtue of theoperation of the Deed of Assignment. That solidary liability of SanyuChemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by AtokFinance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents.We also agree with the Court of Appeals that the original obligorsunder the receivables assigned to Atok Finance remain liable under

the terms of such receivables.WHEREFORE, for all the foregoing, the Petition for Review is herebyGRANTED DUE COURSE, and the Decision of the Court of Appealsdated 18 August 1987 and its Resolution dated 30 September 1987are hereby REVERSED and SET ASIDE. A new judgment is herebyentered REINSTATING the Decision of the trial court in Civil Case



No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penaltyclause attached to the Deed of Assignment, that penalty is herebyreduced to eighteen percent (18%) per annum (instead of P0.03 for every peso monthly [or 36% per annum]). As so modified, theDecision of the trial court is hereby AFFIRMED. Costs against privaterespondents.

SO ORDERED.

G.R. No. 103066 April 25, 1996

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner, vs.HON. COURT OF APPEALS and INTERNATIONAL CORPORATEBANK, respondents.

MENDOZA, J.: p

This is a petition for review on certiorari of the decision 1 of the Court

of Appeals in C.A.-G.R. CV No. 19094, affirming the decision of theRegional Trial Court of the National Capital Judicial Region, BranchXLV, Manila, which ordered petitioner Willex Plastic IndustriesCorporation and the Inter-Resin Industrial Corporation, jointly andseverally, to pay private respondent International Corporate Bankcertain sums of money, and the appellate court's resolution of October 17, 1989 denying petitioner's motion for reconsideration.

The facts are as follows:

Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit accomodation, Inter-Resin Industrial and the Investmentand Underwriting Corporation of the Philippines (IUCP) executed twodocuments, both entitled "Continuing Surety Agreement" and datedDecember 1, 1978, whereby they bound themselves solidarily to payManilabank "obligations of every kind, on which the [Inter-Resin



Industrial] may now be indebted or hereafter become indebted to the[Manilabank]." The two agreements (Exhs. J and K) are the same inall respects, except as to the limit of liability of the surety, the firstsurety agreement being limited to US$333,830.00, while the secondone is limited to US$334,087.00.

On April 2, 1979, Inter-Resin Industrial, together with Willex PlasticIndustries Corp., executed a "Continuing Guaranty" in favor of IUCPwhereby "For and in consideration of the sum or sums obtainedand/or to be obtained by Inter-Resin Industrial Corporation" fromIUCP, Inter-Resin Industrial and Willex Plastic jointly and severallyguaranteed "the prompt and punctual payment at maturity of theNOTE/S issued by the DEBTOR/S . . . to the extent of the aggregateprincipal sum of FIVE MILLION PESOS (P5,000,000.00) Philippine

Currency and such interests, charges and penalties as hereafter maybe specified."

On January 7, 1981, following demand upon it, IUCP paid toManilabank the sum of P4,334,280.61 representing Inter-ResinIndustrial's outstanding obligation. (Exh. M-1) On February 23 and24, 1981, Atrium Capital Corp., which in the meantime hadsucceeded IUCP, demanded from Inter-Resin Industrial and WillexPlastic the payment of what it (IUCP) had paid to Manilabank. Asneither one of the sureties paid, Atrium filed this case in the court

below against Inter-Resin Industrial and Willex Plastic.

On August 11, 1982, Inter-Resin Industrial paid Interbank, which hadin turn succeeded Atrium, the sum of P687,600.00 representing theproceeds of its fire insurance policy for the destruction of itsproperties.

In its answer, Inter-Resin Industrial admitted that the "ContinuingGuaranty" was intended to secure payment to Atrium of the amountof P4,334,280.61 which the latter had paid to Manilabank. It claimed,however, that it had already fully paid its obligation to Atrium Capital.

On the other hand, Willex Plastic denied the material allegations of the complaint and interposed the following Special AffirmativeDefenses:

(a) Assuming arguendo that main defendant is indebted to plaintiff,



the former's liability is extinguished due to the accidental fire thatdestroyed its premises, which liability is covered by sufficientinsurance assigned to plaintiff;

(b) Again, assuming arguendo, that the main defendant is indebted toplaintiff, its account is now very much lesser than those stated in thecomplaint because of some payments made by the former;

(c) The complaint states no cause of action against WILLEX;

(d) WLLLEX is only a guarantor of the principal obliger, and thus, itsliability is only secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claimagainst the principal obliger;

(f) Plaintiff has no personality to sue.

On April 29, 1986, Interbank was substituted as plaintiff in the action.The case then proceeded to trial.

On March 4, 1988, the trial court declared Inter-Resin Industrial tohave waived the right to present evidence for its failure to appear atthe hearing despite due notice. On the other hand, Willex Plastic

rested its case without presenting any evidence. Thereafter Interbankand Willex Plastic submitted their respective memoranda.

On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial and Willex Plastic jointly and severally to pay toInterbank the following amounts:

(a) P3, 646,780.61, representing their indebtedness to the plaintiff,with interest of 17% per annum from August 11, 1982, when Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full payment of

the said amount;

(b) Liquidated damages equivalent to 178 of the amount due; and

(c) Attorney's fees and expenses of litigation equivalent to 208 of thetotal amount due.



Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex Plastic filed its brief, while Inter-Resin Industrialpresented a "Motion to Conduct Hearing and to Receive Evidence toResolve Factual Issues and to Defer Filing of the Appellant's Brief."

After its motion was denied, Inter-Resin Industrial did not file its brief anymore.

On February 22, 1991, the Court of Appeals rendered a decisionaffirming the ruling of the trial court.

Willex Plastic filed a motion for reconsideration praying that it beallowed to present evidence to show that Inter-Resin Industrial hadalready paid its obligation to Interbank, but its motion was denied onDecember 6, 1991:

The motion is denied for lack of merit. We denied defendant-appellantInter-Resin Industrial's motion for reception of evidence because thesituation or situations in which we could exercise the power under BP129 did not exist. Movant here has not presented any argumentwhich would show otherwise.

Hence, this petition by Willex Plastic for the review of the decision of February 22, 1991 and the resolution of December 6, 1991 of theCourt of Appeals.

Petitioner raises a number of issues.

[1] The main issue raised is whether under the "Continuing Guaranty"signed on April 2, 1979 petitioner Willex Plastic may be held jointlyand severally liable with Inter-Resin Industrial for the amount paid byInterbank to Manilabank.

As already stated, the amount had been paid by Interbank'spredecessor-in-interest, Atrium Capital, to Manilabank pursuant to the

"Continuing Surety Agreements" made on December 1, 1978. Indenying liability to Interbank for the amount, Willex Plastic argues thatunder the "Continuing Guaranty," its liability is for sums obtained byInter-Resin Industrial from Interbank, not for sums paid by the latter toManilabank for the account of Inter-Resin Industrial. In support of thiscontention Willex Plastic cites the following portion of the "ContinuingGuaranty":



For and in consideration of the sums obtained and/or to be obtained by INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from you and/or your principal/s asmay be evidenced by promissory note/s, checks, bills receivable/sand/or other evidence/s of indebtedness (hereinafter referred to asthe NOTE/S), I/We hereby jointly and severally and unconditionallyguarantee unto you and/or your principal/s, successor/s and assignsthe prompt and punctual payment at maturity of the NOTE/S issuedby the DEBTOR/S in your and/or your principal/s, successor/s andassigns favor to the extent of the aggregate principal sum of FIVEMILLION PESOS (P5,000,000.00), Philippine Currency, and suchinterests, charges and penalties as may hereinafter be specified.

The contention is untenable. What Willex Plastic has overlooked is

the fact that evidence aliunde was introduced in the trial court toexplain that it was actually to secure payment to Interbank (formerlyIUCP) of amounts paid by the latter to Manilabank that the"Continuing Guaranty" was executed. In its complaint below,Interbank's predecessor-in-interest, Atrium Capital, alleged:

5. to secure the guarantee made by plaintiff of the creditaccommodation granted to defendant IRIC [Inter-Resin Industrial] byManilabank, the plaintiff required defendant IRIC [Inter-ResinIndustrial] to execute a chattel mortgage in its favor and a Continuing

Guaranty which was signed by the other defendant WPIC [WillexPlastic].

In its answer, Inter-Resin Industrial admitted this allegation although itclaimed that it had already paid its obligation in its entirety. On theother hand, Willex Plastic, while denying the allegation in question,merely did so "for lack of knowledge or information of the same." But,at the hearing of the case on September 16, 1986, when asked bythe trial judge whether Willex Plastic had not filed a crossclaim

against Inter-Resin Industrial, Willex Plastic's counsel replied in thenegative and manifested that "the plaintiff in this case [Interbank] isthe guarantor and my client [Willex Plastic] only signed as aguarantor to the guarantee." 2

For its part Interbank adduced evidence to show that the "ContinuingGuaranty" had been made to guarantee payment of amounts made



by it to Manilabank and not of any sums given by it as loan to Inter-Resin Industrial. Interbank's witness testified under cross examinationby counsel for Willex Plastic that Willex "guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later be madebecause of the guarantee to Manila Banking Corporation." 3

It has been held that explanatory evidence may be received to showthe circumstances under which a document has been made and towhat debt it relates. 4 At all events, Willex Plastic cannot now claimthat its liability is limited to any amount which Interbank, as creditor,might give directly to Inter-Resin Industrial as debtor because, byfailing to object to the parol evidence presented, Willex Plastic waivedthe protection of the parol evidence rule. 5

Accordingly, the trial court found that it was "to secure the guaranteemade by plaintiff of the credit accommodation granted to defendantIRIC [Inter-Resin Industrial] by Manilabank, [that] the plaintiff requireddefendant IRIC to execute a chattel mortgage in its favor and aContinuing Guaranty which was signed by the defendant WillexPlastic Industries Corporation." 6

Similarly, the Court of Appeals found it to be an undisputed fact that"to secure the guarantee undertaken by plaintiff-appellee [Interbank]of the credit accommodation granted to Inter-Resin Industrial by

Manilabank, plaintiff-appellee required defendant-appellants to sign aContinuing Guaranty." These factual findings of the trial court and of the Court of Appeals are binding on us not only because of the rulethat on appeal to the Supreme Court such findings are entitled togreat weight and respect but also because our own examination of the record of the trial court confirms these findings of the two courts. 7

Nor does the record show any other transaction under which Inter-Resin Industrial may have obtained sums of money from Interbank. Itcan reasonably be assumed that Inter-Resin Industrial and WillexPlastic intended to indemnify Interbank for amounts which it mayhave paid Manilabank on behalf of Inter-Resin Industrial.

Indeed, in its Petition for Review in this Court, Willex Plastic admittedthat it was "to secure the aforesaid guarantee, that INTERBANKrequired principal debtor IRIC [Inter-Resin Industrial] to execute a



chattel mortgage in its favor, and so a "Continuing Guaranty" wasexecuted on April 2, 1979 by WILLEX PLASTIC INDUSTRIESCORPORATION (WILLEX for brevity) in favor of INTERBANK for andin consideration of the loan obtained by IRIC [Inter-Resin Industrial]."

[2] Willex Plastic argues that the "Continuing Guaranty," being anaccessory contract, cannot legally exist because of the absence of avalid principal obligation. 8 Its contention is based on the fact that it isnot a party either to the "Continuing Surety Agreement" or to the loanagreement between Manilabank and Interbank Industrial.

Put in another way the consideration necessary to support a suretyobligation need not pass directly to the surety, a considerationmoving to the principal alone being sufficient. For a "guarantor or

surety is bound by the same consideration that makes the contracteffective between the principal parties thereto. It is never necessarythat a guarantor or surety should receive any part or benefit, if suchthere be, accruing to his principal." 9 In an analogous case, 10 thisCourt held:

At the time the loan of P100,000.00 was obtained from petitioner byDaicor, for the purpose of having an additional capital for buying andselling coco-shell charcoal and importation of activated carbon, thecomprehensive surety agreement was admittedly in full force and

effect. The loan was, therefore, covered by the said agreement, andprivate respondent, even if he did not sign the promissory note, isliable by virtue of the surety agreement. The only condition that wouldmake him liable thereunder is that the Borrower "is or may becomeliable as maker, endorser, acceptor or otherwise." There is no doubtthat Daicor is liable on the promissory note evidencing theindebtedness.

The surety agreement which was earlier signed by Enrique Go, Sr.and private respondent, is an accessory obligation, it beingdependent upon a principal one which, in this case is the loanobtained by Daicor as evidenced by a promissory note.

[3] Willex Plastic contends that the "Continuing Guaranty" cannot beretroactivelt applied so as to secure payments made by Interbankunder the two "Continuing Surety Agreements." Willex Plastic invokes



the ruling in El Vencedor v . Canlas 11 and Diño v . Court of Appeals 12

in support of its contention that a contract of suretyship or guarantyshould be applied prospectively.

The cases cited are, however, distinguishable from the present case.In El Vencedor v . Canlas we held that a contract of suretyship "is notretrospective and no liability attaches for defaults occurring before itis entered into unless an intent to be so liable is indicated." There wefound nothing in the contract to show that the paries intended thesurety bonds to answer for the debts contracted previous to theexecution of the bonds. In contrast, in this case, the parties to the"Continuing Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to be obtained" by Inter-Resin Industrial fromInterbank.

On the other hand, in Diño v . Court of Appeals the issue was whether the sureties could be held liable for an obligation contracted after theexecution of the continuing surety agreement. It was held that by itsvery nature a continuing suretyship contemplates a future course of dealing. "It is prospective in its operation and is generally intended toprovide security with respect to future transactions." By no means,however, was it meant in that case that in all instances a contrast of guaranty or suretyship should be prospective in application.

Indeed, as we also held in Bank of the Philippine Islands v . Foerster ,13 although a contract of suretyship is ordinarily not to be construed asretrospective, in the end the intention of the parties as revealed bythe evidence is controlling. What was said there 14 applies mutatismutandis to the case at bar:

In our opinion, the appealed judgment is erroneous. It is very true thatbonds or other contracts of suretyship are ordinarily not to beconstrued as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does notinterfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts.

In the present case the circumstances so clearly indicate that thebond given by Echevarria was intended to cover all of theindebtedness of the Arrocera upon its current account with the



plaintiff Bank that we cannot possibly adopt the view of the courtbelow in regard to the effect of the bond.

[4] Willex Plastic says that in any event it cannot be proceededagainst without first exhausting all property of Inter-Resin Industrial.Willex Plastic thus claims the benefit of excussion. The Civil Codeprovides, however:

Art. 2059. This excussion shall not take place:

(1) If the guarantor has expressly renounced it;

(2) If he has bound himself solidarily with the debtor;

The pertinent portion of the "Continuing Guaranty" executed by WillexPlastic and Inter-Resin Industrial in favor of IUCP (now Interbank)reads:

If default be made in the payment of the NOTE/s herein guaranteedyou and/or your principal/s may directly proceed against Me/Uswithout first proceeding against and exhausting DEBTOR/s

properties in the same manner as if all such liabilities constitutedMy/Our direct and primary obligations. (emphasis supplied)

This stipulation embodies an express renunciation of the right of excussion. In addition, Willex Plastic bound itself solidarily liable withInter-Resin Industrial under the same agreement:

For and in consideration of the sums obtained and/or to be obtainedby INTER-RESIN INDUSTRIAL CORPORATION, hereinafter referredto as the DEBTOR/S, from you and/or your principal/s as may beevidenced by promissory note/s, checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as theNOTE/S), I /We hereby jointly and severally and unconditionally

guarantee unto you and/or your principal/s, successor/s and assignsthe prompt and punctual payment at maturity of the NOTE/S issuedby the DEBTOR/S in your and/or your principal/s, successor/s andassigns favor to the extent of the aggregate principal sum of FIVEMILLION PESOS (P5,000,000.00), Philippine Currency, and suchinterests, charges and penalties as may hereinafter he specified.



[5] Finally it is contended that Inter-Resin Industrial had already paidits indebtedness to Interbank and that Willex Plastic should havebeen allowed by the Court of Appeals to adduce evidence to provethis. Suffice it to say that Inter-Resin Industrial had been givengenerous opportunity to present its evidence but it failed to make useof the same. On the otherhand, Willex Plastic rested its case withoutpresenting evidence.

The reception of evidence of Inter-Resin Industrial was set onJanuary 29, 1987, but because of its failure to appear on that date,the hearing was reset on March 12, 26 and April 2, 1987.

On March 12, 1987 Inter-Resin Industrial again failed to appear.Upon motion of Willex Plastic, the hearings on March 12 and 26,

1987 were cancelled and "reset for the last time" on April 2 and 30,1987.

On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial court issued the following order:

Considering that, as shown by the records, the Court had exertedevery earnest effort to cause the service of notice or subpoena on thedefendant Inter-Resin Industrial but to no avail, even with theassistance of the defendant Willex the defendant Inter-Resin

Industrial is hereby deemed to have waived the right to present itsevidence.

On the other hand, Willex Plastic announced it was resting its casewithout presenting any evidence.

Upon motion of Inter-Resin Industrial, however, the trial courtreconsidered its order and set the hearing anew on July 23, 1987. ButInter-Resin Industrial again moved for the postponement of thehearing be postponed to August 11, 1987. The hearing was,

therefore, reset on September 8 and 22, 1987 but the hearings werereset on October 13, 1987, this time upon motion of Interbank. Togive Interbank time to comment on a motion filed by Inter-ResinIndustrial, the reception of evidence for Inter-Resin Industrial wasagain reset on November 17, 26 and December 11, 1987. However,Inter-Resin Industrial again moved for the postponement of thehearing. Accordingly the hearing was reset on November 26 and



December 11, 1987, with warning that the hearings wereintransferrable.

Again, the reception of evidence for Inter-Resin Industrial was reseton January 22, 1988 and February 5, 1988 upon motion of itscounsel. As Inter-Resin Industrial still failed to present its evidence, itwas declared to have waived its evidence.

To give Inter-Resin Industrial a last opportunity to present itsevidence, however, the hearing was postponed to March 4, 1988.

Again Inter-Resin Industrial's counsel did not appear. The trial court,therefore, finally declared Inter-Resin Industrial to have waived theright to present its evidence. On the other hand, Willex Plastic, asbefore, manifested that it was not presenting evidence and requested

instead for time to file a memorandum.There is therefore no basis for the plea made by Willex Plastic that itbe given the opportunity of showing that Inter-Resin Industrial hasalready paid its obligation to Interbank.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED,with costs against the petitioner.

SO ORDERED.

[G.R. No. 55466 : December 3, 1990.]

191 SCRA 805-813

MANILA SURETY & FIDELITY CO., INC. , Petitioner, vs.

COURT OF APPEALS and WILLIAM H. QUASHA ,Respondents.

D E C I S I O N



PARAS, J.:

This is a petition for review on certiorari of the resolution of theCourt of Appeals dated August 5, 1980 * in CA G.R. No. 42461-Rentitled "Republic of the Philippines vs. Leon Bessire, et al.",affirming with modification the lower court's judgment dated April30, 1968 ** with respect to the payment of 12% interest perannum and denying petitioner's motion for reconsideration datedOctober 6, 1980.

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

Sometime after 1951, the Republic of the Philippines, thru itsBureau of Internal Revenue, assessed the Bessire Housing

Corporation (BESCO) in the amount of P16,840.04 representingpercentage taxes for the year 1951. Apparently pressed forpayment, the manager thereof (Leon Bessire) executed in hispersonal capacity on October 30, 1956, with Mutual SecurityInsurance Corporation an "Ordinary Bond for Payment of Taxes",known as MUSIC S-575-A, wherein the parties undertook to

jointly and severally pay the Republic the aforementionedassessment in twelve (12) equal installments as scheduledtherein. On the same day that the bond was posted Leon Bessire,Manila Surety and Corazon Santos Escobar in her personal

capacity and as attorney-in-fact of Eduardo Escobar signed anindemnity agreement binding themselves solidarily to indemnifyMutual Security for any damages or losses it may sustain as aresult of its having consented to become a surety in favor of theBureau of Internal Revenue (BIR). On December 28, 1956, LeonBessire paid the first installment of P1,403.34 due on November30, 1956 and another installment on a later date. He failed topay the succeeding installments thus prompting theCommissioner of Internal Revenue to send a letter of February20, 1958 that unless Mr. Bessire paid P14,035.36 plus theaccrued delinquency penalties within 15 days, the bond would beforfeited. A letter of demand was also sent on the same date toMutual Security. (Rollo, p. 32-33; Petition, Annex A, pp. 2-3)

On May 19, 1958, Atty. William H. Quasha as substitute forCorazon Santos Escobar signed an Indemnity Agreementwhereby he undertook to jointly and severally with Leon Bessire



and BESCO, indemnify Manila Surety for any damage or loss itmay suffer in consequence of its having consented to continuebeing counter surety upon the indemnity agreement MUSIC S-575-A (Rollo, p. 67; Comment, p. 2). On July 18, 1958 the ActingCommissioner of Internal Revenue acknowledged the payment byLeon Bessire of P300.00 and demanded the full payment of thebalance of P13,733.36 on or before July 31, 1958. A letter of demand was also sent to Mutual Security (Rollo, pp. 33-34;Petition, Annex A, pp. 3-4).

On July 31, 1958, Leon Bessire sent a check for P1,403.34 andasked for further time to pay the outstanding balance in view of his financial difficulties. On September 26, 1958, the ActingCommissioner of Internal Revenue wrote Leon Bessire to pay theP12,330.02 in full on or before October 15, 1958 and Mutual

Security to do the same or steps for the forfeiture of the bondwould be taken (Rollo, p. 34; Petition, Annex A, p. 4).

Leon Bessire made further payments: P400.00 on November 13,1958; P500.00 on February 13, 1959; P500.00 on May 12, 1959;and P500.00 on October 28, 1959. On April 7, 1960, a letter of demand was again sent to Leon Bessire giving him until April 30,1960 to pay the balance of P10,430.02 and a letter of substantially the same tenor to Mutual Security. On June 12,1961, Leon Bessire died. (Rollo, pp. 34-35; Petition, Annex A, pp.

4-5).:nad

On February 9, 1962, the Republic of the Philippines upon therequest of the BIR filed a complaint against Leon Bessire andMutual Security Insurance Corporation (Mutual), to have thesurety bond guaranteeing the payment of percentage taxesforfeited and for the said defendants jointly and severally to payP10,032.02 plus interest at the legal rate and costs (Rollo, p.31).:rd

On March 7, 1962, Mutual filed its answer with cross claimagainst Leon Bessire. On July 5, 1963 it filed a third partycomplaint against petitioner, Manila Surety and Fidelity Co., Inc.(Manila Surety). On July 26, 1963, Manila Surety filed a fourth-party complaint against herein private respondent, William H.Quasha (Rollo, p. 32; Petition, Annex A, p. 2).

After trial on the merits, the lower court, through then Judge Luis



B. Reyes, rendered its decision on April 20, 1968, the dispositiveportion of which reads:

"Wherefore, judgment is rendered as follows:

"1. Declaring Surety Bond MUSIC S-575-A, issued bydefendant Mutual Security Insurance Corporation,forfeited and ordering said defendant to pay plaintiff thesum of P10,030.02 plus the legal rate of interest fromFebruary 9, 1962, the date of the filing of the suit, untilsaid amount is fully paid, and to pay the costs of this suit.

"2. Ordering third party defendant Manila Surety FidelityCo. Inc., to pay third party plaintiff Mutual SecurityInsurance Corporation whatever amount the latter asdefendant, is adjudged to pay plaintiff, plus interest at

12% per annum from the date of payment which interestshall be accumulated and added to the principal quarterlyand shall earn interest at the same rate, and attorneys'fees equivalent to 10% of the total amount due under thesurety bond, and

"3. Ordering fourth party defendant to pay and/orindemnify fourth party plaintiff Manila Surety & FidelityCo., Inc. the amount of the judgment which it is orderedto pay in favor of third party plaintiff Mutual Security

Insurance Corporation, with interest thereon at the rate of 12% per annum from July 3, 1963, until fully paid, andthe sum equivalent to 10% of the total amount claimed,as and for attorneys' fees.

"The counterclaim of fourth party defendant is dismissed.

"SO ORDERED." (Rollo, p. 68)

Mutual, Manila Surety and Quasha all filed their respectiveappeals to the respondent Court of Appeals which rendered

judgment on March 21, 1980 affirming the judgment of the lowercourt (Petitioner's brief, p. 4). On April 17, 1980, William H.Quasha, private respondent herein, filed a Motion forReconsideration of the aforementioned judgment alleging as thesole ground therefore that the respondent Court of Appeals erredin affirming without modifying a portion of the decision whichordered fourth party defendant appellant William H. Quasha to



pay and or indemnify fourth party plaintiff appellant ManilaSurety the amount of judgment it is ordered to pay third partyplaintiff appellant Mutual, with interest thereon at the rate of 12% per annum from July 3, 1963 until fully paid (Petitioner'sbrief, p. 4).

Thereafter or on August 5, 1980, respondent Court of Appealsrendered its questioned Resolution the dispositive portion of which reads:

"Wherefore, our March 21, 1980 decision is herebymodified as follows: number 3, paragraph 1 of thedispositive portion of the decision appealed from shouldread:

"3. Ordering fourth party defendant to pay and or

indemnify fourth party plaintiff Manila Surety & FidelityCo. Inc., the amount of judgment which it is ordered topay in favor of third party plaintiff Mutual SecurityInsurance Corporation and the sum equivalent to 10% of the total amount claimed, as and for attorneys' fees.

"The portion which provides for an interest on the amountof judgment at the rate of 12% per annum from July 3,1963 until fully paid is deleted.

"SO ORDERED." (Rollo, pp. 51-52 Petition, Annex B, pp.3-4)

On August 25, 1980, herein petitioner Manila Surety filed itsMotion for Reconsideration of the aforequoted Resolution, whichmotion was summarily denied by respondent Court of Appeals inits Resolution dated October 6, 1980 (Rollo, p. 54; Petition,Annex c, p. 1). Hence this petition.

The sole issue to be resolved in this petition is whether or notrespondent Quasha's liability to pay the 12% interest in case of

default under the Indemnity Agreement arises only after thedecision of respondent Court of Appeals becomes final andexecutory.

The respondent Court of Appeals in its resolution held:

". . . the amount of liability of both the movant and ManilaSurety upon the surety bond is determined only after the



decision of the case becomes final and executory. Hence,before the decision becomes final and executory and theextent of the liability of Manila Surety is not yetdetermined, Manila Surety as co-surety cannot demandthe 12% per cent interest per annum from the movant asco-surety because during this intervening period, there isno liability yet of the movant to pay, hence, there is nointerest yet to be reckoned. . . ." (Rollo, p. 51, Petition;Annex B, p.3).

The petition is impressed with merit.

The Indemnity Agreement, whereby private respondentQuasha bound himself jointly and severally with LeonBessire and the BESCO in favor of petitioner, provides:

"2. INDEMNITY: To indemnify the COMPANY for anydamage, loss, costs, charges, or expenses of whateverkind and nature, including counsel for attorney's fees,which the COMPANY may, at any time, sustain or incur asa consequence of having become surety upon the above-mentioned bond; . . ." (Record on Appeal, p. 77)

In the case of Associated Insurance & Surety Co. Inc. vs.Wellington Chua, et al., 7 SCRA 52 [1963] where a similar

provision appears, this Court held:

". . . The agreement herein sued upon is not only one of indemnity against loss but of indemnity against liability.While the first does not render the indemnitor liable untilthe person to be indemnified makes payment or sustainsloss, the second becomes operative as soon as the liabilityof the person indemnified arises, irrespective of whetheror not he has suffered actual loss." (Emphasis ours)

The next question here is when did the liability of ManilaSurety in favor of Mutual arise so as to give rise to thecorresponding liability on the part of Quasha vis-a-visManila Surety. The Indemnity Agreement whereby ManilaSurety undertook to indemnify Mutual provides:

"3. ACCRUAL OF ACTION — Where the obligation involvesa liquidated amount, for the payment of which theCOMPANY has become legally liable under the terms of



the obligation and its suretyship undertaking or by thedemand of the obligee or otherwise . . . the undersigned

jointly and severally undertake to pay to the COMPANY onthe latter's demand the full amount, necessary todischarge the COMPANY's aforesaid liability; . . ." (Recordon Appeal, p. 44) (Emphasis ours)

Clearly, the liability of Manila Surety arose on July 5, 1963, thedate on which the third party complaint was filed against it byMutual, which was the date of judicial demand, and from thatpoint on, it had already incurred liability, thereby giving rise tothe concommitant liability of Quasha under his indemnityagreement with Manila Surety. Said indemnity agreementprovides:

"3. MATURITY OF THE OBLIGATION UNDER THIS BOND: Saidindemnity shall be paid to the COMPANY as soon as it hasbecome liable for the payment of any amount, under the above-mentioned bond, whether or not it shall have paid such sum orsums of money, or any part thereof" (Rollo, p. 56; Petition,Annex D, pp. 77-78). (Emphasis ours)

Interpreting a similar provision in an indemnity agreement, thisCourt held:

". . . In the indemnity agreement executed by appellant in

favor of appellee, there appears the following clause:'Said indemnity shall be paid to the COMPANY as soon asit has become liable for the payment of any amount underthe abovementioned bond, whether or not it shall havepaid such sums or sums of money or any part thereof.' Itis there said that the liability of appellee as bondsmanwould attach as soon as it has become liable for thepayment of any amount regardless of whether saidamount shall have been paid or not. This is the situationthat actually obtains here. The NARIC, or its legalsuccessor, the Prisco, has actually filed an action in courtdemanding payment of the obligation from appellee underthe bond it has posted on behalf of both FelicisimaPolicarpio and Herminia Cruz, which action is more thanenough to entitle the appellee to enforce the indemnityagreement executed by appellant. This constitutes the



cause of action of appellee in the present case." (ManilaSurety & Fidelity Co. Inc. v. Teodulo Cruz, L-10414, April18, 1958, 103 Phil. 367) (Emphasis ours)

In addition thereto, the indemnity agreement also provides:

"4. INTEREST IN CASE OF DEFAULT: And in case of nonpayment of the said sum or sums of money, an interest of twelve (12%) per cent per annum, which interest, whilenot paid, shall be liquidated and accumulated monthly tothe capital owed by the undersigned, drawing the sameinterest as the said capital." (Rollo, p. 56; Petition, AnnexD, p. 78)

Since respondent Quasha's liability arose on July 5, 1963 thedate the third party complaint was filed and the same not having

been paid, his liability to pay the 12% per cent interest perannum, in case of default as stated in the aforementionedindemnity agreement also arose.

In the cases of Tagawa vs. Aldanese, 43 Phil. 852, 859 [1922];Plaridel Surety Insurance Co. vs. P.L. Galang Machinery Co., 100Phil. 679 [1957], it was held:

"If a surety upon demand fails to pay, he can be held liable forinterest, even if in thus paying, the liability becomes more than

that in the principle obligation. The increased liabilities is notbecause of the contract but because of the default and thenecessity of judicial collection."

It is a basic and fundamental rule in the interpretation of contractthat if the terms thereof are clear and leave no doubt as to theintention of the contracting parties, the literal meaning shallcontrol. In order to judge the intention of the parties, theircontemporaneous and subsequent acts shall be principallyconsidered. (Mercantile Insurance Co., Inc. vs. Felipe Ysmael, Jr.& Co. Inc., 169 SCRA 66 [1989]; Sy vs. Court of Appeals, 131SCRA 116 [1984]; GSIS vs. Court of Appeals, et al., 145 SCRA311 [1986]).

The above-quoted specific provisions of the IndemnityAgreement clearly show that respondent is liable under saidprovisions. Hence, the stipulation agreed upon by the parties isvalid and enforceable (Paramount Surety & Insurance Co., Inc. v.



Pastor D. Ago, 171 SCRA 481 [1989]) and obligations arisingfrom contracts have the force of law (Paramount Surety & Insurance Co., Inc. vs. Pastor D. Ago, 171 SCRA 481 [1989];Villonco Realty Co., Inc. vs. Bormacheco, 65 SCRA 352 [1975];Lazo vs. Republic Surety Insurance Co., Inc., 31 SCRA 329[1970]; Perez Rubio vs. CA, 141 SCRA 488 [1986]).

Elucidating further on the obligations of the parties inagreements of this nature, this Court ruled: "The indemnityagreement was not executed for the benefit of the creditors; itwas rather for the benefit of the surety and if the latter thought itnecessary in its own interest to impose this stipulation, and theindemnitors voluntarily agreed to the same, the court shouldrespect the agreement of the parties and require them to abideby their contract." (Mercantile Insurance Co., Inc. vs. Felipe

Ysmael, 169 SCRA 66 [1989]; Security Bank vs. GlobeAssurance, 107 Phil. 733 [1960]).:nad

PREMISES CONSIDERED, (1) the instant petition is herebyGRANTED; (2) the appealed resolution of the respondent Court of Appeals is hereby SET ASIDE; (3) the original decision of respondent Court of Appeals dated March 21, 1980 is herebyREINSTATED, with MODIFICATION that the liability of respondentQuasha to pay the 12% interest in case of default be reckonedfrom July 5, 1963, the date the third party complaint was filed.

G.R. No. 84084 August 20, 1990

FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs.ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI

PUA, DAVID MALANAO, THE ADMINISTRATOR, PHILIPPINEOVERSEAS AND EMPLOYMENT ADMINISTRATION, THESECRETARY OF LABOR AND EMPLOYMENT, respondents.

David I. Unay, Jr. for petitioner.

Kamid D. Abdul for private respondents.



PARAS, J.:

This is a petition for certiorari seeking to annul 1) the Order

dated March 28, 1988 of the Honorable Secretary of Labor andEmployment in POEA, LRO/RRD Case No. 87-09-1022-DPentitled Abdulgani Salik, et al, v. Pan Pacific Overseas and Recruiting Services and Finman General AssuranceCorporation, which directed herein petitioner to pay jointly andseverally with Pan Pacific the claims of herein privaterespondents amounting to P25,000.00 and 2) the Order datedJune 7, 1988, which denied petitioner's motion for reconsideration (Rollo, p. 2).

The facts of the case are as follows:

Abdulgani Salik et al., private respondents, allegedly appliedwith Pan Pacific Overseas Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22, 1987 and were assuredemployment abroad by a certain Mrs. Normita Egil. Inconsideration thereof, they allegedly paid fees totallingP30,000.00. But despite numerous assurances of employmentabroad given by Celia Arandia and Mrs. Egil, they were not

employed (Ibid ., p. 15).

Accordingly, they filed a joint complaint with the PhilippineOverseas Employment Administration (herein referred to asPOEA) against Pan Pacific for Violation of Articles 32 and 34(a)of the Labor Code, as amended, with claims for refund of a totalamount of P30,000.00 (Ibid .).

The POEA motu proprio impleaded and summoned hereinpetitioner surety Finman General Assurance Corporation

(hereinafter referred to as Finman), in the latter's capacity as PanPacific's bonding company.

Summons were served upon both Pan Pacific and Finman, butthey failed to answer.

On October 9, 1987, a hearing was called, but only the private



respondents appeared. Despite being deemed in default for failing to answer, both Finman and Pan Pacific were still notifiedof the scheduled hearing. Again they failed to appear. Thus, ex-parte proceedings ensued.

During the hearing, herein private respondents reiterated theallegations in their complaint that they first paid P20,000.00 thruHadji Usop Kabagani for which a receipt was issued signed byEngineer Arandia and countersigned by Mrs. Egil and a certainImelda who are allegedly employed by Pan Pacific; that theypaid another P10,000.00 to Engr. Arandia who did not issue anyreceipt therefor; that the total payment of P30,000.00 allegedlyrepresents payments for herein private respondents in theamount of P5,000.00 each, and Abdulnasser Ali, who did not file

any complaint against Pan Pacific (Ibid ., pp. 15-16).

Herein private respondents presented as their witness, HadjiUsop Kabagani who they Identified as the one who actuallyfinanced their application and who corroborated their testimonies on all material points including the non-issuance of a receipt for P10,000.00 by Engr. Arandia.

Herein petitioner, Finman, in an answer which was not timelyfiled, alleged, among others, that herein private respondents do

not have a valid cause of action against it; that Finman is notprivy to any transaction undertaken by Pan Pacific with hereinprivate respondents; that herein private respondents claims arebarred by the statute of frauds and by the fact that they executeda waiver; that the receipts presented by herein privaterespondents are mere scraps of paper; that it is not liable for theacts of Mrs. Egil that Finman has a cashbond of P75,000.00 onlywhich is less than the required amount of P100,000.00; and thatherein private respondents should proceed directly against the

cash bond of Pan Pacific or against Mrs. Egil (Ibid ., pp. 1617).On March 18,1988, the Honorable Franklin M. Drilon, then theSecretary of Labor and Employment, upon the recommendationof the POEA hearing officer, issued an Order, the dispositiveportion of which reads:



WHEREFORE, premises considered, both respondents arehereby directed to pay jointly and severally the claims of complainants, as follows:

1. Abdulgani Salik P5,000.00

2. Balabagan Ampilan 5,000.00

3. Ali Kuba 5,000.00

4. Gandhi Dua 5,000.00

5. David Malanao 5,000.00

Based on the records of this Administration, respondent agency

is presently serving a total period of suspension of seventeen (17) months imposed in three (3) separate orders issued on June2, 1987, August 17, 1987 and September 23, 1987. Under the newschedule of penalties published on January 21, 1987 in thePhilippine Inquirer, the penalty of cancellation shall be imposedwhen the offender has been previously penalized withsuspension the total period of which is 12 months or more.Moreover, the penalty imposable in the case at bar is two (2)months suspension for each count of violation or a total period

of suspension of ten (10) months as the acts were committed inApril 1987. Thus, whether under the old schedule of penaltieswhich required a total period of suspension of twenty-four (24)months for cancellation to be imposed or under the newschedule which provides for a twelve (12) month totalsuspension period, the penalty of cancellation may be properlyimposed upon the herein respondent agency.

In view thereof, the license of Pan Pacific Overseas RecruitingServices is hereby cancelled, effective immediately.

SO ORDERED. (Ibid., pp. 20-21).

A motion for reconsideration having been denied (Ibid ., p. 22),herein petitioner instituted the instant petition for certiorari,raising the following assigned errors:



I

THE HONORABLE ADMINISTRATOR AND THE HONORABLE,SECRETARY OF LABOR ACTED WITH GRAVE ABUSE OFDISCRETION AMOUNTING TO LACK OF JURISDICTION IN MOTUPROPRIO IMPLEADING FINMAN AS CO-RESPONDENT OF PANPACIFIC IN POEA LRO/RRD CASE NO. 87-09-1022 DP WHICHWAS FILED BY ABDULGANI SALIK, ET AL.;

II

THE HONORABLE SECRETARY OF LABOR ACTED WITHOUTOR IN EXCESS OF JURISDICTION AND WITH GRAVE ABUSE OFDISCRETION AMOUNTING TO LACK OF JURISDICTION IN

DIRECTING FINMAN TO PAY JOINTLY AND SEVERALLY WITHPAN PACIFIC THE CLAIMS OF PRIVATE RESPONDENTS ONTHE BASIS OF THE SURETYSHIP AGREEMENT BETWEENFINMAN AND PAN PACIFIC AND THE PHILIPPINE OVERSEASEMPLOYMENT ADMINISTRATION (POEA FOR SHORT); AND

III

THE FINDINGS OF FACT MADE BY THE POEA AND UPONWHICH THE HONORABLE SECRETARY OF LABOR BASED ITS

QUESTIONED ORDERS ARE NOT SUPPORTED BYSUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW. (Ibid .,p. 101)

As required by this Court, herein public respondents filed their memorandum on July 28, 1989 (Ibid ., p. 84); while that of petitioner and private respondents were filed on September 11,1989 (Ibid ., p. 89) and March 16, 1990 (Ibid ., p. 120), respectively.

The petition is devoid of merit.

In its first and second assigned errors, petitioner maintains thatPOEA has no jurisdiction to directly enforce the suretyshipundertaking of FINMAN (herein petitioner) under the surety bond(Ibid ., p. 104).

In the case at bar, it remains uncontroverted that herein



petitioner and Pan Pacific entered into a suretyship agreement,with the former agreeing that the bond is conditioned upon thetrue and faithful performance and observance of the bondedprincipal (Pan Pacific) of its duties and obligations. It was alsounderstood that under the suretyship agreement, hereinpetitioner undertook itself to be jointly and severally liable for allclaims arising from recruitment violation of Pan Pacific (Ibid ., p.23), in keeping with Section 4, Rule V, Book I of theImplementing Rules of the Labor Code, which provides:

Section 4. Upon approval of the application, the applicant shallpay to the Ministry (now Department) a license fee of P6,000.00,post a cash bond of P50,000.00 or negotiable bonds of equivalent amount convertible to cash issued by banking or

financial institution duly endorsed to the Ministry (nowDepartment) as well as a surety bond of P150,000.00 from anaccredited bonding company to answer for valid and legal claims arising from violations of the conditions of the license or the contracts of employment and guarantee compliance with the

provisions of the Code, its implementing rules and regulationsand appropriate issuances of the Ministry (now Department).(Emphasis supplied)

Accordingly, the nature of Finman's obligation under the

suretyship agreement makes it privy to the proceedings againstits principal (Pan Pacific). As such Finman is bound, in theabsence of collusion, by a judgment against its principal eventhough it was not a party to the proceedings Leyson v. Rizal Surety and Insurance Co., 16 SCRA 551 (1966). Furthermore, inGovernment of the Philippines v. Tizon (20 SCRA 1182 [1967]),this Court ruled that where the surety bound itself solidarily withthe principal obligor the former is so dependent on the principaldebtor "that the surety is considered in law as being the same

party as the debtor in relation to whatever is adjudged touchingthe obligation of the latter." Applying the foregoing principles tothe case at bar, it can be very well said that even if hereinFinman was not impleaded in the instant case, still it (petitioner)can be held jointly and severally liable for all claims arising fromrecruitment violation of Pan Pacific. Moreover, as correctlystated by the Solicitor General, private respondents have a legal



claim against Pan Pacific and its insurer for the placement andprocessing fees they paid, so much so that in order to provide acomplete relief to private respondents, petitioner had to beimpleaded in the case (Rollo, p. 87).

Furthermore, Finman contends that herein respondent Secretaryof Labor cannot validly assume jurisdiction over the case at bar;otherwise, proceedings will be railroaded resulting in thedeprivation of the former of any remedial measures under thelaw.

The records of the case reveal that herein Finman filed a motionfor reconsideration of the adverse decision dated March 18, 1988of respondent Secretary of Labor. In the said motion for

reconsideration, no jurisdictional challenge was made (Ibid ., p.22). It was only when it filed this petition that it assailed the jurisdiction of the respondent Secretary of Labor, and that of thePOEA. But then, it was too late. Estoppel had barred hereinpetitioner from raising the issue, regardless of its merits (AkayPrinting Press v. Minister of Labor and Employment, 140 SCRA381 [1985]).

Hence, Finman's contention that POEA's and respondentSecretary's actions in impleading and directing herein petitioner

to pay jointly and severally with Pan Pacific the claims of privaterespondents constitute a grave abuse of discretion amountingto lack of jurisdiction has no basis. (Ibid ., p. 101.)

As regards the third assigned error, herein petitioner maintainsthat the findings of fact made by the POEA upon whichrespondent Secretary of Labor based his questioned Orders arenot supported by substantial evidence and are contrary to law,is likewise untenable.

Herein petitioner, in raising this third issue, is, in effect, askingthis Court to review the respondent Secretary's findings of facts.

Well-settled is the rule that findings of facts of the respondentSecretary are generally accorded great weight unless there wasgrave abuse of discretion or lack of jurisdiction in arriving atsuch findings (Asiaworld Publishing House, Inc. vs. Ople, 152



SCRA 219 (1987).

In the case at bar, it is undisputed that when the case was firstset for hearing, only the private respondents appeared, despitesummons having been served upon both herein petitioner andPan Pacific. This, notwithstanding, both herein petitioner andPan Pacific were again notified of the scheduled hearing, but, asaforestated they also' failed to a pear (Rollo, p. 15). Accordingly,owing to the absence of any controverting evidence, respondentSecretary of Labor admitted and considered privaterespondents' testimonies and evidence as substantial. Under thecircumstances, no justifiable reason can be found to justifydisturbance of the findings of facts of the respondent Secretaryof Labor, supported as they are by substantial evidence and in

the absence of grave abuse of discretion (Asiaworld PublishingHouse, Inc. v. Ople, supra); and in line with the well establishedprinciple that the findings of administrative agencies which haveacquired expertise because their jurisdiction is confined tospecific matters are generally accorded not only respect but attimes even finality. (National Federation of Labor Union (NAFLU)v. Ople, 143 SCRA 124 [1986])

PREMISES CONSIDERED, the questioned Orders of respondentSecretary of Labor are hereby AFFIRMED in toto,

SO ORDERED.

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