GUARANTY AND SURETY

Article 2047

Machetti v. Hospicio de San Jose, 43 Phil. 927

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16666

April 10, 1922

ROMULO MACHETTI, plaintiff-appelle,

vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a
written agreement undertook to construct a building on Calle Rosario in the city of
Manila for the Hospicio de San Jose, the contract price being P64,000. One of the
conditions of the agreement was that the contractor should obtain the "guarantee"
of the Fidelity and Surety Company of the Philippine Islands to the amount of
P128,800 and the following endorsement in the English language appears upon the
contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and conditions
as outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing
the Hospicio de San Jose and, as the work progressed, payments were made to him
from time to time upon the recommendation of the architects, until the entire
contract price, with the exception of the sum of the P4,978.08, was paid.
Subsequently it was found that the work had not been carried out in accordance
with the specifications which formed part of the contract and that the workmanship
was not of the standard required, and the Hospicio de San Jose therefore answered

the complaint and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement abovementioned, in the total sum
of P71,350. After issue was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March 4, 1918, an order was
entered suspending the proceeding in the present case in accordance with section
60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the
Fidelity and Surety Company be made cross-defendant to the exclusion of Machetti
and that the proceedings be continued as to said company, but still remain
suspended as to Machetti. This motion was granted and on February 7, 1920, the
Hospicio filed a complaint against the Fidelity and Surety Company asking for a
judgement for P12,800 against the company upon its guaranty. After trial, the Court
of First Instance rendered judgment against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The case is now before this court upon
appeal by the Fidelity and Surety Company form said judgment.
As will be seen, the original action which Machetti was the plaintiff and the Hospicio
de San Jose defendant, has been converted into an action in which the Hospicio de
San Jose is plaintiff and the Fidelity and Surety Company, the original plaintiff's
guarantor, is the defendant, Machetti having been practically eliminated from the
case.
But in this instance the guarantor's case is even stronger than that of an ordinary
surety. The contract of guaranty is written in the English language and the terms
employed must of course be given the signification which ordinarily attaches to them
in that language. In English the term "guarantor" implies an undertaking of
guaranty, as distinguished from suretyship. It is very true that notwithstanding the
use of the words "guarantee" or "guaranty" circumstances may be shown which
convert the contract into one of suretyship but such circumstances do not exist in
the present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that its rests
on a separate consideration moving from the principal and that although it is written
in continuation of the contract for the construction of the building, it is a collateral
undertaking separate and distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor
only binds himself to pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor. (Saint vs. Wheeler & Wilson
Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi de Higgins
and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta, 40 Phil., 48.)
This latter liability is what the Fidelity and Surety Company assumed in the present
case. The undertaking is perhaps not exactly that of a fianza under the Civil Code,
but is a perfectly valid contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having bound itself to pay only the event
its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until
it is shown that Machetti is unable to pay. Such ability may be proven by the return

of a writ of execution unsatisfied or by other means, but is not sufficiently

established by the mere fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of the insolvent's inability to pay
is not determined until the final liquidation of his estate.
The judgment appealed from is therefore reversed without costs and without
prejudice to such right of action as the cross-complainant, the Hospicio de San Jose,
may have after exhausting its remedy against the plaintiff Machetti. So ordered.
Araullo, C.J., Malcolm, Villamor, Johns and Romualdez, JJ., concur.

Lirag Textile v. SSS, 153 SCRA 338

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-33205

August 31, 1987

LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners,

vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, respondents.

FERNAN, J.:
This is an appeal by certiorari involving purely questions of law from the decision
rendered by respondent judge in Civil Case No. Q-12275 entitled "Social Security
System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."
The antecedent facts, as stipulated by the parties during the trial, are as follows:
1.
That on September 4, 1961, the plaintiff [herein respondent Social Security
System] and the defendants [herein petitioners] Lirag Textile Mills, Inc. and Basilio
Lirag entered into a Purchase Agreement under which the plaintiff agreed to
purchase from the said defendant preferred shares of stock worth ONE MILLION
PESOS [P1,000,000.00] subject to the conditions set forth in such agreement;...
2.
That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff,
on January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE
HUNDRED THOUSAND PESOS [P500,000.00] for which the said defendant issued to
plaintiff 5,000 preferred shares with a par value of one hundred pesos [P10000] per
share as evidenced by stock Certificate No. 128, ...
3.
That further in pursuance of the Purchase Agreement of September 4, 1961,
the plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE UNDRED THOUSAND
PESOS [P500,000.00] for which the said defendant issued to plaintiff 5,000 preferred
shares with a par value of one hundred pesos [P100.00] per share as evidenced by
Stock Certificate No. 139, ...
4.
That in accordance with paragraph 3 of the Purchase Agreement of
September 4, 1961 which provides for the repurchase by the Lirag Textile Mills, Inc.
of the shares of stock at regular intervals of one year beginning with the 4th year

following the date of issue, Stock Certificates Nos. 128 and 139 were to be
repurchased by the Lirag Textile Mills, Inc. thus:
CERT. No. AMOUNT DATE OF REDEMPTION
128

P100,000.00 February 14, 1965

100,000.00

February 14, 1966

100,000.00

February 14, 1967

100,000.00

February 14, 1968

100,000.00

February 14, 1969

139

P100,000.00 July 3, 1966

100,000.00

July 3,1967

100,000.00

July 3,1968

100,000.00

July 3, 1969

100,000.00

July 3,1970

5.
That to guarantee the redemption of the stocks purchased by the plaintiff, the
payment of dividends, as well as the other obligations of the Lirag Textile Mills, Inc.,
defendants Basilio L. Lirag signed the Purchase Agreement of September 4, 1961 not
only as president of the defendant corporation, but also as surety so that should the
Lirag Textile Mills, Inc. fail to perform any of its obligations in the said Purchase
Agreement, the surety shall immediately pay to the vendee the amounts then
outstanding pursuant to Condition No. 4, to wit:
To guarantee the redemption of the stocks herein purchased, the payment of the
dividends, as well as other obligations of the VENDOR herein, the SURETY hereby
binds himself jointly and severally liable with the VENDOR so that should the
VENDOR fail to perform any of its obligations hereunder, the SURETY shall
immediately pay to the VENDEE the amounts then outstanding. '
6.
That defendant corporation failed to redeem certificates of Stock Nos. 128
and 139 by payment of the amounts mentioned in paragraph 4 above;
7.
That the Lirag Textile Mills, lnc. has not paid dividends in the amounts and
within the period set forth in paragraph 10 of the complaint;*
8.
That letters of demands have been sent by the plaintiff to the defendant to
redeem the foregoing stock certificates and pay the dividends set forth in paragraph

10 of the complaint, but the Lirag Textile Mills, Inc. has not made such redemption
nor made such dividend payments;
9.
That defendant Basilio L. Lirag likewise received letters of demand from the
plaintiff requiring him to make good his obligation as surety;
10.
That notwithstanding such letters of demand to the defendant Basilio L. Lirag,
Stock Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no
dividends have been paid on said stock certificates;
11.
That paragraph 5 of the Purchase Agreement provides that should the Lirag
Textile Mills, Inc. fail to effect any of the redemptions stipulated therein, the entire
obligation shall immediately become due and demandable and the Lirag Textile Mills,
Inc., shall, furthermore, be liable to the plaintiff in an amount equivalent to twelve
per cent [12%] of the amount then outstanding as liquidated damages;
12.
That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing
certificates of stock and pay dividends thereon were due to financial reverses, to wit:
[a]
Unrestrained smuggling into the country of textiles from the United States
and other countries;
[b]
Unrestricted entry of supposed remmants which competed with textiles of
domestic produce to the disadvantage and economic prejudice of the latter;
[c]

Scarcity of money and the unavailability of financing facilities;

[d]

Payment of interest on matured loans extended to defendant corporation;

[e]
Construction of the Montalban plant of the defendant corporation financed
largely through reparation benefits;
[f]
Labor problems occasioned by the fact that the defendant company is
financial (sic) unable to improve, in a substantial way, the economic plight of its
workers as a result of which two costly strikes had occurred, one in 1965 and
another in 1968; and
[g]
The occurrence of a fire which destroyed more than 1 million worth of raw
cotton, paralyzed operations partially, increased overhead costs and wiped out any
expected profits that year;
13.
That it has been the policy of the plaintiff to be represented in the board of
directors of the corporation or entity which has obtained financial assistance from
the System be it in terms of loans, mortgages or equity investments. Thus, pursuant
to paragraph 6 of the Purchase Agreement of September 4, 1961 which provides as
follows:

The VENDEE shall be allowed to have a representative in the Board of Directors of

the VENDOR with the right to participate in the discussions and to vote therein;
14.
That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each
issued one common share of stock as a qualifying share to their election to the
Board of Directors of the Lirag Textiles Mills, Inc.;
15.
That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their
respective tenure as member of the Board of Directors of the Lirag Textile Mills, Inc.
attended the meetings of the said Board, received per diems for their attendance
therein in the same manner and in the same amount as any other member of the
Board of Directors, participated in the deliberations therein and freely exercised their
right to vote in such meetings. However, the per diems received by the SSS
representative do not go to the coffers of the System but personally to the
representative in the said board of directors. 1
For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of
the Purchase Agreement, the SSS filed an action for specific performance and
damages before the then Court of First Instance of Rizal, Quezon City, praying that
therein defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be adjudged liable for
[1] the entire obligation of P1M which became due and demandable upon
defendants' failure to repurchase the stocks as scheduled; [21 dividends in the
amount of P220,000.00; [31 liquidated damages in an amount equivalent to twelve
percent (12%) of the amount then outstanding; [4] exemplary damages in the
amount of P100,000.00 and [5] attorney's fees of P20,000.00.
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint,
but were denied the relief sought. Thus, they filed their answer with counterclaim,
denying the existence of any obligation on their part to redeem the preferred stocks,
on the ground that the SSS became and still is a preferred stockholder of the
corporation so that redemption of the shares purchased depended upon the financial
ability of said corporation. Insofar as defendant Basilio Lirag is concerned, it was
alleged that his liability arises only if the corporation is liable and does not perform
its obligations under the Purchase Agreement. They further contended that no
liability on their part has arisen because of the financial condition of the corporation
upon which such liability was made to depend, particularly the non-realization of any
profit or earned surplus. Thus, the other claims for dividends, liquidated damages
and exemplary damages are allegedly without basis.
After entering into the Stipulation of Facts above-quoted, the parties filed their
respective memoranda and submitted the case for decision.
The lower court, ruling that the purchase agreement was a debt instrument, decided
in favor of SSS and sentenced Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS
jointly and severally P1,000,000.00 plus legal interest until the said amount is fully
paid; P220,000.00 representing the 8% per annum dividends on the preferred
shares plus legal interest up to the time of actual payment; P146,400.00 as

liquidated damages; and P10,000.00 as attorney's fees. The counterclaim of Lirag

Textile Mills, Inc. and Basilio L. Lirag was dismissed.
Hence, this petition.
Petitioners assign the following errors:
1.
The trial court erred in deciding that the Purchase Agreement is a debt
instrument;
2.
Respondent judge erred in holding petitioner corporation liable for the
payment of the 8% preferred and cumulative dividends on the preferred shares
since the purchase agreement provides that said dividends shall be paid from the
net profits and earned surplus of petitioner corporation and respondent SSS has
admitted that due to losses sustained since -1964, no dividends had been and can
be declared by petitioner corporation;
3.
Respondent judge erred in sentencing petitioners to pay P146,400.00 in
liquidated damages;
4.
Respondent judge erred in sentencing petitioners to pay P10,000.00 by way
of attorney's fees;
5.
Respondent judge erred in sentencing petitioners to pay interest from the
time of firing the complaint u to the time of full payment both on the P1,000,000.00
invested by respondent SSS in petitioner's corporation and on the P220,000.00
which the SSS claims as dividends due on its investments;
6.
Respondent judge erred in holding that petitioner Lirag is liable to redeem the
P1,000,000.00 worth of preferred shares purchased by respondent SSS from
petitioner corporation and the 8% cumulative dividend, it appearing that Lirag was
merely a surety and not an insurer of the obligation;
7.

Respondent judge erred in dismissing the counterclaim of petitioners.

The fundamental issue in this case is whether or not the Purchase Agreement
entered into by petitioners and respondent SSS is a debt instrument.
Petitioners claim that respondent SSS merely became and still is a preferred
stockholder of the petitioner corporation, the redemption of the shares purchased by
said respondent being dependent upon the financial ability of petitioner corporation.
Petitioner corporation, thus, has no obligation to redeem the preferred stocks.
On the other hand, respondent SSS claims that the Purchase Agreement is a debt
instrument, imposing upon the petitioners the obligation to pay the amount owed,
and creating as between them the relation of creditor and debtor, not that of a
stockholder and a corporation.

We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt
instrument. Its terms and conditions unmistakably show that the parties intended
the repurchase of the preferred shares on the respective scheduled dates to be an
absolute obligation which does not depend upon the financial ability of petitioner
corporation. This absolute obligation on the part of petitioner corporation is made
manifest by the fact that a surety was required to see to it that the obligation is
fulfilled in the event of the principal debtor's inability to do so. The unconditional
undertaking of petitioner corporation to redeem the preferred shares at the specified
dates constitutes a debt which is defined "as an obligation to pay money at some
fixed future time, or at a time which becomes definite and fixed by acts of either
party and which they expressly or impliedly, agree to perform in the contract. 2
A stockholder sinks or swims with the corporation and there is no obligation to
return the value of his shares by means of repurchase if the corporation incurs
losses and financial reverses, much less guarantee such repurchase through a
surety.
As private respondent rightly contends, if the parties intended it [SSS] to be merely
a stockholder of petitioner corporation, it would have been sufficient that Preferred
Certificates Nos. 128 and 139 were issued in its name as the preferred certificates
contained all the rights of a stockholder as well as certain obligations on the part of
petitioner corporation. However, the parties did in fact execute the Purchase
Agreement, at the same time that the petitioner corporation issued its preferred
stock to the respondent SSS. The Purchase Agreement serves to define the rights
and obligations of the parties and to establish firmly the liability of petitioners in case
of breach of contract. The Certificates of Preferred Stock serve as additional
evidence of the agreement between the parties, though the precise terms and
conditions thereof must be read together with, and regarded as qualified by the
terms and conditions of the Purchase Agreement.
The rights given by the Purchase Agreement to respondent SSS are rights not
enjoyed by ordinary stockholders. This fact could only lead to the conclusion made
by the trial court that:
The aforementioned rights specially stipulated for the benefit of the plaintiff
[respondent SSS] suggest eloquently an intention on the part of the plaintiff
[respondent SSS] to facilitate a loan to the defendant corporation upon the latter's
request. In order to afford protection to the plaintiff which otherwise is provided by
means of collaterals, as the plaintiff exacts in its grants of loans in its ordinary
transactions of this kind, as it is looked upon more as a lending institution rather
than as an investing agency, the purchase agreement supplied these protective
rights which would otherwise be furnished by collaterals to the loan. Thus, the
membership in the board is to have a watchdog in the operation of the business of
the corporation, so as to insure against mismanagement which may result in losses
not entirely unavoidable since payment for purposes of redemption as well as the
dividends is expressly stipulated to come from profits and/or surplus. Such a right is
never exacted by an ordinary stockholder merely investing in the corporation. 3

Moreover, the Purchase Agreement provided that failure on the part of petitioner to
repurchase the preferred shares on the scheduled due dates renders the entire
obligation due and demandable, with petitioner in such eventuality liable to pay 12%
of the then outstanding obligation as liquidated damages. These features of the
Purchase Agreement, taken collectively, clearly show the intent of the parties to be
bound therein as debtor and creditor, and not as corporation and stockholder.
Petitioners' contention that it is beyond the power and competence of petitioner
corporation to redeem the preferred shares or pay the accrued dividends due to
financial reverses can not serve as legal justification for their failure to perform
under the Purchase Agreement. The Purchase Agreement constitutes the law
between the parties and obligations arising ex contractu must be fulfilled in
accordance with the stipulations. 4 Besides, it was precisely this eventuality that was
sought to be avoided when respondent SSS required a surety for the obligation.
Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner
corporation's default. As surety, Basilio L. Lirag is bound immediately to pay
respondent SSS the amount then outstanding.
The obligation of a surety differs from that of a guarantor in that the surety insures
the debt, whereas the guarantor merely insures solvency of the debtor; and the
surety undertakes to pay if the principal does not pay, whereas a guarantor merely
binds itself to pay if the principal is unable to pay. 5
On the liability of petitioners to pay 8% cumulative dividend, We agree with the
observation of the lower court that the dividends stipulated by the parties served
evidently as interests. 6 The amount thereof was fixed at 8% per annum and was
not made to depend upon or to fluctuate with the amount of profits or surplus
realized, a clear indication that the parties intended to give a sure and fixed earnings
on the principal loan. The fact that the dividends were supposed to be paid out of
net profits and earned surplus, of which there were none, does not excuse
petitioners from the payment thereof, again for the reason that the undertaking of
petitioner Basilio L. Lirag as surety, included the payment of dividends and other
obligations then outstanding.
The award of the sum of P146,400.00 in liquidated damages representing 12% of
the amount then outstanding is correct, considering that petitioners in the stipulation
of facts admitted having failed to fulfill their obligations under the Purchase
Agreement. The grant of liquidated damages in the amount stated is expressly
provided for in the Purchase Agreement in case of contractual breach.
The pronouncement of the lower court for the payment of interests on both the
unredeemed shares and unpaid dividends is also in order. Per stipulation of facts,
petitioners did not deny the fact of non-payment of dividends nor their failure to
purchase the preferred shares. Since these involve sums of money which are
overdue, they are bound to earn legal interest from the time of demand, in this case,
judicial, i.e., the time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the- Purchase
Agreement. After his firm representation to "pay immediately to the VENDEE the
amounts then outstanding" evidencing his commitment as SURETY, he is estopped
from denying the same. His signature in the agreement carries with it the official
imprimatur as petitioner corporation's president, in his personal capacity as majority
stockholder, as surety and as solidary obligor. The essence of his obligation as
surety is to pay immediately without qualification whatsoever if petitioner
corporation does not pay. To have another interpretation of petitioner Lirag's liability
as surety would violate the integrity of the Purchase Agreement as well as the clear
and unmistakable intent of the parties to the same.
WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security System
vs. Lirag Textile Mills, Inc. and Basilio L. Lirag" is hereby affirmed in toto. Costs
against petitioners.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

Footnotes
*
Defendants Lirag Textile Mills Inc. and Basilio Lirag under Condition 2 of the
Purchase Agreement obligated themselves to pay on the ONE MILLION PESOS
[P1,000,000.00] Preferred Shares cumulative dividends of Eight Percent [8%]
thereon per annum out of the net profits and earned surplus of the defendant
corporation, to wit:
2.
The shares of stock shall earn preferred cumulative dividend of EIGHT
PERCENT [8%] per annum out of the net profits and earned surplus of the VENDOR
before any dividend is declared upon the common shares of stock of the VENDOR.
XXX
Thus, under paragraph 10 of the complaint, it was alleged
that "defendants as of July 3, 1966 had an overdue account
with the plaintiff in the amount of TWO HUNDRED TWENTY
THOUSAND PESOS [P220,000.001 representing dividends on
the preferred shares ..." [p. 28, Rollo].
1

Annex "D," Petition, pp. 53-57, Rollo.

2
Eliot v. Fiscal Court of Pike County, 36 S.W. (2d) 619, 621, 237 Ky 797,
underscoring supplied.

Pp. 66-67, Rollo.

Art. 11 59, Civil Code.

Manila Surety and Fidelity Co. v. Batu Construction Co., 53 O.G. 8836.

P. 62, Rollo.

Article 2048

Severino v. Severino, 56 Phil. 187

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 34642

September 24, 1931

FABIOLA SEVERINO, accompanied by her husband RICARDO VERGARA, plaintiffsappellees,

vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.

R. Nepomuceno for appellant.

Jacinto E. Evidente for appellees.

STREET, J.:

This action was instituted in the Court of First Instance of the Province of Iloilo by
Fabiola Severino, with whom is joined her husband Ricardo Vergara, for the purpose
of recovering the sum of P20,000 from Guillermo Severino and Enrique Echaus, the
latter in the character of guarantor for the former. Upon hearing he cause the trial
court gave judgment in favor of the plaintiffs to recover the sum of P20,000 with
lawful from November 15, 1929, the date of the filing of the complaint, with costs.

But it was declared that execution of this judgment should issue first against the
property of Guillermo Severino, and if no property should be found belonging to said
defendant sufficient to satisfy the judgment in whole or in part, execution for the
remainder should be issued against the property of Enrique Echaus as guarantor.
From this judgment the defendant Echaus appealed, but his principal, Guillermo
Severino, did not.

The plaintiff Fabiola Severino is the recognized natural daughter of Melecio Severino,
deceased, former resident of Occidental Negros. Upon the death of Melecio Severino
a number of years ago, he left considerable property and litigation ensued between
his widow, Felicitas Villanueva, and Fabiola Severino, on the one part, and other
heirs of the deceased on the other part. In order to make an end of this litigation a
compromise was effected by which Guillermo Severino, a son of Melecio Severino,
took over the property pertaining to the estate of his father at the same time
agreeing to pay P100,000 to Felicitas Villanueva and Fabiola Severino. This sum of
money was made payable, first, P40,000 in cash upon the execution of the
document of compromise, and the balance in three several payments of P20,000 at
the end of one year; two years, and three years respectively. To this contract the
appellant Enrique Echaus affixed his name as guarantor. The first payment of
P40,000 was made on July 11, 1924, the date when the contract of compromise was
executed; and of this amount the plaintiff Fabiola Severino received the sum of
P10,000. Of the remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to
the sum of P20,000.

It appears that at the time of the compromise agreement above-mentioned was

executed Fabiola Severino had not yet been judicially recognized as the natural
daughter of Melecio Severino, and it was stipulated that the last P20,000
corresponding to Fabiola and the last P5,000 corresponding to Felicitas Villanueva
should retained on deposit until the definite status of Fabiola Severino as natural
daughter of Melecio Severino should be established. The judicial decree to this effect
was entered in the Court of First Instance of Occidental Negros on June 16, 1925,
and as the money which was contemplated to be held in suspense has never in fact
been paid to the parties entitled thereto, it results that the point respecting the
deposit referred to has ceased to be of moment.

The proof shows that the money claimed in this action has never been paid and is
still owing to the plaintiff; and the only defense worth noting in this decision is the
assertion on the part of Enrique Echaus that he received nothing for affixing his
signature as guarantor to the contract which is the subject of suit and that in effect
the contract was lacking in consideration as to him.

The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties
thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a lawsuit
is recognized in law as a valuable consideration; and the dismissal of the action
which Felicitas Villanueva and Fabiola Severino had instituted against Guillermo
Severino was an adequate consideration to support the promise on the part of
Guillermo Severino to pay the sum of money stipulated in the contract which is the
subject of this action. The promise of the appellant Echaus as guarantor therefore
binding. It is never necessary that the guarantor or surety should receive any part of
the benefit, if such there be, accruing to his principal. But the true consideration of
this contract was the detriment suffered by the plaintiffs in the former action in
dismissing that proceeding, and it is immaterial that no benefit may have accrued
either to the principal or his guarantor.

The judgment appealed from is in all respects correct, and the same will be
affirmed, with costs against the appellant. So ordered.

Avancea, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real and

Imperial, JJ., concur.

Willex v. Court of Appeals, 256 SCRA 478

Republic of the Philippines
SUPREME COURT
Baguio City
SECOND DIVISION

G.R. No. 103066

April 25, 1996

WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, 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 the Regional Trial Court of the
National Capital Judicial Region, Branch XLV, Manila, which ordered petitioner Willex
Plastic Industries Corporation and the Inter-Resin Industrial Corporation, jointly and
severally, to pay private respondent International Corporate Bank certain sums of
money, and the appellate court's resolution of October 17, 1989 denying petitioner's
motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with
the Manila Banking Corporation. To secure payment of the credit accomodation,
Inter-Resin Industrial and the Investment and Underwriting Corporation of the
Philippines (IUCP) executed two documents, both entitled "Continuing Surety
Agreement" and dated December 1, 1978, whereby they bound themselves solidarily
to pay Manilabank "obligations of every kind, on which the [Inter-Resin Industrial]
may now be indebted or hereafter become indebted to the [Manilabank]." The two
agreements (Exhs. J and K) are the same in all respects, except as to the limit of
liability of the surety, the first surety agreement being limited to US$333,830.00,
while the second one is limited to US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a "Continuing Guaranty" in favor of IUCP whereby "For and in
consideration of the sum or sums obtained and/or to be obtained by Inter-Resin
Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly

and severally guaranteed "the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal sum of
FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such interests,
charges and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M1) On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the
payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties
paid, Atrium filed this case in the court below against Inter-Resin Industrial and
Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,600.00 representing the proceeds of its fire
insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the
latter had paid to Manilabank. It claimed, however, that it had already fully paid its
obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint
and interposed the following Special Affirmative Defenses:
(a)
Assuming arguendo that main defendant is indebted to plaintiff, the former's
liability is extinguished due to the accidental fire that destroyed its premises, which
liability is covered by sufficient insurance assigned to plaintiff;
(b)
Again, assuming arguendo, that the main defendant is indebted to plaintiff, its
account is now very much lesser than those stated in the complaint because of some
payments made by the former;
(c)

The complaint states no cause of action against WILLEX;

(d)
WLLLEX is only a guarantor of the principal obliger, and thus, its liability is
only secondary to that of the principal;
(e)
Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the
principal 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 to have waived the
right to present evidence for its failure to appear at the hearing despite due notice.

On the other hand, Willex Plastic rested its case without presenting any evidence.
Thereafter Interbank and Willex Plastic submitted their respective memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:
(a)
P3, 646,780.61, representing their indebtedness to the plaintiff, with interest
of 17% per annum from August 11, 1982, when Inter-Resin Industrial paid
P687,500.00 to the plaintiff, until full payment of the said amount;
(b)

Liquidated damages equivalent to 178 of the amount due; and

(c)
Attorney's fees and expenses of litigation equivalent to 208 of the total
amount due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex
Plastic filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct
Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing of the
Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not file its
brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling
of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to
Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant Inter-Resin
Industrial's motion for reception of evidence because the situation or situations in
which we could exercise the power under BP 129 did not exist. Movant here has not
presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22,
1991 and the resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1]
The main issue raised is whether under the "Continuing Guaranty" signed on
April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with
Inter-Resin Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-interest,
Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made
on December 1, 1978. In denying liability to Interbank for the amount, Willex Plastic
argues that under the "Continuing Guaranty," its liability is for sums obtained by
Inter-Resin Industrial from Interbank, not for sums paid by the latter to Manilabank

for the account of Inter-Resin Industrial. In support of this contention Willex Plastic
cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be obtained by INTERRESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from
you and/or your principal/s as may be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you
and/or your principal/s, successor/s and assigns the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges
and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to
secure payment to Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank that the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5.
to secure the guarantee made by plaintiff of the credit accommodation
granted to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff
required defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its
favor and a Continuing Guaranty which was signed by the other defendant WPIC
[Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that
it had already paid its obligation in its entirety. On the other hand, Willex Plastic,
while denying the allegation in question, merely did so "for lack of knowledge or
information of the same." But, at the hearing of the case on September 16, 1986,
when asked by the trial judge whether Willex Plastic had not filed a crossclaim
against Inter-Resin Industrial, Willex Plastic's counsel replied in the negative and
manifested that "the plaintiff in this case [Interbank] is the guarantor and my client
[Willex Plastic] only signed as a guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing Guaranty" had
been made to guarantee payment of amounts made by it to Manilabank and not of
any sums given by it as loan to Inter-Resin Industrial. Interbank's witness testified
under cross examination by counsel for Willex Plastic that Willex "guaranteed the
exposure/of whatever exposure of ACP [Atrium Capital] will later be made because
of the guarantee to Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it relates.
4 At all events, Willex Plastic cannot now claim that its liability is limited to any
amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as
debtor because, by failing to object to the parol evidence presented, Willex Plastic
waived the protection of the parol evidence rule. 5

Accordingly, the trial court found that it was "to secure the guarantee made by
plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin
Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a
chattel mortgage in its favor and a Continuing Guaranty which was signed by the
defendant Willex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required
defendant-appellants to sign a Continuing Guaranty." These factual findings of the
trial court and of the Court of Appeals are binding on us not only because of the rule
that on appeal to the Supreme Court such findings are entitled to great weight and
respect but also because our own examination of the record of the trial court
confirms these findings of the two courts. 7
Nor does the record show any other transaction under which Inter-Resin Industrial
may have obtained sums of money from Interbank. It can reasonably be assumed
that Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for
amounts which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC
[Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a
"Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for and in
consideration of the loan obtained by IRIC [Inter-Resin Industrial]."
[2]
Willex Plastic argues that the "Continuing Guaranty," being an accessory
contract, cannot legally exist because of the absence of a valid principal obligation. 8
Its contention is based on the fact that it is not a party either to the "Continuing
Surety Agreement" or to the loan agreement between Manilabank and Interbank
Industrial.
Put in another way the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a "guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. It is never necessary
that a guarantor or surety should receive any part or benefit, if such there be,
accruing to his principal." 9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the
purpose of having an additional capital for buying and selling coco-shell charcoal and
importation of activated carbon, the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore, covered by the said
agreement, and private respondent, even if he did not sign the promissory note, is
liable by virtue of the surety agreement. The only condition that would make him
liable thereunder is that the Borrower "is or may become liable as maker, endorser,

acceptor or otherwise." There is no doubt that Daicor is liable on the promissory

note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one
which, in this case is the loan obtained by Daicor as evidenced by a promissory note.
[3]
Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt
applied so as to secure payments made by Interbank under the two "Continuing
Surety Agreements." Willex Plastic invokes the ruling in El Vencedor v. Canlas 11 and
Dio v. Court of Appeals 12 in support of its contention that a contract of suretyship
or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor
v. Canlas we held that a contract of suretyship "is not retrospective and no liability
attaches for defaults occurring before it is entered into unless an intent to be so
liable is indicated." There we found nothing in the contract to show that the paries
intended the surety bonds to answer for the debts contracted previous to the
execution of the bonds. In contrast, in this case, the parties to the "Continuing
Guaranty" clearly provided that the guaranty would cover "sums obtained and/or to
be obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the sureties
could be held liable for an obligation contracted after the execution of the continuing
surety agreement. It was held that by its very nature a continuing suretyship
contemplates a future course of dealing. "It is prospective in its operation and is
generally intended to provide security with respect to future transactions." By no
means, however, was it meant in that case that in all instances a 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 as retrospective, in the end
the intention of the parties as revealed by the evidence is controlling. What was said
there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or
other contracts of suretyship are ordinarily not to be construed as retrospective, but
that rule must yield to the intention of the contracting parties as revealed by the
evidence, and does not interfere with the use of the ordinary tests and canons of
interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by
Echevarria was intended to cover all of the indebtedness of the Arrocera upon its
current account with the plaintiff Bank that we cannot possibly adopt the view of the
court below in regard to the effect of the bond.

[4]
Willex Plastic says that in any event it cannot be proceeded against without
first exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the
benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1)

If the guarantor has expressly renounced it;

(2)

If he has bound himself solidarily with the debtor;

The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and
Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or your
principal/s may directly proceed against Me/Us without first proceeding against and
exhausting DEBTOR/s properties in the same manner as if all such liabilities
constituted My/Our direct and primary obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion. In
addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under
the same agreement:
For and in consideration of the sums obtained and/or to be obtained by INTERRESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S, from
you and/or your principal/s as may be evidenced by promissory note/s, checks, bills
receivable/s and/or other evidence/s of indebtedness (hereinafter referred to as the
NOTE/S), I/We hereby jointly and severally and unconditionally guarantee unto you
and/or your principal/s, successor/s and assigns the prompt and punctual payment
at maturity of the NOTE/S issued by the DEBTOR/S in your and/or your principal/s,
successor/s and assigns favor to the extent of the aggregate principal sum of FIVE
MILLION PESOS (P5,000,000.00), Philippine Currency, and such interests, charges
and penalties as may hereinafter he specified.
[5]
Finally it is contended that Inter-Resin Industrial had already paid its
indebtedness to Interbank and that Willex Plastic should have been allowed by the
Court of Appeals to adduce evidence to prove this. Suffice it to say that Inter-Resin
Industrial had been given generous opportunity to present its evidence but it failed
to make use of the same. On the otherhand, Willex Plastic rested its case without
presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26
and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of
Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset for
the last time" on April 2 and 30, 1987.

On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial
court issued the following order:
Considering that, as shown by the records, the Court had exerted every earnest
effort to cause the service of notice or subpoena on the defendant Inter-Resin
Industrial but to no avail, even with the assistance of the defendant Willex the
defendant Inter-Resin Industrial is hereby deemed to have waived the right to
present its evidence.
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order
and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved
for the postponement of the hearing be postponed to August 11, 1987. The hearing
was, therefore, reset on September 8 and 22, 1987 but the hearings were reset on
October 13, 1987, this time upon motion of Interbank. To give Interbank time to
comment on a motion filed by Inter-Resin Industrial, the reception of evidence for
Inter-Resin Industrial was again reset on November 17, 26 and December 11, 1987.
However, Inter-Resin Industrial again moved for the postponement of the hearing.
Accordingly the hearing was reset on November 26 and December 11, 1987, with
warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January 22,
1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still
failed to present its evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however,
the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel
did not appear. The trial court, therefore, finally declared Inter-Resin Industrial to
have waived the right to present its evidence. On the other hand, Willex Plastic, as
before, manifested that it was not presenting evidence and requested instead for
time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against
the petitioner.
SO ORDERED.
Regalado, Romero, Puno and Torres, Jr., JJ., concur.
Footnotes

1
Penned by Justice Luis A. Javellana with Justices Alfredo M. Marigomen and
Artemon D. Luna, concurring.
2

TSN, Sep. 16, 1986, p. 4.

TSN, Oct. 16, 1986, p. 13.

4 PNB V. Barretto P. Po E. Jap. 53 Phil. 955 (1928).

5

Talosig v. Vda. de Nieba, 43 SCRA 472 (1972).

RTC Decision, p. 8.

7
Somodio v. Court of Appeals, 235 SCRA 307 (1994); Borillo v. Court of
Appeals, 209 SCRA 130 (1992); Collado v. Intermediate Appellate Court, 206 SCRA
206 (1992); Philippine Commercial and Industrial Bank v. Court of Appeals, 193
SCRA 452 (1991).
8

Art. 2052 of the Civil Code provides:

A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a
voidable or an unenforceable contract. It may also guarantee a natural obligation.
9
Severino v. Severino, 56 Phil. 185, 187-88 (1931). Accord, Garcia v. Court of
Appeals, 191 SCRA 493 (1990).
10

Rizal Commercial Banking Corp. v. Arro, 115 SCRA 777, 781-782 (1982).

11

44 Phil. 699 (1923).

12

216 SCRA 9 (1992).

13

49 Phil 843 (1926).

14

Supra note 13 at 848.

Article 2050

De Guzman v. Santos, 68 Phil. 371

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-16568

November 30, 1962

GREGORIO DE GUZMAN, petitioner,

vs.
GUILLERMO E. SANTOS, in his capacity as Executive Judge of Agrarian Relations,
and MANUEL PANER, respondents.
Josefina S. Nepomuceno for respondent Manuel Paner.
Nostratis and Ipac for respondent Guillermo Santos.
PAREDES, J.:
Gregorio de Guzman (herein petitioner), was owner of a parcel of agricultural land
(rice land), of about balitangs, situated in Antipolo, Rizal, admit only property
belonging to him. He was personally cultivating the land, when he mortgaged it in
favor of his brother Florentino de Guzman, who, as creditor, land cultivated, thru his
own tenants, one of whom Nicolas Angeles, father-in-law of respondent herein,
Manuel Paner, who, upon the former's death on 1957, succeeded him.
Sometime in February, 1959, petitioner redeemed the land from his brother and
expressed his desire to cultivate it personally beginning the agricultural years 19591960. Informed of such desire, Paner voluntarily surrendered the possession of the
land to petitioner, who thereafter commenced the preparation of the land for the
said agricultural year.
On August 7, 1959, respondent Paner filed a complaint dated July 31, 1959), before
the respondent Court of Agrarian Relations (CAR), Case No. 77 (Rizal '59), alleging
that he was dispossessed, for no legal or justifiable reason at all, in the cultivation of
the land, beginning said agricultural year, and prayed that he be restored in the
possession thereof and awarded the sum of P300.00 as attorney's fees. Answer was
filed and after due trial on December 11, 1959, a decision was rendered, ordering
Gregorio de Guzman to reinstate petitioner Manuel Paner in the landholding, with all
the rights accorded and obligations imposed upon said petitioner, by R. A. 1199, as
amended by R. A. 2263; to pay Paner thirty-eight (38) cavans of palay or its
equivalent in money at P10.00 per cavan or P380.00; and to pay to petitioner the
amount of P100.00 as attorney's fees. A motion for reconsideration and/or new trial
was denied. Hence, the present petition for certiorari, asking that the decision of the
lower court be set aside and the complaint dismissed.

In his brief, the petitioner alleged that the Court of Agrarian Relations erred (1) In
declaring that the tenancy relation between the respondent Paner and the petitioner
was not extinguished and/or terminated when said Paner surrendered the
possession of the landholding in question to the petitioner; (2) In declaring that
petitioner acted in bad faith and with fraudulent representation when he informed
respondent Paner that he (petitioner) was personally going to cultivate the land,
beginning the agricultural years 1959-1960; (3) In declaring that petitioner did not
personally cultivate the landholding in question, during the same period; and (4) In
awarding damages to respondent Paner
The trial court found as fully established that the petitioner did not commit an
unlawful act of dispossession, as contemplated in Section 49, R. A. 1199, the land
was voluntarily surrendered to petitioner Paner but he failed to comply with the
condition the land himself; for instead of personally work land, and performing the
labor which should devolve upon the tenant he displaced, petitioner entrusted the
major phases of farm labor to other persons, his (petitioner's) only participation in
the cultivation of the holding, consisted of the superficial task of repairing and the
dikes and ditches and that in inducing petitioner surrender the holding, herein
petitioner acted in bad faith and committed fraudulent representations
While as a general rule, the actual findings trial court should not be disturbed, We
are, however, constrained to deviate from said rule in this particular case, because
the record does not sustain with substantial evidence, the pretensions of respondent
Paner. The pertinent provision of law which governs the situation at hand, is the
following section of Act No. 1199:
SEC. 50.
Causes for the Dispossession of a Tenant. Any of the following shall
be a sufficient cause for the dispossession of a tenant of his holdings:
(a)
The bona fide intention of the landholder to cultivate the land himself
personally or through the employment of farm machinery and implements: Provided,
however, That should the landholder not cultivate the land himself or should fail to
mechanical farm implements for a period of one year after the dispossession of the
tenant, it shall be presumed that the acted in bad faith and the tenant shall have the
right to demand possession of the land and damages for any loss incurred by him
because of said dispossession: . . . .
The imputation of bad faith and fraudulent representations is premised on the fact
that when the landholding in question was plowed and harrowed, preparatory
planting, petitioner was aided by his cousins Eugenio de la Rosa and Pastor Legaspi,
and their sons, and by Aquilino Podia, a member of petitioner's household. It has,
however, been fully shown, that the working animals and agricultural implements
employed by them, the harrowing and plowing stages, belonged to the petitioner
and that during the plowing and harrowing the petitioner was within the premises,
and subsequent to the planting of the land, petitioner personally attended to the
care of the growing plants. The respondent Court stated that the petitioner's work
was confined merely to repairing and weeding the dikes and irrigation canals.

Cultivation, however, is not limited to the plowing and harrowing the land alone.
Among the various phases of farm labor provided by law, the maintenance, repair
and wedding of dikes, paddies and irrigation canals in the holding, are included (Sec.
38, R.A. No. 1199, No. 3). The findings made by the trial court that petitioner had
appointed new tenants to the landholding are not supported by competent, reliable
or preponderant evidence. Respondent Paner himself declared that said de la Rosa
and Legaspi worked in the land, but he was "not in a position to state whether they
were hired tenants or helpers of Gregorio de Guzman" (Test of Paner, Sept. 18,
1959, t.s.n. p. 16), and "did not know if they were working in the form of bayanis"
(t.s.n. p. 4, Nov. 4, 1959). And they were only seen to have worked three times. On
the other hand, De la Rosa testified that he was not a tenant of the petitioner; that
he was not paid and that if he and Legaspi ever helped in the plowing and harrowing
of the land, it was because of previous favors extended to them, and their families
by said petitioner and under the "Bayanihan" or cooperative system of farm labor.
Petitioner testified to the same effect.
The "bayanihan" is a laudible Philippine cooperative practice, specially true in rustic
areas. The members of the bayanihan are not tenants, they do not receive pay and
their work are utilized on temporary basis. The law does not prohibit the practice of
bayanihan, either on the part of a tenant or the landholder. As appropriately
commented by a well known author:
The mere fact that respondent did not do all the work himself but temporarily
utilized the services of others to help him, does not mean that he violated the
condition imposed by the Court; it would have been otherwise had the respondent
entirely entrusted the work to other persons and employed laborers on a permanent
basis. The law does not prohibit the tenant or the landowner who works the land
himself to avail occasionally of the help of the others (The Law on Agricultural
Tenancy by Judge G. S. Santos, pp. 28-29, emphasis ours).
The requirement that the landholder must work the land himself personally does not
preclude him from entrusting cultivation of the holding to another person or persons,
in case of illness or temporary incapacity, or to avail himself of the labor of the
members of his farm household or the use universal Filipino practice of exchange
labor system, commonly known as the "amuyo" or "tagnawa" in the Ilocos regions,
"palusong" or "bayanihan" to the Tagalogs and "Salibot" or "ayon-ayon" in the
Western Visayas. . . . (The Law on Agricultural Tenancy by Santos, 1959 ed., p.
108.)
Moreover, if a tenant is allowed to cultivate the land by himself or by the immediate
members of his family or immediate farm household, there can be no plausible
reason why the owner or landholder, if he cultivates the land himself, should not be
permitted to do the thing (Saclolo, et al. v. Court of Agrarian Relations, G.R. No. L13274, Jan. 30, 1960).
Because of the failure of respondent Paner to satisfactorily show that petitioner
acted in bad faith in his dealings with him, the award of damages in his favor, made
by the respondent Court, is unauthorized and constitutes a grave abuse of

discretion. Furthermore, respondent Paner did not ask for damages, and even if he
did, he failed to prove the same. Whether arising from a breach of contract or
whether the result of some provision of the law, judgment for damages suffered,
must rest upon satisfactory proof thereof.
The writ is granted, and the decision, subject of the present appeal, is reversed,
without pronouncement as to costs.
Padilla, Bautista Angelo, Labrador, Concepcion, J.B.L., Barrera, Dizon, Regala and
Makalintal, JJ., concur.
Bengzon. C.J., took no part.

Article 2052

Municipality of Gasan v. Marasigan, 63 Phil. 510

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 43486

September 30, 1936

THE MUNICIPALITY OF GASAN, plaintiff-appellee,

vs.
MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L. LUNA, defendantsappellants.
Luis Atienza Bijis for appellants.
Provincial Fiscal Noel of Marinduque for appellee.
DIAZ, J.:
This is an action brought by the municipality of Gasan of the Province of
Marinduque, against Miguel Marasigan, Angel R. Sevilla and Gonzalo L. Luna, to
recover from them the sum of P3,780, alleging that it forms a part of the license
fees which Miguel Marasigan failed to pay for the privilege granted him of gathering
whitefish spawn (semillas de bagus) in the jurisdictional waters of the plaintiff
municipality during the period from January 1, 1931, to December 31 of said year.
The Court of First Instance of Marinduque, which tried the case, rendered a decision
adverse to the defendants, sentencing them to pay jointly to the plaintiff said sum of
P3,780 with legal interest thereon from August 19, 1932, until fully paid, plus the
costs of the suit. From said judgment, the defendants appealed to this court,
attributing to the lower court the five alleged errors relied upon in their brief, as
follows:
I. The court a quo erred in holding and maintaining that, notwithstanding the fact
that resolution No. 161 of the municipal council of Gasan which gave rise to the
contract and bond, Exhibits A and B, respectively, of the complaint, has been
declared null and void by the provincial board and by the Executive Bureau, the
contract and bond in question are valid and, consequently, enforceable on the
ground that said resolution No. 161 is within or had been adopted within the powers
of the council.
II. The court a quo erred in holding that even granting that the contract Exhibit A is
not valid de jure, it is a de facto contract as to the defendants, particularly the
defendant-grantee Miguel Marasigan.

III. The court a quo erred in not absolving the defendants Angel R. Sevilla and
Gonzalo L. Luna, sureties of the defendant Miguel Marasigan, notwithstanding the
fact that resolution No. 161, by virtue of which said defendant subscribed the bond
Exhibit B of the complaint, had been declared null and void by the provincial board
and by the Executive Bureau.
IV. The court a quo erred in holding that the herein defendant Miguel Marasigan had
taken advantage of the privilege to catch or gather whitefish spawn in the
jurisdictional waters of the municipality of Gasan, during the period from January 1,
to December 31, 1931, notwithstanding the fact that counsel for the plaintiff
municipality failed to present evidence, either documentary or oral, to justify said
fact.
V. The court a quo erred in not absolving each and every one of the herein
defendants from the complaint, and in not ordering the plaintiff municipality to
return to the defendant Miguel Marasigan the sums of four hundred twenty pesos
(P420) and eight hundred forty pesos (P840) deposited with said plaintiff, with
interest thereon from the respective dates of their deposit, until their return.
The case was tried by the lower court with no other evidence than the admissions
made by the parties in the stipulation of facts mentioned in the body of the decision,
the pertinent parts of which will be discussed later. Said stipulation and the attached
papers forming a part thereof enables this court to narrate the material facts of the
case, as follows:
The plaintiff-appellee municipality, on December 9, 1930, put up at auction the
privilege of gathering whitefish spawn in its jurisdictional waters for the period of
one year from January 1, 1931. Two bidders, Graciano Napa and Miguel Marasigan,
appeared at the auction. Both attached to their respective bids the certificate of not
being behind in the payment of any tax, issued by the municipal treasurer of Gasan,
Marinduque, as required by the provisions of resolution No. 42, series of 1930, of
the council of said municipality. Graciano Napa proposed to accept the privilege by
paying P5,000 therefor, Miguel Marasigan proposed to do likewise, but by paying
only P4,200.
The council of the plaintiff-appellee municipality, in its resolution No. 161 (Exhibit 1)
of December 11, 1930 rejected Graciano Napa's bid and accepted that of the
appellant Miguel Marasigan, granting and selling to the latter the privilege put up at
auction for the sum of P4,200, payable quarterly in advance at the rate of P1,050 a
quarter (Exhibit A). To secure his compliance with the terms of the contract which
was immediately formalized by him and the plaintiff, and pursuant to the provisions
of section 8 of resolution No. 128, series of 1925, of the council of said plaintiff,
Miguel Marasigan filed the bond, Exhibit B, subscribed on December 15, 1930, by
the defendants-appellants Angel R. Sevilla and Gonzalo L. Luna, who bound
themselves in said document to pay to the plaintiff the sum of P8,400, if Miguel
Marasigan failed to deposit one-fourth of P4,200 quarterly in advance in the
municipal treasury of Gasan, in violation of the terms of the contract executed and

entered into by him and the plaintiff on December 11, 1930 (Exhibit A), for the
compliance with which they became sureties.
Before the plaintiff municipality and Miguel Marasigan entered into their contract,
and also before the latter's sureties executed the above-stated bond, Graciano Napa,
whose bid was rejected for the reason that he had not attached thereto the
certificate that he is not behind in the payment of any tax which he should have
obtained from the municipal treasurer of Lemery, his native town, forwarded a
protest (Exhibit 4) to the provincial board, which protest was later indorsed by said
provincial board to the Chief of the Executive Bureau, alleging that the plaintiff
municipality violated the provisions of section 2323 of the Administrative Code in
rejecting his bid.
The provincial board, passing upon Graciano Napa's protest and acting under the
authority which, in its opinion, was granted to it by section 2233 of the
Administrative Code, held that resolution No. 161, series of 1930, by virtue of which
the municipal council of Gasan rejected Graciano Napa's bid and accepted that of
Miguel Marasigan, notwithstanding the fact that the latter offered to pay less, was
invalid, and suggested that the privilege should be, awarded to Graciano Napa who,
in its opinion, appeared to be the highest bidder in accordance with the provisions of
sections 2323 and 2319 of the Administrative Code (Exhibit 9). The Executive
Bureau, concurring with the provincial board's points of view, declared, in turn, that
the concession made to Marasigan was illegal in view of the fact that Graciano Napa
was the highest bidder (Exhibit 13).
The plaintiff municipality, through its municipal council, exerted efforts to obtain the
reconsideration of the decisions of the provincial board of Marinduque and of the
Executive Bureau but, as these two entities maintained their decisions (Exhibits 14,
15, 16, 17 and 18), it decided, in its resolution No. 11, series of 1931 (Exhibit 19), to
award the privilege of gathering whitefish spawn within its waters to Graciano Napa,
giving him a period of six days, which was later extended to seven days, from
January 8, 1931 (Exhibit 19-A), to deposit the sum of P500, equivalent to 10 per
cent of his bid of P5,000, with the municipal treasurer of Gasan, so as to comply
with the provisions of section 8 of the conditions of the public auction at which he
was a bidder, warning him that if he failed to do so, the contract entered into by the
plaintiff, through its president, and the appellant Miguel Marasigan (Exhibit A), would
automatically take effect. Graciano Napa not only failed to make the deposit required
by the plaintiff in its two above-stated resolutions Nos. 11 and 12, series of 1931
(Exhibits 19 and 19-A), but he formally declared, through his duly authorized
representative, that he yielded the privilege granted him to Miguel Marasigan or to
any other person selected by the municipal authorities (Exhibit 20).
One day later, or on January 15, 1931, the president of the plaintiff-appellee
municipality sent the letter Exhibit 21 to Miguel Marasigan, which reads:
SIR:

By virtue of Res. No. 11, c. s., as amended by Res. No. 12, same series, and
communication of Mr. J. Zaguirre dated January 14, 1931 copy of which is hereto
attached, you are hereby advised that the contract entered into between you and
the municipality of Gasan for the lease of the bagus fishery privilege for the year
1931 becomes effective on January 14, 1931, to run until December 31, 1931.
You are hereby requested to appear before the session of the Municipal Council to
be held at the office of the undersigned tomorrow, January 16, 1931, bringing with
yourself the contract and bond executed in your favor for ratification.
You are further informed that you are given 10 days from the date hereof, within
which time you are to pay the amount of P1,050, as per tax corresponding to the
first quarter, 1931.
Prior to this, but after the adoption by the municipal council of Gazan of its
resolution No. 163 (Exhibit 7) on December 16, 1930, and two days before the
provincial board declared said council's resolutions Nos. 161 and 163 invalid, the
president of the plaintiff-appellee municipality notified the appellant Miguel
Marasigan that the contract whereby he was granted the privilege of gathering
whitefish spawn during the year 1931, upon his offer to pay P4,200 a year therefor,
was suspended and that he should consider it ineffective in the meantime in view of
the fact that the question whether he (Miguel Marasigan) or Graciano Napa was the
highest bidder still remained undecided by the provincial board of Marinduque and
by the Executive Bureau. The English translation of the letter sent by the municipal
president to Miguel Marasigan, which was written in Tagalog (Exhibit 8), reads:
SIR:
In view of the fact that the whitefish (bagus) case has not been decided or
determined by the provincial board and is still pending action to date, and in view of
the instructions given me by the representative of the Executive Bureau, Mr. Jose
Zaguirre, I beg to inform you, with due respect, that you should refrain from
carrying out and giving efficacy to the contract signed by me in the name of the
municipality, relative to the privilege of gathering whitefish in your favor, from this
date until further notice, because this case is still pending action.
Knowing the above-stated facts, let us now turn to the consideration of the alleged
errors attributed to the lower court by the appellants.
The first and third errors should be considered jointly on account of the close
relation existing between them. The determination of one depends upon that of the
other.
This court believes that there is no necessity of even discussing the first error
because the plaintiff itself accepted the conclusions and decision of the provincial
board and of the Executive Bureau, so much so that in its resolution No. 11, series
of 1931, it thereafter considered Graciano Napa as the highest bidder, going to the
extent of requiring him, as it in fact required him, to make the deposit of P500

prescribed by the conditions of the auction sale in which he had intervened, and
granting him a period of seven days to comply with said requirement (Exhibits 19
and 19-A). Furthermore, when the plaintiff received Graciano Napa's notice
informing it that he ceded the privilege just granted him to appellant Miguel
Marasigan or to any other person that it might choose, said plaintiff, through its
municipal president, required Miguel Marasigan to appear before its municipal
council to present his formerly prepared contract as well as his bond in order that
both documents might be ratified (Exhibit 21). It should be added to the foregoing
that on December 18, 1930, the plaintiff, also through its municipal president
notified appellant Marasigan that his contract should, in the meantime, be
considered ineffectual and that he should do nothing to put it in execution because
the case was still undecided by the provincial board and by the Executive Bureau
(Exhibit 8). It is clear that it may be logically inferred from these facts that the
contract regarding fishing privilege entered into between the plaintiff and appellant
Marasigan on December 11, 1930 (Exhibit A), not only was not consummated but
was cancelled. Consequently, it now appears useless and futile to discuss whether or
not resolution No. 161 (Exhibit 1) is valid and legal. In either case, it is a fact that,
said contract ceased to have life or force to bind each of the contracting parties. It
ceased to be valid from the time it was cancelled and this being so, neither the
appellant Marasigan nor his sureties or the appellants were bound to comply with
the terms of their respective contracts of fishing privilege and suretyship. This is so,
particularly with respect to the sureties-appellants, because suretyship cannot exist
without a valid obligation (art. 1824 of the Civil Code). The obligation whose
compliance by the appellant Marasigan was guaranteed by the sureties-appellants,
was exclusively that appearing in Exhibit A, which should begin on January 1, 1931,
not on the 14th of said month and year, and end on December 31st next. They
intervened in no other subsequent contract which the plaintiff and Miguel Marasigan
might have entered into on or after January 14, 1931. Guaranty is not, presume; it
must be expressed and cannot be extended beyond its specified limits (art. 1827 of
the Civil Code). Therefore, after eliminating the obligation for which said suretiesappellants desired to answer with their bond, the bond necessarily ceased and it
ceases to have effects. Consequently, said errors I and III are true and well
founded.
As to the second error it must be known that among the stipulations contained in
the stipulation of facts submitted to the court are the following:
21. That on July 20, 1931, Miguel Marasigan paid the sum of P16.20 to the
municipal treasurer of Gasan, as internal revenue tax on sales of whitefish (bagus)
spawn amounting to P1,080 during the months of April, May and June, 1931; and
that on August 22, 1931, said Miguel Marasigan presented his sales book to the
municipal treasurer of Gasan, Mr. Gregorio D. Chavez, it appearing therein that said
Miguel Marasigan, in the month of July, 1931, sold whitefish spawn amounting to
P85; in the month of August, 1931, none, and in the month of September, 1931,
none.
22. That Miguel Marasigan is he concessionaire of the privilege to gather whitefish
spawn in the jurisdictional waters of the municipality of Boac, Marinduque, during

the period from January 1, 1931, to December 31 of said year, and that during said
period of time he had paid the sales tax on the whitefish spawn in question only in
the municipality of Gasan, without having made any payment in the municipality of
Boac.
23. That defendant Miguel Marasigan, as bidder at the auction of December 9, 1930,
deposited in the municipal treasury of Gasan the sum of P420, equivalent to 10 per
cent of his bid at said auction, and that said sum has not yet been returned to him
to date.
24. That on June 29, 1931, said Miguel Marasigan delivered another sum of P840 to
the municipal treasurer of Gasan, making the total amount delivered by him to said
municipal treasurer P1,260, the corresponding receipt having been issued to Miguel
Marasigan to that effect.
The facts resulting from the stipulations in question warrant and justify the inference
that the appellant Miguel Marasigan practically enjoyed the privilege of gathering
whitefish spawn in the jurisdictional waters of the municipality of Gasan, under the
terms of the contract executed by him on December 11, 1930, but which was
cancelled later by virtue of Graciano Napa's protest, at least from the month of April
to the month of July, 1931, inclusive. If this were not true, he would not have paid,
as he spontaneously paid to the municipal treasurer of Gasan, the following sums:
P840 on June 29, 1931, and P16.20 on July 20 of said year, nor presented, as he in
fact presented to said official for inspection, his sales book wherein it appears that
his sales of whitefish spawn during the month of July of said year amounted to P85.
The stipulation of facts, however, is silent as to whether or not he enjoyed the
privilege in question during the rest of the year. On the contrary, it states he sold no
whitefish spawn in August or September.
The excuse now offered by appellant Marasigan in his brief that the above-stated
amounts were on account of license fees or taxes on the privilege of gathering
whitefish spawn in the jurisdictional waters of Boac, obtained by him from said
municipality, is not supported by the evidence. If the payments made by him as he
claims them to be, he would have so stated in the stipulations of facts. Not having
done so and, furthermore, the practice generally observed being to pay an obligation
in the municipality where the payment is due, the only conclusion possible is that
said appellant made all such payments on account of the-tacit contract entered into
by him and the plaintiff after he had received the letter of January 15, 1931 (Exhibit
21), sent to him by said plaintiff through its municipal president. This conclusion is
all the more logical because appellant Marasigan insisted in his answer, and still
continues to insist in his brief, that the plaintiff is obliged to refund to him the
amount of P1,260 which he claims to have paid to it, and which is no other than the
amount of the two sums of P420 and P840 stated in the last two paragraphs of the
abovestated stipulation of facts. If it were really true, as said appellant contends,
that the sum of P840 was paid by him on account of his contract for privilege of
gathering whitefish spawn, executed in his favor by the municipality of Boac, he
would not have insisted in his answer, nor would he now insist in his brief, that said
sum be refunded to him, because in the absence of evidence to the contrary, it must

be presumed that it was transmitted by the municipal treasurer of Gasan to that of

Boac, inasmuch as accepting his contention, he was obliged to pay something to the
latter municipality by virtue of his alleged contract with it.
For the foregoing reasons, the conclusion of this court with respect to the second
error attributed to the lower court by appellant Marasigan is that said error is
without merit. The truth is that between him and the plaintiff, there was a tacit
contract for the privilege of gathering whitefish spawn in he jurisdictional waters of
the municipality of Gasan, based upon Exhibit A but without the intervention of the
sureties-appellants, for the above-stated period, or from April to July, 1931,
inclusive, which is equivalent to one and one-third quarter. Said contract was one
which, by its nature, need not be in writing (sec. 335 of Act No. 190); but it is
binding because it has all the essential requisites of a valid contract (art. 1278 of the
Civil Code).
The fourth error is practically disposed of by the same reasons stated in passing
upon the second error.
As to the fifth error, it must be stated that appellant Marasigan really deposited in
the municipal treasury of Gasan, as stated in paragraph 23 of the stipulation of facts,
the sum of P420 on account of his cancelled original contract (Exhibit A), and that
said deposit has not yet been returned to him. Therefore, he is entitled to be
credited with said sum.
Summarizing all that has been stated heretofore, this court holds that appellant
Miguel Marasigan owes and is bound to pay to the plaintiff municipality the proceeds
of one and one-third quarter, for the privilege of gathering whitefish spawn enjoyed
by him in 1931, at the rate of P4,200 a year or P1,400 (P1,050 for one quarter and
P350 for one-third of a quarter); but he is, in turn, entitled to be credited with the
sum of P420 deposited by him on December 9, 1930, and P840 paid by him on June
29, 1931, or the total amount of P1,260. In other words, appellant Marasigan is
bound to pay the sum of P140 to the plaintiff.
In view of the foregoing considerations, this court absolves the defendantsappellants Angel R. Sevilla and Gonzalo L. Luna from the complaint and orders the
defendant-appellant Miguel Marasigan to pay the sum of P140 to the plaintiff
municipality.
It is considered unnecessary to expressly mention appellant Miguel Marasigan's
counterclaim because, as may be seen, he is credited in this judgment with the sum
of P1,260 which is all that he claims therein, without special pronouncement as to
costs. So ordered.
Avancea, C. J., Villa-Real, Abad Santos, Imperial, and Laurel, JJ., concur.

Article 2053

Smith Bell v. PNB, 42 Phil. 733

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 16482

February 1, 1922

SMITH, BELL & COMPANY, LTD., plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellee.
Ross & Lawrence and Ewald E. Selph for appellant.
Roman J. Lacson for appellee.
STREET, J.:
This action was brought by Messrs. Smith, Bell & Co., Ltd., to recover a sum of
money of the defendant, the Philippine National Bank, as damages for its failure to
accept delivery of certain machinery which had been ordered from the plaintiff by
one F.M. Harden, and for the purchase price of which the bank had obligated itself in
the manner stated below. After the hearing the trial judge absolved the defendant,
and the plaintiff appealed.
It appears that in the month of April, 1918, one Fred M. Harden, being desirous of
obtaining eight expellers adopted to the extraction of coconut oil, applied to Smith,
expellers through this house. By the contract signed for this purpose between said
Harden and Smith, Bell & Co., on April 25, 1918, the latter "sold" to Harden eight (8)
Anderson expellers, end-drive, latest model, for the price of P80,000, to be paid on
delivery. It was understood that these expellers would be manufactured in the
United States; and it was stipulated that shipment would be made from the United
States in the month of February or March of the ensuing year.
In order to assure the prompt payment of the price upon delivery, an arrangement
was made between Harden and the Philippine National Bank whereby the latter
bound itself to Smith, Bell & Co. for the payment of the contract price, according to
the terms of the following letter dated April 27, 1918, which was addressed by the
bank to the latter firm:
Messrs. SMITH, BELL & CO.,
Manila, P.I.
GENTLEMEN: In connection with the 8 expellers purchased by Mr. F.M. Harden,
amounting to P80,000 please be advised that this institution will pay the above

amount upon delivery of the expellers to us, upon condition that these are new
Anderson expellers and are laid down in
Manila in first class working order.
Yours very truly,
J. ELMER DELANEY,
Acting President.
Shortly after the contract for the purchase of these expellers had been thus made,
and on or about May 9, 1918, Harden appeared in the office of Smith, Bell & Co. and
requested them to change the order for the expellers from "end-drive" to "sidedrive;" and in obedience to this instruction, the house cabled to its agent in New
York to change the order accordingly, which was done. This fact is in our opinion
clearly established by the concurring testimony of J. H. Schmidt, plaintiff's sales
manager, and one J. C. Cowper, who accompanied Harden on the mission to get the
order changed. In addition to this it appears that the side-drive expeller represents
an improvement over the end-drive and is of a newer type; and upon the occasion
mentioned, Harden exhibited to the manager of Messrs. Smith, Bell & Co., a
catalogue from the Anderson factory showing this fact, as explanatory of his change
in the order.
On July 2, 1919, Smith, Bell & Co. informed both Harden and the bank that the
expellers had arrived. Shortly thereafter Harden, having examined the machinery in
the plaintiff's bodega, advised the bank that the expellers were not as ordered. Upon
this, the bank naturally refused to accept and pay for the machinery, and the
plaintiff disposed of them to the best advantage in the Manila market at a price
which was below the price at which Harden had agreed to take them.
The ground upon which the defense is chiefly rested is that the expellers tendered
by the plaintiff were "side-drive" instead of "end-drive" expellers, and in support of
this contention Harden was produced by the defendant as a witness, and he denied
that the order for expellers had been changed upon his instructions. As we have
already stated, this contention is untenable; and we do not hesitate to find upon the
proof before us that the order was changed at Harden's request. For the rest, it is
shown that the expellers tendered by the plaintiff were new Anderson expellers, in
all respect in first-class working order.
In the light of these facts the right of the plaintiff to recover is clear. The contract by
which the bank obligated itself is both in form and effect an independent
undertaking on the part of the bank directly to the plaintiff; and inasmuch as the
plaintiff had compiled, or offered to comply, with the terms of said contract, the
bank is bound by its promise to pay the purchase price. The consideration for this
promise is to be found in the credit extended to Harden by the plaintiff and in the
fact that the plaintiff, relying upon the bank's promise, has gone to the expense of
bringing to these Islands the expellers which Harden had ordered.

It is undeniable that the contract sued on had its origin and explanation in the
contract between Harden and the plaintiff, and the bank of course obligated itself
solely for the purpose of assuring the payment of the purchase price of the expellers
to the plaintiff. But this does not make the bank subsidiary liable as regards the
contract which is the subject of this suit. Its obligation to the plaintiff is direct and
independent. Moreover, the debt must be considered a liquidated debt, in the sense
intended in article 1825 of the Civil Code; and the action is now maintainable by the
plaintiff directly against the bank without regard to the position of Harden.
At this point the thought may possibly suggested itself that if the view above
indicated is correct, and the bank is to be considered strictly in the light of an
independent promisor, a consequence would be that Harden had no authority to
change the order from end-drive to side-drive expellers; in other words, that the
bank should be held to be obligated according to the terms of the order as it stood
when the bank entered into the undertaking which is the subject of the suit. Having
regard, however, to the situation as all parties understood it, we are of opinion that
the act of Harden in changing the order could not affect the liability of the defendant
bank, especially since the specification in the bank's letter calls for "new" Anderson
expellers and the change made was rather in furtherance of this specification than
prejudicial to it. The real purpose of the bank, as all parties were well aware, was to
supply its credit to enable Harden to obtain the expellers ordered by himself, and for
his purpose, and it would tend to frustrate the intention of the parties to hold that
Harden had no authority to change the order to the extent stated.
We observe that in the second amended complaint of March 8, 1920, which was
the first complaint in which the plaintiff signified his election to claim damages for
breach of contract the damages are alleged to have been in the sum of
P26,339.55, upon which it is asked that interest be allowed at the legal rate from the
date of this complaint. Upon examining the several items which go to compose the
damages, as indicated in the statement, Exhibit D, prepared by the plaintiff's
department of accounts, we consider the following to be legitimate charges, namely,
first, the difference between the contract price and the amount realized from the
sale of the expellers, P22,400; secondly, various charges for storage, insurance,
etc., while the machinery remained in the plaintiff's hands after it should have been
delivered to the defendant, P665.34; and, thirdly, expenses actually paid out by
the plaintiff in moving the expellers, and for collie hire, P640. In the itemized
statement of damages submitted by the plaintiff, interest has been compounded
monthly at 8 per cent, but in the absence of express stipulation this cannot be
allowed; and we are the more disposed to eliminate this charge for interest, for the
reason that the plaintiff's sales manager has effect admitted that the terms imposed
by the plaintiff on Harden were severe.
Judgment will be reversed, and the plaintiff will recover of the defendant the sum of
twenty-three thousand seven hundred five pesos and thirty-four centavos
(P23,705.34), with legal interest from March 8, 1920. No special pronouncement will
be made as to costs of either instances. So ordered.
Johnson, Araullo, Avancea, Villamor, and Johns, JJ., concur.

Wise & Co., v. Kelly, 37 Phil. 696

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-11073

February 21, 1918

WISE & CO. (Ltd.), plaintiff-appellant,

vs.
JAMES KELLY and MARIANO LIM, defendants-appellees.
Lawrence, Ross and Block for appellant.
Cosme Ferrer for appellees.
FISHER, J.:
This action was brought in the Court of First Instance of Manila against the appellee,
Mariano Lim, and one James Kelly, the former as surety and the latter as principal,
to recover the amount of a promissory note.
The note upon which the action was brought is in the following terms:
Be it known that we guarantee unto the firm of Wise and Co. (Ltd.) the payment of
the sum of thirteen thousand seven hundred and forty-nine pesos and nine centavos
(P13,749.09) which James Kelly, a merchant, owes to the said firm of Wise and Co.
(Ltd.) at the end of each month all sums which he may receive from the sale of said
goods and merchandise, and that in the contrary event we, the sureties, undertake
to pay the firm of Wise and Co. (Ltd.) such sums as Mr. James Kelly may fail to turn
in as above stated.
In witness whereof we have signed this instrument, Manila, P. I., December 12,
1912.
(Sgd.) JAMES KELLY.
(Sgd.) MARIANO LIM.
In his answer to the complaint the appellee, Mariano Lim, interposed, among others,
the defense that the obligation was conditional as to him, and that the fact
constituting the condition had occurred.
The trial judge in his decision said, concerning the construction which in his opinion
should be placed upon note in suit:

It will be seen that the said document obliges Lim to respond for the payment to the
firm of Wise and Co. (Ltd.) of the sum of P13,749.09 which the principal obligor
Kelly owes to it for goods and merchandise received and purchased prior thereto, to
be sold in his establishment, to the extent that Kelly fails to comply with the
condition of paying in at the end of each month all sums which he may collect from
the sale of such goods and merchandise, it appearing that he has only undertaken to
pay such sums as have been received from the sale of merchandise by the principal
obligor which have not been paid in by the latter.
Upon the evidence submitted the court below held that plaintiff had not proven that
the principal obligor Kelly had failed to turn over any money whatever received from
the sale of the merchandise for which the note was given, and establishes the
conclusion that Lim had therefore incurred no liability, and that plaintiff has no cause
of action against him.
In accordance with this conclusion, judgment was rendered against the principal
debtor Kelly for the full amount of the note in suit, with interest, and the action was
dismissed as to Lim. From this judgment plaintiff appealed and has assigned as error
the conclusion of the trial court with regard to the conditional nature of the
obligation assumed by Lim.
Upon an examination of the document in question it becomes evident that Lim, as
surety, did not undertake absolutely to pay the sum of P13,749.09, in which the
principal debtor admits himself to be indebted to the creditor firm. His agreement
was limited to respond for the performance by Kelly of one of the accessory pacts of
the contract evidenced by that document, namely, the undertaking to deliver to the
plaintiff firm the total proceeds of the sales of the merchandise for the invoice value
of which the promissory note was given.
It not having been stipulated that the merchandise was to be sold at a price not less
than cost, it follows that even were Kelly to pay in the total amount derived from its
sale, part of his obligation to the sellers might remain undischarged. He,
unquestionably, is liable for the payment of the note whatever may be the price at
which the merchandise might be sold; but this obligation is not extended to Lim. It
having been terminated by the court, in its findings, which we regard as fully
supported by the evidence of record, that plaintiff has not proved that it has the
merchandise mentioned in the note, it follows that there is no evidence of the
existence of the condition the acquisitions of the right on the part of the creditor
depends upon the occurrence of the event constituting the condition. (Civil Code,
art. 1114.)
For the reason stated, we affirm the judgment appealed with costs of this instance
to the appellant. So ordered.
Arellano, C.J., Torres, Johnson, Carson, Araullo, Street, Malcolm, and Avancea, JJ.,
concur.

RCBC v. Arro, 115 SCRA 777

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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 dated
October 6, 1978 and November 7, 1978 in Civil Case No. 11-154 of
the Court of First Instance of Davao, which granted the motion filed
by private respondent to dismiss the complaint of petitioner for a
sum of money, on the ground that the complaint states no cause of
action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978
mailed a manifestation and motion requesting the special civil
action for certiorari be treated as a petition for review. 1 Said
manifestation and 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 Agricultural
Industries Corporation (referred to therein as Borrower, and as
Daicor in this decision), and/or induce the bank at any time or from
time to time 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 make any 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 the Borrower is or may become liable, provided that the
liability shall not exceed at any one time the aggregate principal
sum of P100,000.00.
On April 29, 1977 a promissory note 4 in the amount of
P100,000.00 was 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 repeated demands; hence, on June 30, 1978,
petitioner filed a complaint for a sum of money against Daicor,
Enrique Go, Sr. and Residoro Chua. A motion to dismiss dated
September 23, 1978 was filed by respondent Residoro 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 not be held liable under
the promissory note because it was only Enrique Go, Sr. who
signed the same in behalf of Daicor and in his own personal
capacity.
In an opposition dated September 26, 1978 6 petitioner alleged
that by virtue of the execution of the comprehensive surety
agreement, private respondent is liable because said agreement
covers not merely the promissory note subject of the complaint, but
is continuing; and it encompasses every other indebtedness the
Borrower 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
filed a motion for reconsideration dated October 12, 1978 and on
November 7, 1978 respondent court issued an order denying the
said motion. 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 the
instant case, said comprehensive surety agreement having been
signed by Enrique Go, Sr. and private respondent, binding
themselves as solidary debtors of said corporation not only to
existing obligations but to future ones. Respondent court said that
corollary to that agreement must be another instrument evidencing
the obligation in a form of a promissory note or any other evidence
of indebtedness without which the said agreement serves no
purpose; that since the promissory notes, which is primarily the
basis of the cause of action of petitioner, is not signed by private
respondent, the latter can not be liable thereon.

Contesting the aforecited decision and order of respondent judge,

the present petition was filed before this Court assigning the
following as errors committed by respondent court:
1. That the respondent court erred in dismissing the complaint
against Chua simply on the reasons that 'Chua is not a signatory to
the promissory note" of April 29, 1977, or that Chua could not be
held liable on the note under the provisions of the comprehensive
surety agreement of October 29, 1976; and/or
2. That the respondent court erred in interpreting the provisions of
the Comprehensive Surety Agreement towards the conclusion that
respondent Chua is not liable on the promissory note because said
note is not conformable to the Comprehensive Surety Agreement;
and/or
3. That the respondent court erred in ordering that there is no
cause of action against respondent Chua in the petitioner's
complaint.
The main issue involved in this case is whether private respondent
is liable 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 private respondent 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.,
President and General Manager, respectively of Daicor, on October
19, 1976 to cover existing as well as future obligations which Daicor
may incur with the petitioner bank, subject only to the proviso that
their liability shall 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 in
your discretion, at any time or from time to time hereafter, to make
loans or advances or to extend credit in any other manner to, or at
he request or for the account of the Borrower, either with or
without security, 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 the Borrower is or may become liable as maker,
endorser, acceptor, or otherwise) the undersigned agrees to

guarantee, and does hereby guarantee in joint and several

capacity, the punctual payment at maturity to you of any and all
such instruments, loans, advances, credits and/or other obligations
herein before referred to, and also any and all other indebtedness
of every kind which is now or may hereafter become due or owing
to you by the Borrower, together with any and all expenses which
may be incurred by you in collecting an such instruments or other
indebtedness or obligations hereinbefore referred to ..., provided,
however, that the liability of the undersigned shag not exceed at
any one time the aggregate principal sum of P100,000.00 ...
The agreement was executed obviously to induce petitioner to
grant any application for a loan Daicor may desire to obtain from
petitioner bank. The guaranty is a continuing one which shall
remain in full force and effect until the bank is notified of its
termination.
This is a continuing guaranty and shall remain in fun force and
effect until written notice shall have been received by you that it
has been revoked by the undersigned, ... 9
At the time the loan of P100,000.00 was obtained from petitioner
by Daicor, for the purpose of having an additional capital for buying
and selling coco-shell charcoal and importation of activated carbon,
10 the comprehensive surety agreement was admittedly in full force
and effect. The loan was, therefore, covered by the said
agreement, and private respondent, even if he did not sign the
promisory note, is liable by virtue of the surety agreement. The
only condition that would make him liable thereunder is that the
Borrower "is or may become liable as maker, endorser, acceptor or
otherwise". There is no doubt that Daicor is liable on the
promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr.
and private respondent, is an accessory obligation, it being
dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan was the surety
agreement whereby Go and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at maturity. By terms
that are unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil
Code. Thus
Article 2053. A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no claim

against the guarantor until the debt is liquidated. A conditional

obligation may also be secured.
In view of the foregoing, the decision (which should have been a
mere "order"), dismissing the complaint is reversed and set side.
The case is remanded to the court of origin with instructions to set
aside the motion to dismiss, and to require defendant Residoro
Chua to answer the complaint after which the case shall proceed as
provided by the Rules of Court. No costs.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, Abad
Santos and Escolin, JJ., concur.

Footnotes
1 p. 45, Rollo.
2 p. 54, Rollo.
3 p. 67, Rollo.
4 p. 68, Rollo.
5 Annex B, Petition, p. 17, Rollo.
6 Annex C, Petition, p. 19, Rollo.
7 Annex E, Petition, p. 23, Rollo.
8 Annex H, Petition, p. 39, Rollo.
9 Par. 6, Comprehensive Surety Agreement, p. 67, Rollo.
10 p. 68, Rollo.

Article 2055

SOCONY v. Cho Siong, 52 Phil. 612

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-29588

December 29, 1928

STANDARD OIL CO. OF NEW YORK, plaintiff-appellant,

vs.
CHO SIONG, ET AL., defendants-appellees.
-----------------------------------G.R. No. L-29753

December 29, 1928

ONG GUAN CAN, plaintiff-appellant,

vs.
STANDARD OIL CO. OF NEW YORK, defendant-appellee.
Powell and Hill for appellant in case No. 29588, and for appellee in case No. 29753.
Padilla, Trenas and Magalona for appellees in case No. 29588 and for appellant in
case No. 29753.

AVANCEA, C. J.:
These two case, 29588 and 29753 were jointly prosecuted in the court below and
only one judgment was rendered in both.
In case 29588, the plaintiff, Standard Oil Co. of New York, sued the defendants, Cho
Siong and Ong Guan Can, for the amount of P2,197.42, with interest, plus P750 as
attorney's fees. The trial court ordered the defendants Cho Siong and Ong Guan Can
to pay the plaintiff the amount of P64.46, with legal interest from the date when the
complaint was filed until full payment, plus P200 by way of attorney's fees; and
defendant Cho Siong to pay the plaintiff the sum of P2,132.96, with legal interest
thereon from the date when the complaint was filed until fully paid, plus P500 as
attorney's fees.1awphi1.net
On January 27, 1926, the plaintiff and defendant Cho Siong entered into a contract
whereby Cho Siong obligated himself to sell as agent, plaintiff's petroleum products.
He guaranteed the fulfilment of his obligation by giving a personal bond in the sum

of P3,000, subscribed by Ong Guan Can, and with the sum of P1,000 in cash which
he delivered to the plaintiff, with the right to apply it to the payment of any amount
in which he might become indebted. Cho Siong also bound himself to pay such
attorney's fees, costs, and other expenses, as might be occasioned the plaintiff
should it be under the necessity of filing suit for the recovery of any amount to
which it might be entitled pursuant to this contract in a sum equal to 10 per cent of
the amount owed.
By virtue of this contract, Cho Siong received from the plaintiff petroleum to the
value of P14,136.79, and made good to said plaintiff the total amount of
P14,027.33, thus leaving a balance of P64.46 in favor of the plaintiff and against the
defendant Cho Siong.
But it appears that on the same day (January 27, 1926), when the plaintiff and
defendant Cho Siong entered into the contract to agency and when the other
defendant, Ong Guan Can subscribed the P3,000 bond, the defendant Cho Siong
signed an instrument in favor of the plaintiff in which he assumed responsibility for
all the accounts that might be owing to the plaintiff by the former agent, Tong Kuan,
and for all goods the latter might have in his possession at the time when the
agency was transferred to Cho Siong. According to the plaintiff's evidence, the
amount then owed by Tong Kuan was P3,132.96. Adding P64.46 to this amount, we
have the total debt of P3,197.42. Deducting from this the P1,000 in cash which Cho
Siong deposited with the plaintiff to be applied upon his liabilities, it leaves a debit
balance of P2,197.42 which is the amount claimed in the complaint.
According to the above, excluding the debt of the former agent Tong Kuan, the only
balance against the defendant Cho Siong on his own contract of agency with the
plaintiff is the sum of P64.46. Since the plaintiff has the P1,000 belonging to the
defendant Cho Siong, which may be applied to the payment of the sums owed by
the latter, it follows that, as to Cho Siong's agency, he has incurred no liabiliy, for
out of the P1,000 deposited with the plaintiff he still has P935.54 in his favor.
Consequently, Ong Guan Can, as a surety for those debts which Cho Siong might
incur upon the contract of agency, does not answer for anything, the principal not
having incurred any liability. It is plain under the terms of the bond signed by Ong
Guan Can that he did not answer for Cho Siong, save for the latter's act by virtue of
the contract of agency. He cannot be held liable for the debt of agent Tong Kuan
which Cho Siong assumed by virtue of another contract of which said Ong Guan Can
was not even aware. A contract of suretyship is to be strictly interpreted and is not
to be extended beyond its terms.
The amount of P750 for attorney's fees and court costs, which Cho Siong bound
himself to pay to the plaintiff, was agreed upon in the contract of agency, and as
Cho Siong did not incur any liability with respect to this contract he cannot be
ordered to pay this sum.
In the instrument by which Cho Siong assumed the debt of the former agent, Tong
Kuan, no stipulation was made as to attorney's fees and as it is on this contract that

Cho Siong failed to perform his obligaion it is also clear that he is not liable for any
amount as attorney's fees.
In view of the foregoing, the appealed judgment is modified as to case No. 29588
and the defendant Cho Siong is ordered to pay the plaintiff the amount of P2,197.42
only, the other defendant Ong Guan Can being relieved from all liability.
In case No. 29753 Ong Guan Can claims the sum of P15,000 from the Standard Oil
Co., of New York. In the former case No. 29588, the Standard Oil Co., of New York
secured a preliminary attachmet against Ong Guan Can, which was levied on some
of his lands. This attachment consisted simply in the annotation thereof in the
transfer certificate of tile entered on November 17, 1927, which attachment was
dissolved and the annotation cancelled on the 19th of the same month. The
attachment, therefore, only lasted two days. The amount of P15,000 which Ong
Guan Can claims of the Standard Oil Co., of New York is the amount of damages he
alleges were, caused him by this attachment.
The trial court finding that no damage proven to have been suffered by Ong Guan
Can on account of said attachment, absolved the Standard Oil Co., of New York from
this claim in case No. 29753.
Without considering the other question raised in this case, and accepting the trial
court's conclusions that no damage was occasioned Ong Guan Can by said
attachment which only lasted two days, the judgment appealed from is affirmed,
with costs against the appellant. So ordered.
Johnson, Street, Malcolm, Villamor, Ostrand, Romualdez and Villa-Real, JJ., concur.

Plaridel v. Galang Machinery, 100 Phil. 679

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21520

December 11, 1967

PLARIDEL SURETY and INSURANCE COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Gil R. Carlos and Associates for petitioner.
Office of the Solicitor General for respondent.
BENGZON, J.P., J.:
Petitioner Plaridel Surety & Insurance Co., is a domestic corporation engaged in the
bonding business. On November 9, 1950, petitioner, as surety, and Constancio San
Jose, as principal, solidarily executed a performance bond in the penal sum of
P30,600.00 in favor of the P. L. Galang Machinery Co., Inc., to secure the
performance of San Jose's contractual obligation to produce and supply logs to the
latter.
To afford itself adequate protection against loss or damage on the performance
bond, petitioner required San Jose and one Ramon Cuervo to execute an indemnity
agreement obligating themselves, solidarily, to indemnify petitioner for whatever
liability it may incur by reason of said performance bond. Accordingly, San Jose
constituted a chattel mortgage on logging machineries and other movables in
petitioner's favor1 while Ramon Cuervo executed a real estate mortgage.2
San Jose later failed to deliver the logs to Galang Machinery3 and the latter sued on
the performance bond. On October 1, 1952, the Court of First Instance adjudged
San Jose and petitioner liable; it also directed San Jose and Cuervo to reimburse
petitioner for whatever amount it would pay Galang Machinery. The Court of
Appeals, on June 17, 1955, affirmed the judgment of the lower court. The same
judgment was likewise affirmed by this Court4 on January 11, 1957 except for a
slight modification apropos the award of attorney's fees.
On February 19 and March 20, 1957, petitioner effected payment in favor of Galang
Machinery in the total sum of P44,490.00 pursuant to the final decision.

In its income tax return for the year 1957, petitioner claimed the said amount of
P44,490.00 as deductible loss from its gross income and, accordingly, paid the
amount of P136.00 as its income tax for 1957.
The Commissioner of Internal Revenue disallowed the claimed deduction of
P44,490.00 and assessed against petitioner the sum of P8,898.00, plus interest, as
deficiency income tax for the year 1957. Petitioner filed its protest which was
denied. Whereupon, appeal was taken to the Tax Court, petitioner insisting that the
P44,490.00 which it paid to Galang Machinery was a deductible loss.
The Tax Court dismissed the appeal, ruling that petitioner was duly compensated for
otherwise than by insurance thru the mortgages in its favor executed by San Jose
and Cuervo and it had not yet exhausted all its available remedies, especially as
against Cuervo, to minimize its loss. When its motion to reconsider was denied,
petitioner elevated the present appeal.
Of the sum of P44,490.00, the amount of P30,600.00 which is the principal sum
stipulated in the performance bond is being claimed as loss deduction under Sec.
30 (d) (2) of the Tax Code and P10,000.00 which is the interest that had accrued
on the principal sum is now being claimed as interest deduction under Sec. 30 (b)
(1).
Loss is deductible only in the taxable year it actually happens or is sustained.
However, if it is compensable by insurance or otherwise, deduction for the loss
suffered is postponed to a subsequent year, which, to be precise, is that year in
which it appears that no compensation at all can be had, or that there is a remaining
or net loss, i.e., no full compensation.5
There is no question that the year in which the petitioner Insurance Co. effected
payment to Galang Machinery pursuant to a final decision occurred in 1957.
However, under the same court decision, San Jose and Cuervo were obligated to
reimburse petitioner for whatever payments it would make to Galang Machinery.
Clearly, petitioner's loss is compensable otherwise (than by insurance).itc-alf It
should follow, then, that the loss deduction can not be claimed in 1957.
Now, petitioner's submission is that its case is an exception. Citing Cu Unjieng Sons,
Inc. v. Board of Tax Appeals,6 and American cases also, petitioner argues that even
if there is a right to compensation by insurance or otherwise, the deduction can be
taken in the year of actual loss where the possibility of recovery is remote. The
pronouncement, however to this effect in the Cu Unjieng case is not as authoritative
as petitioner would have it since it was there found that the taxpayer had no legal
right to compensation either by insurance or otherwise.7 And the American cases
cited8 are not in point. None of them involved a taxpayer who had, as in the present
case, obtained a final judgment against third persons for reimbursement of
payments made. In those cases, there was either no legally enforceable right at all
or such claimed right was still to be, or being, litigated.

On the other hand, the rule is that loss deduction will be denied if there is a
measurable right to compensation for the loss, with ultimate collection reasonably
clear. So where there is reasonable ground for reimbursement, the taxpayer must
seek his redress and may not secure a loss deduction until he establishes that no
recovery may be had.9 In other words, as the Tax Court put it, the taxpayer
(petitioner) must exhaust his remedies first to recover or reduce his loss.
It is on record that petitioner had not exhausted its remedies, especially against
Ramon Cuervo who was solidarily liable with San Jose for reimbursement to it. Upon
being prodded by the Tax Court to go after Cuervo, Hermogenes Dimaguiba,
president of petitioner corporation, said that they would10 but no evidence was
submitted that anything was really done on the matter. Moreover, petitioner's
evidence on remote possibility of recovery is fatally wanting. Its right to
reimbursement is not only secured by the mortgages executed by San Jose and
Cuervo but also by a final and executory judgment in the civil case itself. Thus, other
properties of San Jose and Cuervo were subject to levy and execution. But no writ of
execution, satisfied or unsatisfied, was ever submitted. Neither has it been
established that Cuervo was insolvent. The only evidence on record on the point is
Dimaguiba's testimony that he does not really know if Cuervo has other
properties.11 This is not substantial proof of insolvency.itc-alf Thus, it was too
premature for petitioner to claim a loss deduction.
But assuming that there was no reasonable expectation of recovery, still no loss
deduction can be had. Sec. 30 (d) (2) of the Tax Code requires a charge-off as one
of the conditions for loss deduction:
In the case of a corporation, all losses actually sustained and charged-off within the
taxable year and not compensated for by insurance or otherwise. (Emphasis
supplied)
Mertens12 states only four (4) requisites because the United States Internal
Revenue Code of 193913 has no charge-off requirement.itc-alf Sec. 23(f) thereof
provides merely:
In the case of a corporation, losses sustained during the taxable year and not
compensated for by insurance or otherwise.
Petitioner, who had the burden of proof14 failed to adduce evidence that there was
a charge-off in connection with the P44,490.00or P30,600.00 which it paid to
Galang Machinery.
In connection with the claimed interest deduction of P10,000.00, the Solicitor
General correctly points out that this question was never raised before the Tax
Court. Petitioner, thru counsel, had admitted before said court15 and in the
memorandum it filed16 that the only issue in the case was whether the entire
P44,490.00 paid by it was or was not a deductible loss under Sec. 30 (d) (2) of the
Tax Code. Even in petitioner's return, the P44,490.00 was claimed wholly as losses
on its bond.17 The alleged interest deduction not having been properly litigated as

an issue before the Tax Court, it is now too late to raise and assert it before this
Court.
WHEREFORE, the appealed decision is, as it is hereby, affirmed. Costs against
petitioner Plaridel Surety & Insurance Co. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles
and Fernando, JJ., concur.
Footnotes
1 Exh. K, C.T.A. Records, pp. 71-72.
2 Exh. L, C.T.A. Records, pp. 74-76.
3 Short for P.L. Galang Machinery Co., Inc.
4 Plaridel Surety & insurance Co., Inc. v. P.L. Galang Machinery Co., Inc., 100 Phil.
679.
5 See: Sec. 30(d)(2), Int. Rev. Code; Rev. Regulations No 2, Secs. 94 & 96; Cu
Unjieng Sons, Inc. v. Board of Tax Appeals, 100 Phil. 1.
6 Supra, Note 5.
7 100 Phil. 1, at 15-19, 23.
8 Petitioner's brief, p. 18.
9 5 Mertens (1966 ed.), Chap. 28, pp. 19, 21.
10 Session of Sept. 18, 1962, T.S.N., pp. 49-51.
11 Ibid., T.S.N., pp. 52-53.
12 5 Mertens (1956 ed.), Chap. 28, p. 9.
13 26 U. S. C. A. 10.
14 5 Mertens (1956 ed.), Chap. 28, pp. 7-8.
15 Session of Sept. 17, 1962, T.S.N., p. 2.
16 C.T.A. Records, p. 83.
17 See B.I.R Records, p. 5, 8, 14-16, 20, 22.

Republic v. Palafox Lumber, 43 SCRA 365

Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-26473

February 29, 1972

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
PAL-FOX LUMBER CO., INC. AND FAR EASTERN SURETY & INSURANCE COMPANY,
INC., defendants, FAR EASTERN SURETY & INSURANCE CO., INC., defendantappellant; FAR EASTERN SURETY & INSURANCE CO., INC., third-party plaintiffappellant, vs. GASPAR PALANCA & JOSEPH LEE, third-party defendants.

MAKALINTAL, J.:p
Claiming that the Pal-Fox Lumber Co., Inc. was indebted to the Bureau of Internal
Revenue for forest charges and surcharges amounting to P11,851.56, and that the
Far Eastern Surety & Insurance Co., Inc. was jointly and severally liable with the
lumber company for the payment of said forest charges up to P5,000.00 on account
of a forestry bond which the surety company executed in favor of the plaintiff on
November 27, 1946, guaranteeing faithful compliance by the principal with all the
provisions of the Forest Law and National Internal Revenue Code, as well as the
"prompt and complete payment of all charges lawfully accruing on the forest
products cut or gathered by (Pal-Fox Lumber Co., Inc.), and of all fines and
penalties imposed in accordance with the provisions of law," the plaintiff commenced
suit before the Court of First Instance of Manila (Civil Case No. 32386) seeking to
recover, jointly and severally, from Pal-Fox Lumber Co., Inc. and the Far Eastern
Surety & Insurance Co., Inc. the sum of P5,000.00 plus interest from the filing of the
complaint, and from the Pal-Fox Lumber Co., Inc. alone the balance of P6,841.56
plus legal interest.
The Far Eastern Surety & Insurance Co., Inc. filed its answer with a cross-claim
against its co-defendant Pal-Fox Lumber Co., Inc. which, due to the latter's failure to
file an answer despite valid service of summons, was subsequently declared in
default. With leave of court, the surety company later filed a third-party complaint
against certain persons based on a separate indemnity agreement wherein said
third-party defendants appear to have bound themselves to indemnify the surety

company for all damages it may suffer by reason of the execution of the forestry
bond. In time, these third-party defendants were similarly declared in default.
After trial, the court a quo rendered a decision the dispositive portion of which
reads: .
WHEREFORE, judgment is hereby rendered ordering defendants to pay to plaintiff,
jointly and severally, the sum of P5,000.00, with legal interest thereon from the filing
of the complaint until fully paid, and defendant Pal-Fox Lumber Co., Inc. to pay to
plaintiff the further sum of P6,841.56, with legal interest thereon from the filing of
the complaint until fully paid, plus costs; and likewise ordering cross-defendant PalFox Lumber Co., Inc. and third-party defendants Gaspar G. Palanca and Joseph Lee
to pay to defendant Far Eastern Surety & Insurance Co., Inc., jointly and severally,
any amount which the latter may pay to plaintiff under his judgment, plus premium
in the amount of P3,750.00 and stipulated attorney's fees and interest at the rate of
15% and 12% per annum, respectively, on the total amount due, the said interest to
be compounded quarterly from November 22, 1946, until fully paid.
Unable to secure, in a motion for reconsideration, a judgment absolving it from any
and all liability under Forestry Bond No. 7004, the surety company appealed to the
Court of Appeals (CA-G.R. No. 31338-R) which Court subsequently certified the case
here on a finding that the appeal involves only questions of law, to wit: .
The first legal point which arises in connection with said exhibits is: What is the
probative value of documents which were admitted only as part of the testimony of
the witness who identified them? Do they constitute evidence of the truth of their
contents or not? In other words, are they evidence of demands for payment
considering that Mr. Zalita merely testified that said exhibits are certified copies of
records and documents now in the possession of the Record Control Section of the
Bureau of Internal Revenue?
The next issue to resolve is who has the burden of proving that the claim of the
plaintiff is not yet paid?
xxx

xxx

xxx

In the third assigned error, appellant raises the question of prescription of action. ..."
(Court of Appeals resolution prom. on August 15, 1966 in CA-G.R. No. 31338-R, pp.
6-7).
During the pendency of this case before this Court, certain pertinent developments
have come about which practically render the resolution of appellant's assigned
errors unnecessary. Thus in a manifestation filed on February 10, 1967 the surety
company expressed its willingness to pay the sum of P5,000.00 under its forestry
bond anytime "that an order is issued (by this Court) directing the defendant surety
to so pay according to this manifestation." In a resolution dated February 22, 1967
this Court granted appellant surety company's plea, thereby allowing it to pay the
Republic of the Philippines the sum of P5,000.00, in full payment of its liability under

Forestry Bond No. 7004, and dismissing the case insofar as said appellant was
concerned.
On March 27, 1967 the plaintiff moved for reconsideration, pointing out that the
surety company's correct liability under the appealed decision was P5,000.00 plus
legal interest from the filing of the complaint. In other words, the plaintiff would
want the surety company to pay the legal interest adjudged by the trial court before
the case may finally be considered dismissed insofar as appellant surety was
concerned. Despite the opposition registered by the surety company this Court
resolved on May 10, 1967 "... to MODIFY the resolution of February 22, 1967 in that
the appellant Far Eastern Surety and Insurance Co., Inc. is further ordered to pay
the Republic of the Philippines interest on the P5,000.00 at the rate of 6% per
annum computed from April 24, 1957 when the complaint was filed until October 3,
1966 when the appellant offered to pay the appellee the sum of P5,000.00 in
settlement of its obligation but which offer was ignored by the appellee; PROVIDED,
that in case the appellant fails or refuses to pay the interest herein stated the case
against him would not be considered dismissed, thereby leaving the matter on the
liability of said appellant to pay interest subject to future orders by this Court along
with the other matters that may be resolved in this case." .
As things stand now, the contending parties are one in conceding that the decisive
issue for determination, in view of the surety company's willingness to pay the
amount of P5,000.00 under its forestry bond, is its liability for the payment of legal
interest thereon. 1 The said company's denial of liability for such interest is based on
the stipulation in the bond that it was bound to the plaintiff "in the sum of
P5,000.00." .
Judgment must go to the plaintiff. In the case of National Marketing Corporation vs.
Marquez, et al., L-25553, January 31, 1969, (26 SCRA 722, 726), this Court resolved
a similar question as follows: .
On the third and last issue (on whether the surety's liability can exceed the amount
of its bond), it is enough to remark that while the guarantee was for the original
amount of the debt of Gabino Marquez, the amount of the judgment by the trial
court in no way violates the rights of the surety. The judgment on the principal was
only for P10,000.00, while the remaining P9,990.91 represent the moratory interest
due on account of the failure to pay the principal obligation from and after the same
had fallen due, and default had taken place. Appellant surety was fully aware that
the obligation earned interest, since the note was annexed to its contract, Exhibit
"C". The contract of guaranty executed by the appellant Company nowhere excludes
this interest, and Article 2055, paragraph 2, of the Civil Code of the Philippines is
clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise not only the principal
obligation but also all its accessories, including judicial costs, provided with respect
to the latter, that the guarantor shall only be liable for those costs incurred after he
has been judicially required to pay." (Emphasis supplied)" .

WHEREFORE, the decision appealed from is affirmed, with the modification that the
appellant should pay the interest adjudged in said decision up to the date of
payment of the principal sum of P5,000.00. No pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Zaldivar, Castro, Fernando, Teehankee, Barredo,
Villamor and Makasiar, JJ., concur.

Footnotes
1
In fact payment of the principal of P5,000.00 has been effected, as alleged in
the surety company's opposition to the plaintiff's motion for reconsideration of the
resolution of this Court of February 22, 1967, and evidenced by a photostat of the
receipt attached.

Namarco v. Marquez, 26 SCRA 722

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-25553

January 31, 1969

NATIONAL MARKETING CORPORATION, plaintiff-appellee,

vs.
GABINO MARQUEZ, ET AL., defendants,
PLARIDEL SURETY & INSURANCE COMPANY, defendant-appellant.
Benjamin M. Tan and Jose S. Valencia for plaintiff-appellee.
Carlos, Madarang, Carballo and Valdez for defendant-appellant.
Gabino Marquez for and in his own behalf as defendant.
REYES, J.B.L., J.:
This Court is prayed by appellant, Plaridel Surety & Insurance Company, to
reverse the decision of the Court of First Instance of Manila condemning it to pay to
the appellee, National Marketing Corporation, the principal sum of P10,000.00, plus
P9,990.91 in accrued interest up to 1 November 1964, and interest thereafter at 7%
per annum on the principal and 6% on the accrued interest, together with 10% on
the total amount due by way of attorney's fees and costs.
The appeal being made directly to this Supreme Court, the facts found by
the court below must be held binding upon this appellant. Such facts are stated in
the appealed decision to be as follows (Record on Appeal, pages 18-21):
From the evidence thus presented, it appears that under the provisions of
Executive Order No. 350, Series of 1950, all the properties, rights, obligations, and
contracts of the Philippine Relief and Trade Rehabilitation Administration (PRATRA)
had been transferred to the Price Stabilization Corporation (PRISCO). Also by virtue
of Republic Act No. 1345, as amended, all rights and contracts of the PRISCO
involving real estate, fixed assets and stock in trade had been assumed by herein
plaintiff, the NAMARCO.
It also appears that on June 24, 1950, defendant Marquez secured from the
PRATRA one (1) tractor and one (1) rice thresher, with a total value of P20,000.00
for which the said defendant paid thereon the sum of P8,000.00 as down payment,

thereby leaving a balance of P12,000.00, as evidenced by an invoice marked as

Exhibit A.
On the same date, defendant Marquez executed a promissory note in the
amount of P12,000.00 payable in installments commencing from June 24, 1951 to
June 25, 1952, with interest thereon at the rate of 7% per annum from June 24,
1950 until finally paid, which promissory note is marked in this case as Exhibit B.
It is further stipulated in the aforesaid promissory note that in the event of
failure of the said defendant to pay the principal obligation or interest thereon when
due and payable, an additional sum equivalent to 10% of the total amount due shall
be paid as attorney's fees.
To guarantee full compliance with the aforementioned obligation, defendant
Marquez, as principal, and defendant Plaridel Surety & Insurance Company, as
surety, executed Guaranty Bond P. S. & I. No. 4220 in favor of the PRATRA, wherein
they bound themselves, jointly and severally, to pay the said amount of P12,000.00
(Exhibit C).
In this guaranty bond, the surety expressly waives its right to demand
payment and notice of non-payment and agrees that the liabilities of this guaranty
shall be direct and immediate and not contingent upon the exhaustion by the
PRATRA of whatever remedies it may have against the principal, and that the same
shall be valid and continuous until the obligation so guaranteed is paid in full (Exhibit
C-1).
After making partial payments in the sums of P2,870.19 and P326.77 on
July 7, 1951 and February 23, 1952, respectively, defendant Marquez defaulted in
the payment of the other installments, so that the total amount due NAMARCO as of
October 31, 1964 is P19,990.91, representing principal and accrued interest, as
shown in a statement of account marked as Exhibit D.1awphil.t
On March 22, 1956, February 16, 1963, June 10, 1964, September 18, 1964
and October 13, 1964, plaintiff demanded from defendants Marquez and Plaridel
Surety & Insurance Company, payment of their outstanding obligation, as shown in
Exhibits E, E- 2, E-3, E-4, E-6, E-8, E-10, and E-12. The claim, therefore, of
defendant Plaridel Surety & Insurance Company that they never received a demand
for payment from plaintiff must necessarily fail, considering that it is clearly shown in
registry return receipts marked as Exhibits E-5, E-9, E-11, and E-13 that the same
had been received by the addressee.
As the said amount was not paid despite the aforementioned demands
therefor upon the said defendants, the present action was instituted on December
16, 1964, to enforce collection.
The appellant surety company poses three questions for our resolution:

(1) Whether the Court of First Instance had original jurisdiction to take cognizance of
the suit;
(2) Whether the plaintiff-appellee's action is barred by prescription;
(3) Whether the surety's liability can exceed the sum of P12,000.00.
On the first question tendered, appellant surety company argues that since
the balance due on the principal of the promissory note guaranteed by it is only
P10,000.00, in view of the debtor's payment of P2,000.00 on account of the principal
of the loan, jurisdiction lay with the Municipal Court, and not on the Court of First
Instance, pursuant to section 44 (c) of the Judiciary Act, as amended by Republic
Act No. 3828.
The contention is without merit, for it ignores the fact that upon the terms
of the promissory note, Exhibit "B", copy of which was attached to the guaranty
bond, as its annex "A", default upon the principal or interest entitled the creditor to
an additional ten per centum of the total amount due for attorneys' fees and costs of
collection. Even disregarding interest overdue and payable, when the complaint was
filed the creditor-appellee was entitled to collect no less than P10,000.00 on the loan
plus P1,000.00 attorneys' fees, or a total of P11,000.00. The initial limit of the
original jurisdiction of the Court of First Instance under Republic Act No. 3828 being

all cases in which the demand, exclusive of interest, or the value of the
property in controversy, amounts to more than ten thousand pesos.
the court below did not incur in this error.
The contention that plaintiff-appellee's cause of action against the surety
was barred by the statute of limitations in 1964, because the face value of the
promissory note fell due on 25 June 1962, is likewise untenable. The course of
extinctive prescription was interrupted by the written demands for payment made
upon the principal debtor on 22 March 1956, 16 February 1963, and June,
September and October of 1964, copies of which were furnished the surety. Article
1115 of the Civil Code of the Philippines prescribes that "the prescription of actions is
interrupted when there is a written extrajudicial demand by the creditor".
The surety avers that a demand upon the debtor is no demand upon the
surety, and that the copies of the letters of demand upon the former do not
constitute a demand upon the guarantor. This thesis is worthless because (a) the
liability of the appellant was expressly made joint and several by the terms of the
guaranty bond, and (b) for the reason that, in the latter document, "the surety also
waives its right to demand payment and notice of non-payment" (Bond, paragraph
3). The words "demand payment" vis-a-vis the creditor can only refer to "demand
for payment".

Laches not having been invoked as a defense in the court below, the same
can not be gone into at this stage of the proceedings. At any rate, the established
jurisprudence is that mere delay of the creditor in proceeding against the principal
debtor does not release the guarantor (Lavides vs. Eleazar, 106 Phil. 576, 579, and
cases therein cited), and much less will it relieve a surety, who is solidarily liable
with the main debtor.
On the third and last issue, it is enough to remark that while the guarantee
was for the original amount of the debt of Gabino Marquez, the amount of the
judgment by the trial court in no way violates the rights of the surety. The judgment
on the principal was only for P10,000.00, while the remaining P9,990.91 represent
the moratory interest due on account of the failure to pay the principal obligation
from and after the same had fallen due, and default had taken place. Appellant
surety was fully aware that the obligation earned interest, since the note was
annexed to its contract, Exhibit "C". The contract of guaranty executed by the
appellant Company nowhere excludes this interest, and Article 2055, paragraph 2, of
the Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise not only the
principal obligation but also all its accessories, including judicial costs, provided with
respect to the latter, that the guarantor shall only be liable for those costs incurred
after he has been judicially required to pay. (Emphasis supplied)
Explaining the provisions of Article 1827 of the Civil Code of 1889, couched
in terms similar to the one quoted, Manresa, in his Commentaries (Volume 12. Fifth
Edition, page 241), says:
Para dicho caso dispone el Codigo que la extension de esa clase especial de
fianzas comprendera, no solo la obligacion principal, sino tambien todos sus
accesorios, incluso, los gastos del juicio, con la limitacion establecida en el mismo.
Cierto es que con ello se amplian los terminos de la fianza a mas de los limites de la
obligacion principal, objeto y motivo de aquella, pero esto depende de los actos del
fiador, pues pudiendo este precisar y determinar al constituir la fianza los limites de
la misma, restringiendo su responsabilidad unica y exclusivamente a los terminos
estrictos de la obligacion principal, si no lo hizo asi dejando de utilizar esa
restriccion, potestativa en el, debe presumirse que quiso quedar obligado en la
forma amplia que en el articulo se establece.
La responsabilidad del fiador, conforme a este precepto, se extiende incluso
a los intereses por razon de mora del deudor. Asi lo ha reconocido la jurisprudencia,
declarando que subrogado el fiador en el lugar del deudor para hacer efectiva la
obligacion principal contraida, cuando este no la cumple, responde no solo de
aquella, sino tambien de sus consecuencias legales, una de ellas, en concepto de
indemnizacion de perjuicios, al abono de intereses por razon de mora del citado
deudor en el pago de cantidad liquida, segun determinan los articulos 1.101 y 1.108
del Codigo civil, sin que pueda sostenerse que no naciendo la obligacion del fiador
hasta que se hace la exclusion de bienes del deudor, no puede aquel incurrir en
mora (sentencia de 22 de noviembre de 1916).

And we have previously ruled that compensated sureties are not entitled to
have their contracts interrupted strictissimi juris in their favor (Leyson vs. Rizal
Surety [1966] 16 SCRA 555; Pacific Tobacco Corp. vs. Lorenzana, 102 Phil. 234,
241-242).
WHEREFORE, finding no error in the judgment appealed from, the same is
affirmed, with costs against appellant Plaridel Surety and Insurance Company.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano,
Teehankee and Barredo, JJ., concur.

Vizconde v. IAC, 149 SCRA 226

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74231

April 10, 1987

CORAZON J. VIZCONDE, petitioner,

vs.
INTERMEDIATE APPELLATE COURT & PEOPLE OF THE PHILIPPINES, respondents.

NARVASA, J.:
Corazon J. Vizconde has appealed as contrary to law and the evidence, the Decision
of the Court of Appeals 1 affirming her conviction of the crime of estafa by the Court
of First Instance of Rizal Quezon City Branch, in Criminal Case No. Q- 5476.
Vizconde and Pilar A. Pagulayan were charged in the Trial Court with
misappropriation and conversion of an 8-carat diamond ring belonging to Dr.
Marylon J. Perlas in an information which avers that they:
* * * wilfully, unlawfully and feloniously, with intent of gain and with unfaithfulness
and/or abuse of confidence, defraud(ed) DRA. MARYLOU J. PERLAS in the following
manner, to wit: the said accused received from the offended party one (1) 8-karat
solo diamond ring, white, double cut, brilliant cut with multiple bentitos, valued at
P85,000.00, to be sold by them on commission basis, with the obligation to tum over
the proceeds of the sale to the offended party, or to return the said ring if unsold,
but the Id accused, once in possession thereof, contrary to their obligation,
misapplied, misappropriated and converted the same to their own personal use and
benefit, and in spite of repeated demands made upon them, both accused failed,
omitted and refused, and still fait omit and refuse up to the present, to comply with
their aforesaid obligation, to the damage and prejudice of the offended party, in the
aforementioned amount of P85,000.00, Philippine currency. 2
After trial both accused were convicted and each sentenced to serve an
indeterminate prison term of from eight (8) years, four (4) months and one (1) day
to ten (10) years and two (2) months of prision mayor, with the accessory penalties
provided by law, and jointly and severally to indemnify the offended party in the
sum of P55,000.00 for the unaccounted balance of the value of the ring with legal
interest from April 22, 1975, the further sum of P30,000.00 as and for moral
damages and the sum of P10,000.00 for attorney's fees. 3

Both accused appealed to the Court of Appeals, but as Pilar A. Pagulayan had
evaded promulgation of sentence in the Trial Court and had appealed only through
counsel the Appellate Court vacated her appeal as ineffectual. 4 On Vizconde's part,
the Court of Appeals affirmed the judgment of the Trial Court in all respects except
the penalty of imprisonment, which it increased to a term of from ten (10) years and
one (1) day of prision mayor to twelve (12) years ten (10) months and twenty-one
(21) days of reclusion temporal. A motion for reconsideration was denied. Vizconde
thereafter filed the present petition for review on certiorari. 5
Required to comment on the petition, the Solicitor General, despite having argued
for affirmance of Vizconde's conviction in the Court of Appeals, now recommends
that she be acquitted, but nonetheless held civilly liable to the complainant in the
sum of P55,000.00 (the unaccounted balance of the value of the ring as found by
the Trial Court) " * * * or whatever portion thereof which remains unpaid. * * * 6
From the record and the findings of the courts below, it appears that sometime in
the first week of April, 1975, the complainant, Dr. Marylon J. Perlas, called up the
appellant Vizconde, a long-time friend and former high school classmate, asking her
to sen Perlas' 8-carat diamond ring. Shortly afterwards, Perlas delivered the ring to
Vizconde to be sold on commission for P 85,000.00. Vizconde signed a receipt for
the ring. 7
About a week and a half later, Vizconde returned the ring to Perlas, who had asked
for it because she needed to show it to a cousin However, Vizconde afterwards
called on Perlas at the latter's home, with another lady, Pilar A. Pagulayan, who
claimed to have a "sure buyer" for the ring. 8 Perlas was initially hesitant to do so,
but she eventually parted with the ring so that it could be examined privately by
Pagulayan's buyer when the latter' gave her a postdated check for the price (P
85,000.00) and, together with Vizconde, signed a receipt prepared by Perlas. This
receipt-people's Exhibit "A"- reads as follows:
RECEIPT
Received from Dra. Marylon Javier-Perlas one (1) solo 8 karat diamond ring, white,
double cut, brilliant cut with multiple brilliantitos, which I agree to sell for
P85,000.00 (eighty-five thousand pesos) on commission basis and pay her in the
following manner:
P85,000.00 postdated check
PNB check 730297
dated April 26, 1975
for P85,000.00

It is understood that in the event the above postdated check is dishonored for any
reason whatsoever on its due date, the total payment of the above item shall
become immediately due and demandable without awaiting further demand.
I guarantee that the above check will be sufficiently funded on the respective due
date.
Quezon City, Philippines
22 April 1975
(SGD.) PILAR A. PAGULAYAN
PILAR A. PAGULAYAN
16 Rd. 8 Project 6
I guarantee jointly and severally
(SGD.) CORAZON J. VIZCONDE
CORAZON J. VIZCONDE 9
After Pagulayan's postdated check matured, Perlas deposited it to her account at
Manila Bank. It was dishonored for the reason, "No arrangement," stated in the
debit advice. Perlas then called up Vizconde to inform her about the dishonor of the
check. The latter suggested that Perlas re-deposit the check while she (Vizconde)
followed up the sale of the ring. Perlas re-deposited the check, but again it was
dishonored because drawn against insufficient funds. 10 So Perlas took the matter to
counsel who sent separate letters of demand to Vizconde and Pagulayan for return
of the ring or payment of P85,000.00. 11
After nine days, Vizconde and Pagulayan called on Perlas. Pagulayan paid Perlas
P5,000.00 against the value of the ring. She also gave into Perlas' keeping three
certificates of title to real estate to guarantee delivery of the balance of such value.
A receipt for the money and the titles was typed and signed by Perlas, which she
also made the two sign. 12 The receipt Exhibit "D" of the prosecution reads:
Received from Mrs. Pilar Pagulayan, the sum of FIVE THOUSAND PESOS ONLY
(P5,000.00) representing part of the proceeds of the sale of one (1) solo 8 carat
diamond ring, white, double cut, brilliant cut w/multiple brilliantitos, given to Mrs.
Pilar Pagulayan and Mrs. Corazon de Jesus Vizconde on 22 April 1975, to be sold on
commission basis for eighty- five thousand pesos (P85,000.00).
Received also owner's duplicate copies of TCT Nos. 434907, 434909, 434910, which
will be returned upon delivery of the remaining balance of the proceeds of the sale
of said diamond ring for eighty five thousand pesos (P85,000.00).

This receipt is being issued without prejudice to legal action.

Quezon City, Philippines
7 May 1975
(Sgd.) Marylon J. Perlas
Dra. Marylon J. Perlas
Conforme:
(Sgd.) Pilar A. Pagulayan
Pilar A. Pagulayan
(Sgd.) Corazon J. Vizconde
Corazon Vizconde 13
Vizconde and Pagulayan having allegedly reneged on a promise to complete
payment for the ring on the very next day, Perlas filed with the Quezon City Fiscal's
office a complaint against them for estafa This notwithstanding, Pagulayan stin paid
Perlas various sums totalling P25,000.00 which, together with the P5,000.00 earlier
paid, left a balance of P55,000.00 still owing. 14
Both the Trial Court and the Court of Appeals found istilln these facts sufficient
showing that Vizconde and Pagulayan had assumed a joint agency in favor of Perlas
for the sale of the latter's ring, which rendered them criminally liable, upon failure to
return the ring or deliver its agreed value, under Art. 315, par. l(b), of the Revised
Penal Code, for defraudation committed " * * * with unfaithfulness or abuse of
confidence * * * by misappropriating or converting, to the prejudice of another, * *
* personal property received in trust or on commission, or under any other
obligation involving the duty to make delivery of or to return the same, * * * " The
Solicitor General falling back, as already stated, from an earlier stance, disagrees
and submits in his Comment that the appellant cannot be convicted of estafa under
a correct interpretation of the two principal exhibits of the prosecution, the receipts
Exhibits A" and "D". 15 He is correct.
Nothing in the language of the receipt, Exhibit "A", or in the proven circumstances
attending its execution can logically be considered as evidencing the creation of an
agency between Perlas, as principal, and Vizconde, as agent, for the sale of the
former's ring. True, reference to what may be taken for an agency agreement
appears in the clause " * * * which I agree to sell * * * on commission basis" in the
main text of that document. But it is clear that if any agency was established, it was
one between Perlas and Pagulayan only, this being the only logical conclusion from
the use of the singular "I" in said clause, in conjunction with the fact that the part of
the receipt in which the clause appears bears only the signature of Pagulayan. To

warrant anything more than a mere conjecture that the receipt also constituted
Vizconde the agent of Perlas for the same purpose of selling the ring, the cited
clause should at least have used the plural "we," or the text of the receipt containing
that clause should also have carried Vizconde's signature.
As the Solicitor General correctly puts it, the joint and several undertaking assumed
by Vizconde in a separate writing below the main body of the receipt, Exhibit "A",
merely guaranteed the civil obligation of Pagulayan to pay Perlas the value of the
ring in the event of her (Pagulayan's) failure to return said article. It cannot, in any
sense, be construed as assuming any criminal responsibility consequent upon the
failure of Pagulayan to return the ring or deliver its value. It is fundamental that
criminal responsibility is personal and that in the absence of conspiracy, one cannot
be held criminally liable for the act or default of another.
A person to be guilty of crime, must commit the crime himself or he must, in some
manner, participate in its commission or in the fruits thereof. * * * 16
Thus, the theory that by standing as surety for Pagulayan, Vizconde assumed an
obligation more than merely civil in character, and staked her very liberty on
Pagulayan's fidelity to her trust is utterly unacceptable; it strikes at the very essence
of guaranty (or suretyship) as creating purely civil obligations on the part of the
guarantor or surety. To render Vizconde criminally liable for the misappropriation of
the ring, more than her mere guarantee written on Exhibit "A" is necessary. At the
least, she must be shown to have acted in concert and conspiracy with Pagulayan,
either in obtaining possession of the ring, or in undertaking to return the same or
delivery its value, or in the misappropriation or conversion of the same.
Now, the information charges conspiracy between Vizconde and Pagulayan, but no
adequate proof thereof has been presented. It is of course true that direct proof of
conspiracy is not essential to convict an alleged conspirator, and that conspiracy may
be established by evidence of acts done in pursuance of a common unlawful
purpose. 17 Here, however, the circumstances from which a reasonable inference of
conspiracy might arise, such as the fact that Vizconde and the complainant were
friends of long standing and former classmates, that it was Vizconde who introduced
Pagulayan to Perlas, that Vizconde was present on the two occasions when the ring
was entrusted to Pagulayan and when part payment of P5,000.00 was made, and
that she signed the receipts, Exhibits "A" and "D," on those occasions are, at best,
inconclusive. They are not inconsistent with what Vizconde has asserted to be an
innocent desire to help her friend dispose of the ring; nor do they exclude every
reasonable hypothesis other than complicity in a premeditated swindle. 18
The foregoing conclusion in nowise suffers from the fact that the second receipt,
Exhibit "D", appears to confirm that the ring "* * * was given to Mrs. Pilar Pagulayan
and Mrs. Corazon de Jesus Vizconde on 22 April 1975, to be sold on commission
basis for eighty five thousand pesos (P85,000.00)." 19 The implications and
probative value of this writing must be considered in the context of what had already
transpired at the time of its making. The ring had already been given to Pagulayan,
and the check that she had issued in payment therefor (or to secure payment, as

the complainant would have it) had already been dishonored twice. That the
complainant then already entertained serious apprehensions about the fate of the
ring is evident in her having had her lawyers send Vizconde and Pagulayan demands
for restitution or payment, with threat of legal action. Given that situation, Exhibit
"D", insofar as it purports to confirm that Vizconde had also received the ring in
trust, cannot be considered as anything other than an attempt to "cure" the lack of
mention of such an entrustment in the first receipt, Exhibit "A", and thereby bind
Vizconde to a commitment far stronger and more compelling than a mere civil
guarantee for the value of the ring. There is otherwise no explanation for requiring
Vizconde and Pagulayan to sign the receipt, which needed only the signature of
Perlas as an acknowledgment of the P5,000.00 given in part payment, and the
delivery of the land titles to secure the balance.
The conflict in the recitals of the two receipts insofar as concerns Vizconde's part in
the transaction involving Perlas' ring is obvious and cannot be ignored. Neither, as
the Court sees it, should these writings be read together in an attempt to reconcile
what they contain, since, as already pointed out, the later receipt was made under
circumstances which leave no little doubt of its truth and ;Integrity. What is clear
from Exhibit "A" is that the ring was entrusted to Pilar A. Pagulayan to be sold on
commission; there is no mention therein that it was simultaneously delivered to and
received by Vizconde for the same purpose or, therefore, that Vizconde was
constituted, or agreed to act as, agent jointly with Pagulayan for the sale of the ring.
What Vizconde solely undertook was to guarantee the obligation of Pagulayan to
return the ring or deliver its value; and that guarantee created only a civil obligation,
without more, upon default of the principal. Exhibit "D", on the other hand, would
make out Vizconde an agent for the sale of the ring. The undisputed fact that Exhibit
"A" was executed simultaneously with the delivery of the ring to Pagulayan
compellingly argues for accepting it as a more trustworthy memorial of the real
agreement and transaction of the parties than Exhibit "D" which was executed at a
later date and after the supervention of events rendering it expedient or desirable to
vary the terms of that agreement or transaction.
In view of the conclusions already reached, consideration of the Solicitor General's
argument also quite persuasive that Exhibit "D" in fact evidences a
consummated sale of the ring for an agreed price not fully paid for, which yields the
same result, is no longer necessary. It is, however, at least another factor
reinforcing the hypothesis of Vizconde's innocence.
Upon the evidence, appellant Corazon J. Vizconde was a mere guarantor, a solidary
one to be sure, of the obligation assumed by Pilar A. Pagulayan to complainant
Marylon J. Perlas for the return of the latter's ring or the delivery of its value.
Whatever liability was incured by Pagulayan for defaulting on such obligation and
this is not inquired into that of Vizconde consequent upon such default was
merely civil, not criminal. It was, therefore, error to convict her of estafa.
As already stated, the Solicitor General however maintains, on the authority of
People vs. Padilla, 20 that the appellant should be held hable to pay the complainant
the amount of P55,000.00, or whatever part of such amount remains unpaid, for the

value of the ring. Again, this is a correct proposition, there being no question as
in fact admitted by her that the appellant executed the guarantee already referred
to.
WHEREFORE, except insofar as it affirms the judgment of the Trial Court ordering
appellant Corazon J. Vizconde, solidarity with Pilar A. Pagulayan, to indemnify the
complainant Marylon J. Perlas in the amount of P55,000.00 for the unaccounted
balance of the value of the latter's ring, the appellant pealed Decision of the Court of
Appeals is reversed and set aside, and said appellant is acquitted, with costs de
oficio. As the record indicates that levies on preliminary attachment and on
execution pending appeal have been made on behalf of the complainant, 21 which
may have resulted in further reducing the abovestated balance, the appellant may,
upon remand of this case to the Trial Court, prove any reductions, by the operation
of said levies or otherwise, to which the amount of the indemnity adjudged may be
justly subject.
SO ORDERED.
Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.
Yap (Chairman), J., is on leave.

Footnotes
1

In CA-G.R. No. 23774-CR; Mendoza, ponente, Alampay and Borromeo, JJ.

Record, pp. 1-2.

Record, pp. 620-629.

Rollo, (CA-G.R. No. 23774-CR), pp. 62-63.

Rollo, (CA-G.R. No. 23774-CR), pp. 61-73.

Rollo, pp. 96-103.

Rollo, (CA-G.R. No. 23774-CR), p. 63.

Rollo, (CA-G.R. No. 23774-CR), p. 621.

Rollo, pp. 64-65; Record, pp. 141-142.

10

Rollo, Id.; Exhibits "B", "B-1" and "B-2"; Record, pp. 143- 145.

11

Exhibit "C-1 ";Record, pp. 148-149.

12

Rollo, p. 65.

13

Record, p. 146.

14

Exhibits "E", "F". "G" and "H"; Record, pp. 147,150-152.

15

Commnent; Rollo, p. 96.

16

U.S. vs. Acebedo, 18 Phil. 428.

17
People vs. Cadag, 2 SCRA 388; People vs. Cruz, 4 SCRA 11-14; People vs.
Belen, 9 SCRA 39; People vs. Capito, 22 SCRA 1130; People vs. Alcantara, 33 SCRA
812.
18
People vs. Macatanaw, 62 SCRA 516, 527; People vs. Aniel, 96 SCRA 199,
208-209; People vs. Sosing, 111 SCRA 368, 377; see also Duran vs. CA, 71 SCRA
68,84 and Borromeo vs. CA, 131 SCRA 318, 326.
19

Emphasis supplied.

20
129 SCRA 558; see also People vs. Jalandoni, 131 SCRA 454; People vs.
Maniego, G.R. No. L-30910, February 27, 1987.
21

Record, pp. 53, 181, 809, 814, 822.

Article 2057
Estate of Hemady v. Luzon Surety, 100 Phil. 388
Article 2058
Wise & Co., v. Tanglao, 63 Phil. 372
Southern Motors v. Barbosa, 99 Phil. 263
Saavedra v. Price, 68 Phil. 699
Article 2059
Imperial Insurance v. De Los Angeles, 111 SCRA 24
Article 2060
Luzon Steel v. Sia, 28 SCRA 58
Arroyo v. Jungsay, 34 Phil. 589
Article 2065
Cacho v. Valles, 45 Phil. 107
Mira Hermanos v. Manila Tobacconists, 74 Phil. 367
Article 2066
Tuason v. Machuca, 46 Phil. 561
PNB v. Luzon Surety, 68 SCRA 207
Article 2067
Saenz v. Yap Chuan, 16 Phil. 76
Article 2070
Manila Surety v. Batu Construction, 101 Phil. 494
Gen. Indemnity v. Alvarez, 100 Phil. 1059
Article 2080
PNB v. Manila Surety, 14 SCRA 776