5. ANTONIO GARCIA, JR. VS. COURT OF APPEALS, LASAL DEVELOPMENT CORP.

FACTS: Western Minolco Corporation (WMC) obtained from Philippine Investments Systems
Organigation (PISO) two loans of 2,500,000 and 1,000,000 for which it issued promissory notes.
Antonio Garcia and Ernest Kahn executed a surety agreement for the 2.5 million loan. WMC
failed to pay after repeated demands. A memorandum of agreement was entered into by WMC
and its creditors in which promissory notes were to be issued by NDC, fully and unconditionally
guaranteed by the Philippine Government, in payment of WMCs obligation. Also, the parties to
the original loans agreed to an extension of the original period of payment and the compounding
of the interest on the principal loans.
Lasal Development Corporation, PISOs assignee of the credit, sued Garcia. He claims that the
issuance of the new promissory notes which extended the period of payment and provided for the
compounding of the interest operated as a novation of the contract, therefore releasing him from
his obligation as surety.
ISSUE: Whether Garcia is Liable from his obligation as surety.
RULING: The suretys obligation is not an original and direct one for the performance of his
own act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promise of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal.

15. INTERNATIONAL FINANCE CORPORATION V. IMPERIAL TEXTILE MILLS,

INC

FACTS: Philippine Polyamide Industrial Corporation (PPIC) made a loan agreement with
International Finance Corporation (IFC) in the amount of $7,000,000.00 payable in 16 semiannual installments with an interest rate of 10% per annum.
On the same date, a GauranteeAgreement was executed with Imperial Textile Mills, Inc
(ITM), Grand Textile Manufacturing Corp (Grandtex) and IFC as parties thereto. ITM and
Grandtex agreed to guarantee PPICs obligations under the loan agreement. PPIC paid the first 3
installments and asked for a rescheduling of the next installments but despite the reschedule,
PPIC defaulted.
IFC served a written notice of default to PPIC demanding the latter to pay the outstanding
principal and all the accrued interests. Despite the notice, PPIC failed to pay. IFC then applied
for the extrajudicial foreclosure of mortgages on the real estate, properties, etc. owned by PPIC
located at Calamba, Laguna. The sheriff then issued a notice of extrajudicial sale and IFC and
DBP were the only bidders. PPIC failed to pay the remaining balance. Consequently, IFC
demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance but no
payment was made. IFC filed a complaint against PPIC and ITM for the payment of the
outstanding balance plus interests and attorneys fees. The trial court held PPIC liable for the
payment of theoutstanding loan plus interest but the trial court relieved ITM of its obligation as
guarantor, dismissing IFCs complaint against ITM. The CA reversed the decision of thetrial
court in so far as the latter exonerated ITM from any obligation to IFC.
ISSUE: Whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the
loan.
RULING: While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was jointly and severally liable. To put emphasis on the nature of that liability, the
Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations
meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.
Therefore, ITM bound itself to be solidarily liable with PPIC for the latters obligations under the
Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be
deemed merely secondarily liable. ITMs liability commenced only when it guaranteed PPICs
obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus,
Art.2047 applies, by guaranty, a person, called the guarantor binds himself to the creditor to
fulfill the obligation of the principal in case the latter should fail to do so.xxx and Art.1216,
the creditor may proceed against any one of the solidary debtors. Contracts have the force
of law between the parties who are free to stipulate any matter not contrary to law, morals, etc. so
the Court cannot give a different meaning to the plain language of the Guarantee Agreement.