08 October 2010
the ground that such claim had prescribed under
ATOK FINANCE CORPORATION vs. COURT OF
APPEALS G.R. No. 80078. May 18, 1993
FELICIANO, J.:
FACTS:
On 27 July 1979, private respondents Sanyu
Chemical Corporation as principal and Sanyu
Trading Corporation along with individual private
stockholders of Sanyu Chemical as sureties,
executed a Continuing Suretyship Agreement in
favor of Atok Finance as creditor.
In 1981, Sanyu Chemical assigned its trade
receivables outstanding to Atok Finance in
consideration of receipt from Atok Finance of the
amount of P105,000.00. The assigned receivables
carried a standard term of thirty (30) days; it
appeared, however, that the standard commercial
practice was to grant an extension of up to one
hundred twenty (120) days without penalties.
In 1984, Atok Finance commenced action against
Sanyu Chemical, the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili before the Regional
Trial Court of Manila to collect a sum of money
plus penalty charges starting from 1 September
1983. Atok Finance alleged that Sanyu Chemical
had failed to collect and remit the amounts due
under the trade receivables.
Sanyu Chemical and the individual private
1
respondents sought dismissal of Atok's claim upon
Article 1629 of the Civil Code and for lack of cause
of action. The private respondents contended that
the Continuing Suretyship Agreement, being an
accessory contract, was null and void since, at the
time of its execution, Sanyu Chemical had no pre-
existing obligation due to Atok Finance.
After trial the trial court rendered a decision in
favor of Atok Finance. On appeal the CA reversed
and set aside the decision of the trial court and
entered a new judgment dismissing the complaint
of Atok Finance.
ISSUE:
Whether the individual private respondents may
be held solidarily liable with Sanyu Chemical
under the provisions of the Continuing Suretyship
Agreement, or whether that Agreement must be
held null and void as having been executed
without consideration and without a pre-existing
principal obligation to sustain it.
Whether private respondents are liable under the
Deed of Assignment which they, along with the
principal debtor Sanyu Chemical, executed in
favor of petitioner, on the receivables thereby
assigned.
HELD:
Although obligations arising from contracts have
the force of law between the contracting parties,
(Article 1159 of the Civil Code) this does not mean
that the law is inferior to it; the terms of the
contract could not be enforced if not valid. So,
even if, as in this case, the agreement was for a
continuing suretyship to include obligations
enumerated in the agreement, the same could not
be enforced. First, because this contract, just like
guaranty, cannot exist without a valid obligation
(Art. 2052, Civil Code); and, second, although it
may be given as security for future debt (Art.
2053, C.C.), the obligation contemplated in the
case at bar cannot be considered 'future debt' as
envisioned by this law.
There is no proof that when the suretyship
agreement was entered into, there was a pre-
existing obligation which served as the principal
obligation between the parties. Furthermore, the
'future debts' alluded to in Article 2053 refer to
debts already existing at the time of the
constitution of the agreement but the amount
thereof is unknown, unlike in the case at bar
where the obligation was acquired two years after
the agreement."
A guaranty or a suretyship agreement is an
accessory contract in the sense that it is entered
into for the purpose of securing the performance
of another obligation which is denominated as the
principal obligation. It is also true that Article 2052
of the Civil Code states that "a guarantee cannot
exist without a valid obligation." Nevertheless, a
guaranty may be constituted to guarantee the
2
performance of a voidable or an unenforceable
contract. It may also guarantee a natural
obligation." Moreover, Article 2053 of the Civil
Code states that a guaranty may also be given as
security for future debts, the amount of which is
not yet known; there can be no claim against the
guarantor until the debt is liquidated. A
conditional obligation may also be secured."
Comprehensive or continuing surety agreements
are in fact quite commonplace in present day
financial and commercial practice. A bank or a
financing company which anticipates entering into
a series of credit transactions with a particular
company, commonly requires the projected
principal debtor to execute a continuing surety
agreement along with its sureties. By executing
such an agreement, the principal places itself in a
position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each
financing or credit accommodation extended to
the principal debtor. As we understand it, this is
precisely what happened in the case at bar.
As regards the second issue, the contention of
Sanyu Chemical was that Atok Finance had no
cause of action under the Deed of Assignment for
the reason that Sanyu Chemical's warranty of the
debtors' solvency had ceased. It relied on Article
1629 of the Civil Code which provides: In case the
assignor in good faith should have made himself
responsible for the solvency of the debtor, and the
contracting parties should not have agreed upon
the duration of the liability, it shall last for one
year only, from the time of the assignment if the
period had already expired. If the credit should be
payable within a term or period which has not yet
expired, the liability shall cease one year after the
maturity."
The debt referred to in this law is the debt under
the assigned contract or the original debts in favor
of the assignor which were later assigned to the
assignee. The debt alluded to in the law, is not the
debt incurred by the assignor to the assignee as
contended by the appellant. Applying the said law
to the case at bar, the records disclose that none
of the assigned receivables had matured when the
Deed of Assignment was executed.
It may be stressed as a preliminary matter that
the Deed of Assignment was valid and binding
upon Sanyu Chemical. Assignment of receivables
is a commonplace commercial transaction today.
It is an activity or operation that permits the
assignee to monetize or realize the value of the
receivables before the maturity thereof. In other
words, Sanyu Chemical received from Atok
Finance the value of its trade receivables it had
assigned; Sanyu Chemical obviously benefitted
from the assignment. The payments due in the
first instance from the trade debtors of Sanyu
Chemical would represent the return of the
investment which Atok Finance had made when it
3
paid Sanyu Chemical the transfer value of such
receivables.
Article 1629 of the Civil Code is not material. The
liability of Sanyu Chemical to Atok Finance rests
not on the breach of the warranty of solvency; the
liability of Sanyu Chemical was not ex lege but
rather ex contractu. Under the Deed of
Assignment, the effect of non-payment by the
original trade debtors was a breach of warranty of
solvency by Sanyu Chemical, resulting in turn in
the assumption of solidary liability by the assignor
under the receivables assigned. In other words,
the assignor Sanyu Chemical becomes a solidary
debtor under the terms of the receivables covered
and transferred by virtue of the Deed of
Assignment. The obligations of individual private
respondent officers and stockholders of Sanyu
Chemical under the Continuing Suretyship
Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor
under each of the assigned receivables by virtue
of the operation of the Deed of Assignment. That
solidary liability of Sanyu Chemical is not subject
to the limiting period set out in Article 1629 of the
Civil Code.
It follows that at the time the original complaint
was filed by Atok Finance in the trial court, it had
a valid and enforceable cause of action against
Sanyu Chemical and the other private
respondents.
The Petition for Review is hereby GRANTED DUE judgment is hereby entered REINSTATING the
COURSE, and the Decision of the Court of Appeals Decision of the trial court.
are hereby REVERSED and SET ASIDE. A new

Republic of the Philippines promissory note in the amount of P1,200.00,

SUPREME COURT payable ninety (90) days after date, with interest
Manila at 1 per cent per month. On the same date, a
surety bond was executed by Catalina de Leon, as
EN BANC principal, and the World Wide Insurance & Surety
Co., Inc., as surety, whereby they bound to pay
G.R. No. L-12077 June 27, 1958 said amount jointly and severally to Augusto V.
Ongsiako. As the obligation was not paid on its
EMMANUEL C. ONGSIAKO, ET AL., plaintiffs,
date of maturity either by Catalina de Leon or by
vs.
the surety notwithstanding the demands made
THE WORLD WIDE INSURANCE and SURETY
upon them, Ongsiako brought this action on March
CO., INC., ET AL., defendants.
6, 1953 in the Municipal Court of Manila to recover
the same from both the principal and the surety.
THE WORLD WIDE INSURANCE and SURETY
Judgment having been rendered for the plaintiff,
CO. INC.,cross-claimant-appellant,
both defendants appealed to the court of first
vs.
instance. In the latter court, Catalina de Leon
CATALINA DE LEON, cross-defendant-appellee.
failed to answer and so she was declared in
Villareal and Amacio for appellant. default. In due time the surety company filed its
Mariano M. Magsalin and Macario L. Nicolas for answer setting up a counterclaim against plaintiff
appellee. and a cross-claim against its co-defendant.

BAUTISTA ANGELO, J.: After hearing, the court rendered judgment

ordering Catalina de Leon to pay plaintiff the sum
On November 10, 1951, Catalina de Leon of P1,200.00, with interest at the rate of 1 per
executed in favor of Augusto V. Ongsiako a cent per month from February 10, 1952, and the
sum of P300.00 as attorneys' fees, and costs.

4
Defendant surety company was likewise ordered
to pay to plaintiff the same judgment but with the
proviso that "execution should not issue against
defendant The World-Wide Insurance & Surety Co.,
Inc., until a return is made by the Sheriff upon
execution against defendant Catalina de Leon
showing that the judgment against her remained
unsatisfied in whole or in part; and provided,
further, that defendant Catalina de Leon shall
reimburse to defendant Company whatever
amount the latter might pay under this judgment
together with such expenses as may be necessary
to effectuate said reimbursement." From this
judgment, the surety company appealed and the
case is now before us because, as certified by the
Court of Appeals, it only involves questions of law.
Augusto V. Ongsiako, having died in the
meantime, was substituted by his special
administrators Emmanuel Ongsiako and Severino
Santiangco.
The surety bond in question was executed in
November 10, 1951 and among the important
provisions it contains is the following: that the
principal and the surety "are held and firmly
bound unto Dr. Augusto V. Ongsiako in the sum of
One Thousand Two Hundred Pesos (P1,200.00),
Philippine Currency, for the payment of which well
and truly to be made, we bind ourselves ... jointly
5
and severally, firmly by these presents" (and
referring to the Promissory Note) "whose terms
and conditions are made parts hereof." In said
bond there also appears a special condition which
recites: "The Liability of the World-Wide Insurance
& Surety Co., Inc. under this bond will expire on
February 10, 1952." The note therein referred to,
on the other hand, provides that the obligation is
payable ninety days from date of issue, November
10, 1951, which means that its date of maturity is
February 10, 1952. The evidence shows that
neither the principal nor the surety paid the
obligation on said date of maturity and
immediately thereafter demands for payment
were made upon them. Thus, it appears that as
early as February 12, 1952, or two days
thereafter, the creditor wrote to the surety
company a letter notifying it of the failure of its
principal to pay the obligation and requesting that
it make good its guaranty under the bond (Exhibit
B), which demand was reiterated in subsequent
letters (Exhibits C, D and E). To these demands,
the company merely set up the defense that it
only acted as a guarantor and as such its liability
cannot be exacted until after the property of the
principal shall have been exhausted (Exhibit G).
It therefore appears that appellant has no
justification whatever to resist the claim of the
plaintiff for in the judgment appealed from it is
precisely provided that execution of judgment
should not issue against it until after it is shown
that the execution of the judgment against the
principal has been returned by the sheriff
unsatisfied, which was the only excuse given by
said appellant in not fulfilling its commitment
under the bond. And yet it appealed from said
judgment just to put up the additional defense
that its liability under the bond has already
expired because of the condition that its liability
shall expire on February 10, 1952. Even if this
were true, we consider however this stipulation as
unfair and unreasonable for it practically nullifies
the nature of the undertaking assumed by
appellant. It should be noted that the principal
obligation is payable ninety days from date of
issue, which falls on February 10, 1952. Only on
this date can demand for payment be made on
the principal debtor. If the debtor should fail to
pay and resort is made to the surety for payment
on the next day, it would be unfair for the latter to
allege that its liability has already expired. And
yet such is the stand taken by appellant. As the
terms of the bond should be given a reasonable
interpretation, it is logical to hold that the liability
of the surety attaches as soon as the principal
debtor defaults, and notice thereof is given the
surety within reasonable time to enable it to take
6
steps to protect its interest. This is what was done
by appellee in the present case. After all, the
surety has a remedy under the law which is to
foreclose the counterbond put up by the principal
debtor. This is in effect what was done by the
lower court.
This Court has taken note of the reprehensible
attitude adopted by the surety company in this
case by resorting to improper means in an effort
to evade its clear responsibility under the law. An
instance of such attitude is the insertion in the
bond of a provision which in essence tends to
nullify its commitment. This is a subtle way of
making money thru trickery and deception. Such
practice should be stopped if only to protect
honest dealers or people in financial stress.
Because of such improper conduct, this Court
finds no justification for the present appeal and
considers it frivolous and unnecessary. For this
appellant should be made to pay treble costs.
Wherefore, the decision appealed from is affirmed,
with treble costs against appellant.
Bengzon, Concepcion, Reyes, J. B. L., Endencia,
and Felix, JJ., concur.
Paras, C. J., Montemayor, and Reyes, A., JJ., concur
in the result.
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-48958 June 28, 1988
CITIZENS SURETY and INSURANCE COMPANY,
INC., petitioner,
vs.
COURT OF APPEALS and PASCUAL M.
PEREZ, respondents.
F. Sumulong & Associates Law Offices for
petitioner.
GUTIERREZ, JR., J.:
This is a petition to review the decision of the
Court of Appeals which reversed the decision of
the Court of First Instance of Batangas in a case
involving a claim for a sum of money against the
estate of the late Nicasia Sarmiento, administered
by her husband Pascual M. Perez.
On December 4, 1959, the petitioner issued two
(2) surety bonds CSIC Nos. 2631 and 2632 to
7
guarantee compliance by the principal Pascual M.
Perez Enterprises of its obligation under a
"Contract of Sale of Goods" entered into with the
Singer Sewing Machine Co. In consideration of the
issuance of the aforesaid bonds, Pascual M. Perez,
in his personal capacity and as attorney-in-fact of
his wife, Nicasia Sarmiento and in behalf of the
Pascual M. Perez Enterprises executed on the
same date two (2) indemnity agreements wherein
he obligated himself and the Enterprises to
indemnify the petitioner jointly and severally,
whatever payments advances and damage it may
suffer or pay as a result of the issuance of the
surety bonds.
In addition to the two indemnity agreements,
Pascual M. Perez Enterprises was also required to
put up a collateral security to further insure
reimbursement to the petitioner of whatever
losses or liabilities it may be made to pay under
the surety bonds. Pascual M. Perez therefore
executed a deed of assignment on the same day,
December 4,1959, of his stock of lumber with a
total value of P400,000.00. On April 12, 1960, a
second real estate mortgage was further executed
in favor of the petitioner to guarantee the
fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with
its obligation under the contract of sale of goods
with Singer Sewing Machine Co., Ltd.
Consequently, the petitioner was compelled to
pay, as it did pay, the fair value of the two surety
bonds in the total amount of P144,000.00. Except
for partial payments in the total sum of
P55,600.00 and notwithstanding several
demands, Pascual M. Perez Enterprises failed to
reimburse the petitioner for the losses it sustained
under the said surety bonds.
The petitioner filed a claim for sum of money
against the estate of the late Nicasia Sarmiento
which was being administered by Pascual M.
Perez.
In opposing the money claim, Pascual M. Perez
asserts that the surety bonds and the indemnity
agreements had been extinguished by the
execution of the deed of assignment. After the
trial on the merits, the Court of First Instance of
Batangas rendered judgment on April 15, 1968,
the dispositive portion of which reads:
WHEREFORE, considering that the
estate of the late, Nicasia Sarmiento is
jointly and severally liable to the
Citizens' Surety and Insurance Co.,
8
Inc., for the amount the latter had
paid the Singer Sewing Machine
Company, Ltd., the court hereby
orders the administrator Pascual M.
Perez to pay the claimant the sum of
P144,000.00, with interest at the rate
of ten (10%) per cent per annum from
the date this claim was filed, until fully
paid, minus the payments already
made in the amount of P55,600.00."
(pp. 97-98, Record on Appeal)
Both parties appealed to the Court of Appeals, On
August 31, 1978, the Court of Appeals rendered
its decision with the following dispositive portion:
WHEREFORE, the decision rendered by
the Court of First Instance of Batangas
on April 15, 1986 is hereby reversed
and set aside and another one
entered dismissing the claim of the
Citizens' Surety and Insurance Co.,
Inc., against the estate of the late
Nicasia Sarmiento. No pronouncement
as to costs. (p. 37, Rollo)
The petitioner raises the following alleged errors
of the respondent court as the issues in this
petition for review:
I extinguished by reason of the execution of the
RESPONDENT COURT OF APPEALS ERRED IN
CONCLUDING THAT THE OBLIGATION OF PRIVATE
RESPONDENT PASCUAL M. PEREZ HAD BEEN
EXTINGUISHED BY VIRTUE OF THE EXECUTION OF
THE DEED OF ASSIGNMENT (EXHIBIT "1") AND/OR
THE RELEASE OF THE SECOND REAL ESTATE
MORTGAGE (EXHIBIT "2").
II
RESPONDENT COURT OF APPEALS ERRED IN
CONCLUDING THAT THERE WAS DATION IN
PAYMENT BY VIRTUE OF THE EXECUTION OF THE
DEED OF ASSIGNMENT (EXHIBIT "1").
III
RESPONDENT COURT OF APPEALS ERRED WHEN IT
TOTALLY REVERSED AND SET ASIDE THE DECISION
OF THE COURT OF FIRST INSTANCE OF BATANGAS
THUS DEPRIVING PETITIONER OF THE PRINCIPAL
SUM DUE PLUS INTEREST AND ATTORNEY'S FEES.
(p. 4, Petitioner's Brief)
The main issue in this petition is whether or not
the administrator's obligation under the surety
bonds and indemnity agreements had been
9
deed of assignment.
It is the general rule that when the words of a
contract are plain and readily understandable,
there is no room for construction thereof (San
Mauricio Milling Co. v. Ancheta, 105 SCRA 371).
However, this is only a general rule and it admits
exceptions.
Pascual M. Perez executed an instrument
denominated as "Deed of Assignment." Pertinent
portions of the deed read as follows:
I, Pascual M. Perez, Filipino, of legal
age, married, with residence and
postal address at 115 D. Silang,
Batangas, as the owner and operator
of a business styled "PASCUAL M.
PEREZ ENTERPRISES," with office at R-
31 Madrigal Building, Escolta, Manila,
hereinafter referred to as ASSIGNOR,
for and in consideration of the
issuance in my behalf and in favor of
the SINGER SEWING MACHINE
COMPANY, LTD., of two Surety Bonds
(CSIC) Bond Nos. 2631 and 2632 each
in the amount of SEVENTY TWO
THOUSAND PESOS (P72,000.00), or
with a total sum of ONE RED FORTY-
FOUR THOUSAND PESOS
(Pl44,000.00), Philippine Currency, by
the CITIZENS' SURETY AND
INSURANCE CO., INC., a corporation
duly organized and existing under and
by virtue of the laws of the Republic of
the Philippines, with principal office at
R-306 Samanillo Building, Escolta,
Manila, Philippines, and duly
represented in the act by its Vice-
President and General Manager,
ARISTEO L. LAT, hereinafter referred to
as ASSIGNEE, assign by these
presents, unto said ASSIGNEE, its
heirs, successors, administrators or
assigns the herein ASSIGNOR'S stock
(Insured) of low grade lumber, class
"No. 2 COMMON" kept and deposited
at Tableria Tan Tao at Batangas,
Batangas, with a total measurement
of Two Million (2,000,000.00) board
feet and valued of P0.20 per board
feet or with a total value of
P400,000.00 which lumber is intended
by the ASSIGNOR for exportation
under a Commodity Trade Permit, the
condition being that in the event that
the herein assignor exports said
10
lumber and as soon as he gets the
necessary export shipping and related
and pertinent documents therefor, the
ASSIGNOR will turn said papers over
to the herein ASSIGNEE, conserving all
of the latter's dominion, rights and
interests in said exportation.
The ASSIGNEE hereby agrees and
accepts this assignment under the
conditions above-mentioned. (pp. 77-
79, Record on Appeal)
On its face, the document speaks of an
assignment where there seems to be a complete
conveyance of the stocks of lumber to the
petitioner, as assignee. However, in the light of
the circumstances obtaining at the time of the
execution of said deed of assignment, we can not
regard the transaction as an absolute conveyance.
As held in the case of Sy v. Court of Appeals, (131
SCRA 116,124):
It is a basic and fundamental rule in
the interpretation of contract that if
the terms thereof are clear and leave
no doubt as to the intention of the
contracting parties, then the literal
meaning of the stipulations shall
 control but when the words appear
contrary to the evident intention of
the parties, the latter shall prevail
over the former. (Labasan v. Lacuesta,
86 SCRA 16) In order to judge the
intention of the parties, their
contemporaneous and subsequent
acts shall be principally
considered. (Emphasis supplied)
The petitioner issued the two (2) surety bonds on
December 4, 1959 in behalf of the Pascual M.
Perez Enterprises to guaranty fullfillment of its
obligation under the "Contract of Sale of Goods"
entered into with the Singer Sewing Machine Co.
In consideration of the two surety bonds, two
indemnity agreements were executed by Pascual
M. Perez followed by a Deed of Assignment which
was also executed on the same date.
In the case of Lopez v. Court of appeals (114 SCRA
673), we stated that:
The indemnity agreement and the
stock assignment must be considered
together as related transactions
because in order to judge the
intention of the contracting parties,
their contemporaneous and
11
subsequent acts shall be principally
considered. (Article 1371, New Civil
Code). Thus, considering that the
indemnity agreement connotes a
continuing obligation of Lopez towards
Philamgen, while the stock
assignment indicates a complete
discharge of the same obligation, the
existence of the indemnity agreement
whereby Lopez had to pay a premium
of P1,000.00 for a period of one year
and agreed at all times to indemnify
Philamgen of any and all kinds of
losses which the latter might sustain
by reason of it becoming a surety, is
inconsistent with the theory of an
absolute sale for and in consideration
of the same undertaking of
Philamgen. There would have been no
necessity for the execution of the
indemnity agreement if the stock
assignment was really intended as an
absolute conveyance. Hence, there
are strong and cogent reasons to
conclude that the parties intended
said stock assignment to complement
the indemnity agreement and thereby
sufficiently guarantee the
indemnification of Philamgen should it
 be required to pay Lopez" loan to
Prudential Bank. (at pp. 682-683)
The respondent court stated that "by virtue of the
execution of the deed of assignment ownership of
administrator-appellant's lumber materials had
been transferred to the claimant-appellant and
this amounted to dation in payment whereby the
former is considered to have alienated his
property in favor of the latter in satisfaction of a
monetary debt (Artide 1245). As a consequence
thereof, administrator-appellant's obligation under
the surety bonds is thereby extinguished upon the
execution of the deed of assignment." This
statement is not sustained by the records.
The transaction could not be dation in payment.
As pointed out in the concurring and dissenting
opinion of Justice Edgardo L. Paras and the
dissenting opinion of Justice Mariano Serrano
when the deed of assignment was executed on
December 4, 1959, the obligation of the assignor
to refund the assignee had not yet arisen. In other
words, there was no obligation yet on the part of
the petitioner, Citizens' Surety and Insurance
Company, to pay Singer Sewing Machine Co.
There was nothing to be extinguished on that
date, hence, there could not have been a dation in
payment.
12
In the case of Lopez v. Court of Appeals (supra) we
had the occasion to explain:
Considering the above jurisprudence,
We find that the debt or obligation at
bar has not matured on June 2, 1959
when Lopez 'alienated' his 4,000
shares of stock to Philamgen. Lopez'
obligation would arise only when he
would default in the payment of the
principal obligation (the loan) to the
bank and Philamgen had to pay for it.
Such fact being adverse to the nature
and concept of dation in payment, the
same could not have been constituted
when the stock assignment was
executed. Moreover, there is no
express provision in the terms of the
stock assignment between Philamgen
and Lopez that the principal obligation
(which is the loan) is immediately
extinguished by reason of such
assignment. (at p. 686)
The deed of assignment cannot be regarded as an
absolute conveyance whereby the obligation
under the surety bonds was automatically
extinguished. The subsequent acts of the private
respondent bolster the fact that the deed of
assignment was intended merely as a security for
the issuance of the two bonds. Partial payments
amounting to P55,600.00 were made after the
execution of the deed of assignment to satisfy the
obligation under the two surety bonds. Since later
payments were made to pay the indebtedness, it
follows that no debt was extinguished upon the
execution of the deed of assignment. Moreover, a
second real estate mortgage was executed on
April 12, 1960 and eventually cancelled only on
May 15, 1962. If indeed the deed of assignment
extinguished the obligation, there was no reason
for a second mortgage to still have to be
executed. We agree with the two dissenting
opinions in the Court of Appeals that the only
conceivable reason for the execution of still
another mortgage on April 12, 1960 was because
the obligation under the indemnity bonds still
existed. It was not yet extinguished when the
deed of assignment was executed on December 4,
1959. The deed of assignment was therefore
intended merely as another collateral security for
the issuance of the two surety bonds.
Recapitulating the facts of the case, the records
show that the petitioner surety company paid
P144,000.00 to Singer on the basis of the two
surety bonds it had issued in behalf of Pascual
Perez Enterprises. Perez in turn was able to
13
indemnify the petitioner for its payment
to Singer in the amount of P55,600.00 thus
leaving a balance of only P88,400.00.
The petitioner surety company was more than
adequately protected. Lumber worth P400,000.00
was assigned to it as collateral. A second real
estate mortgage was also given by Perez although
it was later cancelled obviously because the
P400,000.00 worth of lumber was more than
enough guaranty for the obligations assumed by
the petitioner. As pointed out by Justice Paras in
his separate opinion, the proper procedure was for
Citizens' Insurance and Surety Co., to collect the
remaining P88,400.00 from the sales of lumber
and to return whatever remained to Perez. We
cannot order the return in this decisions because
the Estate of Mrs. Perez has not asked for any
return of excess lumber or its value. There
appears to have been other transactions, surety
bonds, and performance bonds between the
petitioner and Perez Enterprises but theseare
extraneous matters which, the records show, have
absolutely no bearing on the resolution of the
issues in this petition.
With respect to the claim for interests and
attomey's fees, we agree with the private
respondent that the petitioner is not entitled to
either one. It had the means to recoup its
investment and losses many times over, yet it
chose to litigate and delay the final determination
of how much was really owing to it. As stated by
Justice Paras in his separate opinion:
Interest will not be given the Surety
because it had all the while (or at
least, it may be presumed that such
was the case) the P400,000.00 worth
of lumber, from which value the
'refunding' by assignor could have
been deducted if it had so informed
the assignor of the plan.
For the same reason as in No. (5),
attomey's fees cannot be charged, for
despite the express stipulation on the
FIRST DIVISION
[G.R. No. 80201. November 20, 1990.]
ANTONIO GARCIA, JR., Petitioner, v. COURT
14
matter in the contract, there was
actually no failure on the part of the
assignor to comply with the obligation
of refinding. The means of compliance
was right there with the Surety itself-.
surely it could have earlier conferred
with the assignor on how to effect the
'refunding. (p. 39, Rollo)
WHEREFORE, the petition is hereby DISMISSED.
For the reasons above-stated, the claim of
Citizens' Surety and Insurance Co., Inc., against
the estate of Nicasia Sarmiento is DISMISSED. SO
ORDERED.
Fernan (Chairman), Feliciano, Bidin and Cortes, JJ.,
concur.
OF APPEALS, LASAL DEVELOPMENT
CORPORATION, Respondents.
Quisumbing, Torres & Evangelista
for Petitioner.
R .C . Domingo, Jr. & Associates for Private
Respondent.
SYLLABUS
1. ID.; ID.; ID.; OBLIGATION AND LIABILITY OF A
SURETY. 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 promisee
of the principal is said to be direct, primary and
absolute; (Sykes v. Everett, 167 NC 600), in other
words, he is directly and equally bound with the
principal. The surety therefore becomes liable for
the debt or duty of another although he possesses
no direct or personal interest over the obligations
nor does he receive any benefit therefrom.
(Miners Merchants Bank v. Gidley, 150 WVa 229,
144 SE 2d 711).
2. ID.; ID.; ID.; SURETY NOT AFFECTED BY THE
CHANGE IN THE RATE OF INTEREST, SUCH BEING
MERELY A COLLATERAL AGREEMENT BETWEEN
THE CREDITOR AND THE PRINCIPAL DEBTOR. As
for the compounded interest, we apply by analogy
the case of Bank of the Philippine Islands v. Gooch
and Redfern, (45 Phil. 514) which was affirmed in
the later case of the Bank of the Philippine Islands
v. Albaladejo & Cia (53 Phil. 141). In the said
cases, the respective sureties claimed that since
the creditor changed the rate of interest in the
principal obligation without their knowledge or
consent, they were relieved from liability under
their contract. It was held, however, that the
change in the rate of interest was merely a
15
collateral agreement between the creditor bank
and the principal debtor that did not affect the
surety. When the debtor promised to pay the extra
rate of interest on demand of the plaintiff, the
liability he assumed was his alone and was
separate and apart from the original contract. His
agreement to pay the additional rate of interest
was an additional burden upon him and him only.
That obligation in no way affected the original
contract of the surety, whose liability remained
unchanged. (Keenes Admr. v. Miller, 103 Ky, 628;
Parson on Bills and Notes, 571, Chitty on Bills,
212; Malteson v. Ellsworth, 33 Wis 488).
DECISION
CRUZ, J.:
On April 15, 1977, the Western Minolco
Corporation (WMC) obtained from the Philippine
Investments Systems Organization (PISO) two
loans for P2,500,000.00 and P1,000,000.00 for
which it issued the corresponding promissory
notes payable on May 30, 1977. On the same
date, Antonio Garcia and Ernest Kahn executed a
surety agreement binding themselves jointly and
severally for the payment of the loan of
P2,500,000.00 on due date.
Upon failure of WMC to pay after repeated
demands, demand was made on Garcia pursuant
to the surety agreement. Garcia also failed to pay.
Hence, on April 5, 1983, Lasal Development
Corporation (to which the credit had been
assigned earlier by PISO) sued Garcia for recovery
of the debt in the Regional Trial Court of Makati.
On May 18, 1983, Garcia moved to dismiss on the
grounds that: (a) the complaint stated no cause of
action; (b) the suit would result in unjust
enrichment of the plaintiff because he had not
received any consideration from PISO; (c) the
surety agreement violated the doctrine of the
limited liability of corporations; and (d) the
principal obligation had been novated.
After considering the arguments and evidence of
the parties, the trial court granted the motion and
dismissed the complaint on the ground that the
surety agreement was invalid for absence of
consideration.
The plaintiff moved for reconsideration and when
this was denied elevated the matter to the Court
of Appeals. In a decision dated June 23, 1987, the
respondent court reversed Judge Jesus M. Elbinias
and remanded the records of the case for trial on
the merits. Garcia then came to this Court in this
petition for review on certiorari, pleading the
same arguments raised in the trial
court.chanrobles.com:cralaw:red
The petitioners first ground is that, as found by
16
the trial court, the surety agreement was invalid
because no consideration had been paid to him by
PISO for executing the contract and that the
amount of the entire loan had been received and
enjoyed by WMC. He cites the following articles of
the Civil Code in support of his contention that
lack of consideration was a personal defense
available to him as surety:chanrob1es virtual 1aw
library
Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship.
Art. 1222. A solidary debtor may, in action filed by
the creditor, avail himself of all defenses which
are derived from the nature of the obligation and
of those which are personal to him, or pertain to
his own share. With respect to those which
personally belong to the others, he may avail
himself thereof only as regards that part of the
debt for which the latter are responsible.
The point is not well taken in view of the nature
and purpose of a surety agreement.chanrobles
virtualawlibrary
chanrobles.com:chanrobles.com.ph

Suretyship is a contractual relation resulting from
an agreement whereby one person, the surety,
engages to be answerable for the debt, default or
miscarriage of another, known as the principal.
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 promisee of the principal
is said to be direct, primary and absolute; 1 in
other words, he is directly and equally bound with
the principal. The surety therefore becomes liable
for the debt or duty of another although he
possesses no direct or personal interest over the
obligations nor does he receive any benefit
therefrom. 2
The peculiar nature of a surety agreement is that
it is regarded as valid despite the absence of any
direct consideration received by the surety either
from the principal obligor or from the creditor. A
contract of surety, like any other contract, must
generally be supported by a sufficient
consideration. However, the consideration
necessary to support a surety obligation need not
pass directly to the surety; a consideration moving
to the principal alone will suffice.
It has been held that if the delivery of the original
contract is contemporaneous with the delivery of
17
the suretys obligation, each contract becomes
completed at the same time, and the
consideration which supports the principal
contract likewise supports the subsidiary one. 3
And this is the kind of surety contract to which the
rule of strict construction applies as opposed to a
compensated surety contract undertaken by
surety corporations which are organized for the
purpose of conducting an indemnity business at
established rates and compensation unlike an
ordinary surety agreement where the surety binds
his name through motives of friendship and
accomodation. 4
It follows from the above principles that Lasal
would not be unjustly enriched if the petitioner
were to be held liable for the obligation contracted
by WMC. The creditor would only be recovering
the amount of its loan plus its increments. The
petitioner, for his part, can still go against WMC
for the amount he may have to pay Lasal as
assignee of the PISO credit.
Regarding the petitioners claim that he is liable
only as a corporate officer of WMC, the surety
agreement shows that he signed the same not in
representation of WMC or as its president but in
his personal capacity. He is therefore personally
bound. There is no law that prohibits a corporate
officer from binding himself personally to answer
for a corporate debt. While the limited liability
doctrine is intended to protect the stockholder by
immunizing him from personal liability for the
corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding
himself to the payment of the corporate debts.
The petitioner cannot therefore take refuge in this
doctrine that he has by his own acts effectively
waived.cralawnad
Concerning the issue of novation, we note first the
following provisions of the memorandum of
agreement supposedly entered into by WMC and
its creditors which the petitioner argues had the
effect of releasing him from the surety
agreement:chanrob1es virtual 1aw library
IV. Release of JSS
The CREDITORS expressly agree to release and
hereby release the Joint and Several Signatories
(JSS) of MINOLCOs officers from any liability
whatsoever on the obligations which they have
personally guaranteed or secured. Any action
therefore against all the aforesaid signatories are
waived in view of the promissory notes to be
issued by NDC which are fully and unconditionally
guaranteed by the Philippine Government, in
payment of MINOLCOs obligations to said
CREDITORS.
x x x extinguishes the guaranty. The mere failure on the
VI. The CREDITORS who have filed cases in court
against MINOLCO and who are signatories to this
18
agreement agree to dismiss the case with
prejudice, accepting the repayment scheme set
forth in paragraph II as a just and equitable
procedure for collecting their credits.
Significantly, however, the agreement (Annex 5)
was signed only by Don M. Ferry as chairman of
the board of directors of WMC and does not carry
the signature of any of the creditors. 5 Hence, it
has no binding force whatsoever on such
creditors.
The petitioner cites other developments or
transactions between the parties to the original
loans that he contends had the effect of novating
the said contracts and consequently extinguished
the surety agreement. Among these are the
extension of the original period of payment and
the compounding of the interest on the principal
obligations, both of which operated to the
prejudice of the petitioner.
The petitioner invokes Article 2079 of the Civil
Code, which provides:chanrob1es virtual 1aw
library
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor
part of the creditor to demand payment after the
debt has become due does not of itself constitute
any extension of time referred to herein.
However, Paragraph 5 of the surety agreement
clearly stipulated as follows:chanrobles virtual
lawlibrary
The sureties expressly waive all rights to demand
payment and notice of non-payment and protest,
and agree that the securities of every kind, that
now or may hereafter be left with the lender, its
successors, indorsees or assigns, as collateral, for
the said loan, or any evidence of debt or
obligations, or upon which a lien may exist may
be withdrawn or surrendered at any time, and the
time of payment thereof extended, without notice
to or consent by the sureties, and the liability on
this suretyship shall be solidary, direct and
immediate and not contingent upon any pursuit
by the lender, its successors, indorsees or assigns,
of whatever remedies the lender may have
against the principal or the securities or liens it
may possess. (Emphasis supplied.)
Since in the surety contract, the petitioner not
only consented to an extension in the payment of
the obligation but even waived his right to be
notified of such extension, he cannot now claim
that he has been released from his undertaking
because of the extension granted to the
principal.chanrobles.com : virtual law library
As for the compounded interest, we apply by
analogy the case of Bank of the Philippine Islands
v. Gooch and Redfern, 6 which was affirmed in the
later case of the Bank of the Philippine Islands v.
19
Albaladejo & Cia. 7 In the said cases, the
respective sureties claimed that since the creditor
changed the rate of interest in the principal
obligation without their knowledge or consent,
they were relieved from liability under their
contract. It was held, however, that the change in
the rate of interest was merely a collateral
agreement between the creditor bank and the
principal debtor that did not affect the surety.
When the debtor promised to pay the extra rate of
interest on demand of the plaintiff, the liability he
assumed was his alone and was separate and
apart from the original contract. His agreement to
pay the additional rate of interest was an
additional burden upon him and him only. That
obligation in no way affected the original contract
of the surety, whose liability remained unchanged.
8
Thus, despite the compounding of the interest,
the liability of the surety remains only up to the
original uncompounded interest, as stipulated in
the promissory note, that is, 17% per annum, with
a penalty charge of 2 1/2% per month until full
payment.
The petitioner cites other supposed agreements in
support of his theory of novation such as the
prepayment of the restructured loans of WMC
before the distribution of dividends to the
common stockholders, the proposed sale on
installments of its assets to Negros Occidental
Copperfield Mines, and the preference given to
other creditors of WMC over PISO. But we do not
think these are material as, to be so, the
alteration must change the legal effects of the
original contract. The alleged alterations do not
have that effect.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
It is axiomatic, and only fair, that the creditors of
a corporation must be paid first before dividends
may be distributed among the stockholders.
Unsecured creditors are given preference in
bankruptcy or insolvency proceedings because
secured creditors can after all go against the
security given by the debtor. As for the
installment sale of WMCs assets to Negros
Occidental Copperfield Mines, which might make it
difficult for the petitioner to recover any amount it
may have to pay on the loan of WMC, this was a
risk he took when he signed the surety
agreement. As it did not prohibit the alienation of
the properties of the principal debtor, the sale to
Negros cannot be considered a novation of the
original agreement. In fact, the proposed sale was
intended precisely to enable WMC to meet its
pending obligations.
The most important argument against the alleged
novation is the failure of the petitioner to establish
the validity of the new contract, an essential
requisite for the novation of a previous valid
obligation. Petitioner insists that the various
communications made by WMC with DBP,
together with the memorandum of agreement
20
(Annexes 1 to 7), are sufficient to establish the
new undertaking made by WMC with all its
creditors, including DBP. We do not think so.
It is true as a general rule no form of words or
writing is necessary to give effect to a novation. 9
Nevertheless, since the parties involved here are
corporations, it must first be proved that the
contracts, assuming they were made, were
executed by the persons possessing the proper
authority to bind their respective principals.
Annexes 1-4 are a mere exchange of
correspondence between the officers of WMC and
DBP. Although they contain the provisions and
proposals that, according to petitioner, should
suffice to establish that the original contract
between WMC and PISO has been materially
altered, they cannot be considered per se
sufficient to give rise to a valid new obligation.
WMC was in fact directed by Joseph W. Edralin, the
Assistant Executive Officer of the DBP, to
communicate with Atty. Hilario Oraolino of the
Office of the Chief Legal Counsel for the
preparation and execution of the necessary legal
documents to cover the approval and confirmation
of the several proposals made. No such
documents, as duly signed by the parties, were
ever presented in court. Annexes 5 to 7 10 are
also incomplete documents and not binding
without the signatures of the supposed
contracting parties.chanrobles.com.ph : virtual
law library
The argument of subrogation cannot be
considered at this stage as it is being invoked only
now. It is settled that an issue not raised in the
court a quo cannot be raised for the first time on
appeal because this would be offensive to the
basic rules of fair play. 11
As for the alleged substitution of debtors, nowhere
in the record can we find evidence of this claim.
The commitment made by DBP to the creditors of
WMC was that, although they had a first mortgage
lien over substantially all the assets of WMC
(which if foreclosed would leave most of its
creditors without recourse), they would
nevertheless defer proceedings against those
assets and instead allow their sale to NDC (with
better terms) to enable WMC to meet the
obligations. 12 In effect, what DBP did was merely
to restructure its credit with WMC and make
additional accommodations in the form of
investments on preferred and common shares of
stock of WMC. It was clearly an effort to assist
WMC perform its obligations with its creditors. But
not more than that.
Concerning the promissory notes supposedly
issued by NDC to the creditors of WMC and with
the full and unconditional guaranty of the
Philippine Government as contained in Annex 5,
suffice it to repeat that such Annex 5
(memorandum of agreement between WMC and
DBP), as well as Annex 6 (addendum to Annex 5,
making NOCOMIN, instead of NDC as the buyer)
21
and Annex 7 (contract of sale between WMC and
NOCOMIN), are all not signed by the contracting
parties and therefore have no evidentiary weight
or binding force.cralawnad
We approve the following observations made by
the Court of Appeals:chanrob1es virtual 1aw
library
Novation of contract cannot be presumed. In order
that an obligation may be extinguished by another
which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the
old and the new obligations be on every point
incompatible with each other (Art. 1292, Civil
Code). In every novation there are four essential
requisites. (1) a previous valid obligation; (2) the
agreement of all the parties to the new contract;
(3) the extinguishment of the old contract; and (4)
validity of the new one. Novation requires the
creation of new contractual relations as well as
the extinguishment of the old. There must be a
consent of all the parties to the substitution,
resulting in the extinction of the old obligation and
the creation of a valid new one (Tiu Siuco v.
Habana, 45 Phil. 707). The acceptance of the
promissory note by the plaintiff is not novation of
the contract. The legal doctrine is that an
obligation to pay a sum of money is not novated
in a new instrument by changing the term of
payment and adding other obligations not
incompatible with the old one (Inchausti & Co. v.
Yulo, 34 Phil. 978). It is not proper to consider an
obligation novated as in the case at bar by the
mere granting of extension of payment which did
not even alter its essence. To sustain novation
necessitates that the same be so declared in
unequivocal terms or that there is complete and
substantial incompatibility between the two
obligations (Sandico v. Paquing, 42 SCRA 322). An
obligation to pay a sum of money is not novated
in a new instrument wherein the old is ratified by
changing only the terms of payment and adding
other obligations not incompatible with the old
one or wherein the old contract is merely
supplementing the new one (Dungo v. Lopea, L-
19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena
FIRST DIVISION
[G. R. No. 127261. September 7, 2001]
VISAYAN SURETY & INSURANCE
CORPORATION, petitioner,
vs. THE HONORABLE COURT OF APPEAL
S, SPOUSES JUN
BARTOLOME+ and SUSANBARTOLOME a
nd DOMINADOR V. IBAJAN,
+ [2]
respondents.
DECISION
PARDO, J.:
22
Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal
Commercial Banking Corp. v. Militante, AC GR CV
04077, Sept. 20, 1985; Investors Finance Corp. v.
Cruz, AC GR CV 04710, Nov. 27,
1985).chanrobles.com : virtual law library
WHEREFORE, the petition is DENIED and the
challenged decision of the respondent court
AFFIRMED, with costs against the petitioner.
SO ORDERED.
Narvasa , Gancayco, Grio-Aquino and
Medialdea, JJ., concur.
The Case
The case is a petition to review and set aside a
decision[1] of the Court of Appeals affirming that of
the Regional Trial Court, Bian, Laguna, Branch 24,
holding the surety liable to the intervenor in lieu
of the principal on a replevin bond.
The Facts
The facts, as found by the Court of Appeals,
are as follows:
On February 2, 1993, the spouses Danilo
Ibajan and Mila Ambe Ibajan filed with the
Regional Trial Court, Laguna, Bian a complaint
against spouses Jun and Susan Bartolome, for
replevin to recover from them the possession of of replevin and to order the return of the jeepney
an Isuzu jeepney, with damages. Plaintiffs Ibajan to them.
alleged that they were the owners of an Isuzu
On May 3, 1993, Dominador V. Ibajan, father of
jeepney which was forcibly and unlawfully taken
plaintiff Danilo Ibajan, filed with the trial court a
by defendants Jun and Susan Bartolome on
motion for leave of court to intervene, stating that
December 8, 1992, while parked at their
he has a right superior to the plaintiffs over the
residence.
ownership and possession of the subject vehicle.
On February 8, 1993, plaintiffs filed a replevin
On June 1, 1993, the trial court granted the
bond through petitioner Visayan Surety &
motion to intervene.
Insurance Corporation. The contract of surety
provided thus: On August 8, 1993, the trial court issued an
order granting the motion to quash the writ of
WHEREFORE, we, sps. Danilo Ibajan and Mila replevin and ordering plaintiff Mila Ibajan to return
Ibajan and the VISAYAN SURETY & INSURANCE the subject jeepney to the intervenor Dominador
CORP., of Cebu, Cebu, with branch office at Ibajan.[5]
Manila, jointly and severally bind ourselves in the
On August 31, 1993, the trial court ordered the
sum of Three Hundred Thousand Pesos
issuance of a writ of replevin directing the sheriff
(P300,000.00) for the return of the property to the
to take into his custody the subject motor vehicle
defendant, if the return thereof be adjudged, and
and to deliver the same to the intervenor who was
for the payment to the defendant of such sum as
the registered owner.[6]
he/she may recover from the plaintiff in the
action.[3] On September 1, 1993, the trial court issued a
writ of replevin in favor of intervenor Dominador
On February 8, 1993, the trial court granted Ibajan but it was returned unsatisfied.
issuance of a writ of replevin directing the sheriff
On March 7, 1994, intervenor Dominador
to take the Isuzu jeepney into his custody.
Ibajan filed with the trial court a
Consequently, on February 22, 1993, Sheriff Arnel
motion/application for judgment against plaintiffs
Magat seized the subject vehicle and turned over
bond.
the same to plaintiff spouses Ibajan.[4]
On June 6, 1994, the trial court rendered
On February 15, 1993, the spouses Bartolome
judgement the dispositive portion of which reads:
filed with the trial court a motion to quash the writ

23
WHEREFORE, in the light of the foregoing
premises, judgment is hereby rendered in favor of
Dominador Ibajan and against Mila Ibajan and the
Visayan Surety and Insurance Corporation
ordering them to pay the former jointly and
severally the value of the subject jeepney in the
amount of P150,000.00 and such other damages
as may be proved by Dominador Ibajan plus costs.
[7]
On June 28, 1994, Visayan Surety and
Insurance Corporation and Mila Ibajan filed with
the trial court their respective motions for
reconsideration.
On August 16, 1994, the trial court denied
both motions.
On November 24, 1995, Visayan Surety and
Insurance Corporation (hereafter Visayan Surety)
appealed the decision to the Court of Appeals.[8]
On August 30, 1996, the Court of Appeals
promulgated its decision affirming the judgment
of the trial court.[9] On September 19, 1996,
petitioner filed a motion for reconsideration.[10] On
December 2, 1996, the Court of Appeals denied
the motion for reconsideration for lack of merit.[11]
Hence, this petition.[12]
The Issue
24
The issue in this case is whether the surety is
liable to an intervenor on a replevin bond posted
by petitioner in favor of respondents.[13]
Respondent Dominador Ibajan asserts that as
intervenor, he assumed the personality of the
original defendants in relation to the plaintiffs
bond for the issuance of a writ of replevin.
Petitioner Visayan Surety contends that it is
not liable to the intervenor, Dominador Ibajan,
because the intervention of the intervenor makes
him a party to the suit, but not a beneficiary to
the plaintiffs bond. The intervenor was not a party
to the contract of surety, hence, he was not bound
by the contract.
The Courts Ruling
The petition is meritorious.
An intervenor is a person, not originally
impleaded in a proceeding, who has legal interest
in the matter in litigation, or in the success of
either of the parties, or an interest against both,
or is so situated as to be adversely affected by a
distribution or other disposition of property in the
custody of the court or of an officer thereof.[14]
May an intervenor be considered a party to a
contract of surety which he did not sign and which
was executed by plaintiffs and defendants?
 It is a basic principle in law that contracts can relationship and obligation of the surety is limited
bind only the parties who had entered into it; it to the defendants specified in the contract of
cannot favor or prejudice a third person. surety.
[15]
Contracts take effect between the parties,
WHEREFORE, the Court REVERSES and sets
their assigns, and heirs, except in cases where the
aside the decision of the Court of Appeals in CA-G.
rights and obligations arising from the contract
R. CV No. 49094. The Court rules that petitioner
are not transmissible by their nature, or by
Visayan Surety & Insurance Corporation is not
stipulation or by provision of law.[16]
liable under the replevin bond to the intervenor,
A contract of surety is an agreement where a respondent Dominador V. Ibajan.
party called the surety guarantees the
No costs.
performance by another party called the principal
or obligor of an obligation or undertaking in favor SO ORDERED.
of a third person called the obligee. [17] Specifically,
Davide, Jr., C.J., (Chairman), Puno,
suretyship is a contractual relation resulting from
Kapunan, and Ynares-Santiago, JJ., concur.
an agreement whereby one person, the surety,
engages to be answerable for the debt, default or
miscarriage of another, known as the principal.[18]
Republic of the Philippines
The obligation of a surety cannot be extended SUPREME COURT
by implication beyond its specified limits. [19] When Manila
a surety executes a bond, it does not guarantee
that the plaintiffs cause of action is meritorious, THIRD DIVISION
and that it will be responsible for all the costs that
may be adjudicated against its principal in case
the action fails. The extent of a suretys liability is
determined only by the clause of the contract of
suretyship.[20] A contract of surety is not G.R. No. 33174 July 4, 1991
presumed; it cannot extend to more than what is
stipulated.[21] PHILIPPINE NATIONAL BANK, petitioner,
vs.
Since the obligation of the surety cannot be
extended by implication, it follows that the surety THE HONORABLE COURT OF APPEALS
cannot be held liable to the intervenor when the (Special Fourth Division), LUZON SURETY

25
CO., INC., and ESTANISLAO E. DEPUSOY,
trading under the style of E.E. DEPUSOY
CONSTRUCTION, respondents.
Domingo A. Santiago, Jr., Lucas R. Vidad, Nicolas
C. Alino, Cesar T. Basa and Roland A. Niedo for
petitioner.
Tolentino, Cruz, Reyes, Lava & Manuel for
respondent Luzon Surety Co., Inc.
F.M. Ejercito for respondent E.E. Depusoy
Construction.
DAVIDE, JR., J.:p
Before Us is a petition for the review
on certiorari of the decision of the Court of
Appeals promulgated on 12 December 1970 in
CA-G.R. No. 36615-R 1 affirming, with modification,
the decision of the then Court of First Instance
(now Regional Trial Court) of Manila, Branch VII,
dated 30 September 1959 in Civil Case No.
35163 2 an action for collection of sum of money
filed by petitioner against private respondents.
The dispositive portion of the trial court's decision
reads:
26
IN VIEW WHEREOF:
1. The case against Luzon Surety Co.
is dismissed but its counterclaim is
also dismissed for lack of sufficient
merit;
2. Defendant Estanislao Depusoy is
condemned to pay unto the Philippine
National Bank the respective sums as
principal of P35,000.00, P30,000.00,
P10,000.00, and P25,000.00 together
with the interests as outlined in the
statement of account set forth in the
body of this decision. No
pronouncements as to costs.
3
SO ORDERED.
The dispositive portion of the decision of
respondent Court of Appeals reads:
WHEREFORE, with the modification
that the defendant Depusoy shall pay
10% interest on the amount of the
judgment, the decision of the trial
court is hereby affirmed in all other
respects. Without pronouncement as
to costs. 4
 However, immediately preceding this is a
paragraph reading:
We agree with the appellant that the
trial court erred in not sentencing
Estanislao Depusoy to pay attorney's
fees equivalent to 10% of the amount
due. This is expressly provided for in
the promissory notes, and as it does
not appear to be unreasonable, the
stipulations of the parties should be
given effect.
As carefully summarized by the Court of Appeals,
the relevant facts in this case are as follows:
On August 6, 1955, Estanislao
Depusoy, doing business under the
name of E.E. Depusoy Construction,
and the Republic of the Philippines,
represented by the Director of Public
Works, entered into a building
contract, Exhibit 2-Luzon, for the
construction of the GSIS building at
Arroceros Street, Manila, Depusoy to
furnish all materials, labor, plans, and
supplies needed in the construction.
Depusoy applied for credit
accommodation with the plaintiff. This
27
was approved by the Board of
Directors in various resolutions subject
to the conditions that he would assign
all payments to be received from the
Bureau of Public Works of the GSIS to
the bank, furnish a surety bond, and
the surety to deposit P10,000.00 to
the plaintiff. The total accommodation
granted to Depusoy was P100,000.00.
This was later extended by another
P10,000.00 and P25,000.00, but in no
case should the loan exceed
P100,000.00, Exhibits K-1, K-2, K-3 and
K-4. In compliance with these
conditions, Depusoy executed a Deed
of Assignment of all money to be
received by him from the GSIS as
follows:
That I, Estanislao
Depusoy, of legal age,
Filipino, married to
Lourdes G. Gonzales,
doing business under the
style of E. E. San Beda
Subdivision, Manila, for
and in consideration of
certain loans, overdrafts
or other credit
accommodations to be
granted by the PHILIPPINE
NATIONAL BANK, Manila,
have assigned, transferred
and conveyed and by
these presents do hereby
assign, transfer and
convey unto the said
PHILIPPINE NATIONAL
BANK, its successors and
assigns all payment to be
received from my contract
with the Bureau of Public
Works, Republic of the
Philippines date (sic)
August 6, 1955.
By virtue of this
assignment it is hereby
understood that the
assignor hereby
acknowledges the monies,
sums or payments due
from the Bureau of Public
Works, Republic of the
Philippines, and which are
hereby assigned to the
PHILIPPINE NATIONAL
BANK as monies, sums
28
and payments belonging
to the PHILIPPINE
NATIONAL BANK, and that
any act or
misappropriation or
conversion which the
assignor or the latter's
representatives may
commit with respect to
the said sums, monies and
payments will subject the
assignor or the latter's
representatives to the
criminal liabilities imposed
by the Penal Code and
such other damages which
the Civil Code provides.
It is further understood
that the PHILIPPINE
NATIONAL BANK can
collect and receive any
and all sums, monies and
payments above-
mentioned from the
Bureau of Public Works,
Republic of the
Philippines, and for that
matter said bank is hereby
 authorized to indorse for
deposit or for encashment
any and all checks,
treasury warrants, money
orders, drafts and other
kinds of negotiable
instruments that might be
issued in connection with
the payment herein
assigned.
This assignment shall be
irrevocable subject to the
terms and conditions of
the promissory notes,
overdrafts and any other
kind of documents which
the PHILIPPINE NATIONAL
BANK have (sic) required
or may require the
assignor to execute to
evidence the above-
mentioned obligation.
Luzon thereafter executed two surety
bonds, one for the sum of P40,000.00
Exhibit D, and the other for
P60,000.00, Exhibit E. Exhibit its D
and E, except for the amount, are
29
expressed in the same words as
follows:
That we, E. E. DEPUSOY
CONSTRUCTION CO., of 32
2nd Street, San Beda
Subdv., Manila, as
principal and LUZON
SURETY COMPANY, INC., a
corporation duly organized
and existing under and by
virtue of the laws of the
Philippines, as surety, are
held and firmly bound
unto the PHILIPPINE
NATIONAL BANK of Manila
in the sum of SIXTY
THOUSAND PESOS ONLY
(P60,000.00), Philippine
Currency, for the payment
of which sum, well and
truly to be made, we bind
ourselves, our heirs,
executors, administrators,
successors, and assigns,
jointly and severally,
firmly by these presents:
The conditions of the
obligation are as follows:
WHEREAS, the above
bounden principal, on
the . . . . day of
September, 1956 in
consideration of a certain
loan of (P60,000.00)
executed a Deed of
Assignment in favor of the
Philippine National Bank
on all payments to be
received by him from the
Bureau of Public Works in
connection with a contract
dated August 6, 1956.
WHEREAS, said PHILIPPINE
NATIONAL BANK, requires
said principal to give a
good and sufficient bond
in the above stated sum
to secure the full and
faithful performance on
his part of said
Agreement.
30
NOW, THEREFORE, if the
principal shall well and
truly perform and fulfill all
the undertakings,
covenants, terms,
conditions and agreement
stipulated in said
Agreement then, this
obligation shall be null
and void; otherwise, it
shall remain in full force
and effect.
The liability of LUZON
SURETY COMPANY, INC.,
under this bond will expire
January 31, 1957.
Furthermore, it is hereby
agreed and understood
that the LUZON SURETY
COMPANY, INC. will not be
liable for any claim not
discovered and presented
to the company within
THREE (3) months from
the expiration of this bond
and that the obligee
hereby waives his right to
file any court action
 against the surety after
the termination of the
period of the three months
above mentioned.
With the consent of Luzon, the bond
was extended for another 6 months
from January 31, 1957.
Under the credit accommodation
granted by the plaintiff bank, Depusoy
obtained several amounts from the
bank. On January 14, 1957, Depusoy
received P50,000.00 from the bank
which he promised to pay in
installments on the dates therein
indicated, Exhibit A. On January 17,
1957, he received another P50,000.00
under the same conditions as the
promissory note Exhibit A, except with
respect to the time of payment. Under
this arrangement all payments made
by the GSIS were payable to the
Philippine National Bank. The treasury
warrants or checks, however, were not
sent directly to the plaintiff. They were
received by Depusoy, who in turn
delivered them to the plaintiff bank.
The plaintiff then applied the money
31
thus received, first, to the payment of
the amount due on the promissory
notes at the time of the receipt of the
treasury warrants or checks, and the
balance was credited to the current
account of Depusoy with the plaintiff
bank. A total of P1,309,461.89 were
(sic) paid by the GSIS to the plaintiff
bank for the account of Estanislao
Depusoy, Exhibit 1-Luzon. Of this
amount, P246,408.91 were (sic) paid
according to Exhibit 1 for the
importation of construction materials,
and P1,063,408.91 were (sic) received
by the Loans and Discounts
Department of the plaintiff bank. This
amount was disposed off by the
plaintiffs Loans & Discounts
Department as follows:
a) P795,976.64 were (sic)
credited to the current
account of Depusoy with
the plaintiff;
b) P20,000.00 were (sic)
credited to the plaintiffs
Foreign Department;
 c) P2,552.94 were (sic)
credited to the payment of
interest; and
d) P210,000.00 were (sic)
applied to the principal of
indebtedness. (Exh. N-1).
Depusoy defaulted in his building
contract with the Bureau of Public
Works, and sometime in September,
1957, the Bureau of Public Works
rescinded its contract with Depusoy.
No further amounts were thereafter
paid by the GSIS to the plaintiff bank.
The amount of the loan of Depusoy
which remains unpaid, including
interest, is over P100,000.00.
Demands for payment were made
upon Depusoy and Luzon, and as no
payment was made, . . . 5
herein petitioner filed with the trial court a
complaint (Civil Case No. 35163) against
Estanislao Depusoy and private respondent Luzon
Surety Co. Inc. (LSCI).
32
After trial on the merits, the trial court rendered a
decision the dispositive portion of which is above
adverted to.
In dismissing the case as against LSCI, the trial
court ruled that the surety bonds it issued, Exhs.
"D" and "E";
. . . guaranteed only the faithful
performance of the deed of
assignments, Exhibit C, and nothing
else. That the bonds were extended
by the letters Exhs. E and I did not
change their conditions. . . . 6
Petitioner appealed from said decision to the
Court of Appeals, (C.A.-G.R. No. 6615-R) relying on
the following assigned errors:
I
The trial court erred in holding that
defendant-appellee Luzon Surety
Company, Inc. "guaranteed only the
faithful performance of the deed of
assignment, Exh. "C", and nothing
else"; in holding the defense of the
appellee Luzon Surety Company, Inc.,
that there has been no breach of the
terms and conditions of the bonds
Exhs. "D" and "E"; in finding that the
"bonds" can only be therefore
understood to guarantee that the
payment due from the GSIS to
Depusoy would be delivered unto the
bank.
II
The trial court erred in not finding that
the bonds (Exhs. "D" and "E") should
be read jointly with the resolutions
approving the loan (Exhs. "K" to "K-
5"), the promissory notes and the
deed of assignment in the
determination of the true intent of the
parties in the execution of the bonds
which are the basis of the liability of
the defendant-appellee Luzon Surety
Company, Inc., in not considering
resolutions Exhs. "K" to "K-5";
promissory notes Exhs. "B", "G", and
"H" and the deed of assignment, Exh.
"C" as integral parts of the surety
bonds Exhs. "D" and "E" as therein
incorporated by reference in said
surety bonds as such necessarily
33
bound the appellee Luzon Surety
Company to their terms.
III
The trial court erred in not construing
the terms of the bonds in favor of the
plaintiff-appellant PNB and against the
defendant-appellee Luzon Surety
Company, Inc.
IV
The lower court erred in not holding
that the bonds Exhs. "D" and "E" and
letters of extension Exhs. "F" and "I"
were compensated surety agreements
executed as required by PNB board
resolution Exhs. "K" to "K-5" for the
purpose of securing the payment to
the PNB of the amount advanced by
the said bank to the appellee
Estanislao Depusoy to finance the
construction of the GSIS building
subject to the construction contract
Exh. "2-Luzon" or Exh. "O-PNB"; in not
finding that Exhs. "F" and "I" are
indubitable proofs that defendant-
appellee Luzon Surety Company, Inc.,
is liable for the repayment of the
P100,000.00 loan and the additional
accommodations granted to the
defendant-appellee Estanislao
Depusoy; and in not finding and
holding that Exhs. "D" and "E" in the
sense that they have been extended
so as to secure new accommodations
aside from the original obligation
mentioned in said bonds.
V assignment which incorporated said
The trial court erred in finding that all
payments due from the GSIS
construction to Depusoy were actually
delivered unto the bank; and in not
finding that Depusoy made diversions
from these amounts for which the
surety should be bound to answer
under the terms of its bonds.
VI
The trial court erred in not finding that
when appellee Depusoy incurred
breach (sic) in his construction
contract with the Bureau of Public
Works said default on the part of the
34
principal in his contract resulted in a
consequent breach of his undertaking
under the deed of assignment; and
that consequently any breach in the
undertaking of the principal in said
deed of assignment communicated
liability to the surety; in not finding
likewise that breach on the part of the
appellee Depusoy in his undertaking
under the promissory notes meant
breach of the terms of the deed of
promissory notes and that this breach
in the deed of assignment
communicated liability to the surety
under the terms of the bonds; and
that trial court (sic) erred in not
finding that there was a breach of the
bonds due to the failure of the
appellee Luzon Surety Company, Inc.
to see to it that the full amount of
P1,309,461.89 remitted by the GSIS to
the PNB was actually received by the
PNB; in not finding that the PNB did
not receive all the amounts still due to
the said institutions as remitted by the
GSIS under the terms of the deed of
assignment.
 VII
The trial court erred in not sentencing
defendant-appellee Estanislao
Depusoy to pay the attorney's fees
equivalent to 10% of the amounts due
and the costs of the suit.
VIII
The trial court erred in not admitting
in the evidence proof of the amount
actually received by the foreign
department of the PNB and the letter
of the GSIS to the PNB as part of the
rebuttal evidence of the defendant-
appellee (see evidences (sic) offered
as part of the record on appeal for
purposes of review).
IX
The trial court erred in relying
exclusively for its decision on the
relation of facts presented by the
appellee-Luzon Surety Company;
disregarding evidences (sic) presented
by the PNB consist of documentary
evidences (sic) disclosing patent facts
35
appearing on the face of said
documents and that consequently the
decision is not based on the real facts
and law of the case; and consequently
dismissing the case against the Luzon
Surety. 7
In due course the Court of Appeals rendered the
decision adverted to above. In disposing of the
assigned errors, it patiently examined and
analyzed the facts and made an extensive,
exhaustive and well-reasoned disquisition thereon
which We deem necessary to quote:
The assignment of error maybe (sic)
reduced into one single question,
what is the obligation of Luzon under
the surety bonds, or, stated otherwise,
what obligation had been guaranteed
by Luzon under the terms of the
surety bonds? It is the contention of
the plaintiff that the surety bonds,
Exhibits D and E, guaranteed the
payment of the loans or the debt of
Depusoy to the plaintiff to the extent
of P100,000.00. Luzon, however,
contends that what it guaranteed was
the performance of Depusoy of his
obligation under the Deed of
Assignment, Exhibit C, and not other
agreements between Depusoy and
the bank. This contention was upheld
by the lower court. This, we believe is
the correct construction of the surety
bonds. Under the surety bonds,
Depusoy and Luzon bound themselves
to the plaintiff in the sum of
P100,000.00. It recited that the
principal, Depusoy, and Luzon bound
themselves jointly and severally to the
PNB under the following conditions:
that "in consideration of a certain
loan, Depusoy executed a Deed of
Assignment in favor of the PNB on all
payments to be received by him from
the Bureau of Public Works in
connection with a contract of August
6, 1956"; that the PNB required the
principal to give a good and sufficient
bond to secure the full and faithful
performance on his part of said
agreement; and that, "if the principal
shall well and truly perform and fulfill
all the undertakings, covenants, terms
and conditions, and agreements
stipulated in said agreement, this
obligation shall be null and void".
Now, what are the undertakings,
36
covenants, terms, conditions, and
agreements stipulated in the said
agreement or Deed of Assignment?
The undertakings of the principal
Depusoy, under the Deed of
Assignment, Exhibit C, were to assign,
transfer, and convey to the plaintiff
bank all payments to be received by
Depusoy from the Bureau of Public
Works; that Depusoy acknowledged
that such sums assigned and received
by the plaintiff would belong to the
PNB, and if any conversion should be
made by the assignor or his
representative, he would be criminally
liable; that the PNB could collect and
receive all sums and monies, and
payments, and the bank was
authorized to endorse for deposit or
for encashment all checks or money
orders, or negotiable instruments that
it might receive in connection with the
assignment. Nowhere in the Deed of
Assignment nor in the bonds did
Luzon guarantee that Depusoy would
pay his indebtedness to the plaintiff
and that upon Depusoy's default,
Luzon would be liable. When the
terms of the agreement are clear,
there can be no room for construction. bonds, Exhibits D and E, as shown by
If the intention of the parties, and the following:
particularly of Luzon, was to
guarantee the payment of the debt of 1) Contrary to the usual
Depusoy to the plaintiff, the bonds practice of the plaintiff, Luzon did
would have recited in its preamble not sign the promissory notes,
that the principal was indebted to the Exhibits A and B;
PNB and that the PNB required the
principal to give a good and sufficient 2) Although the
bond to secure the faithful resolutions of the Board of
performance on his part of the terms Directors required that the surety
of the promissory notes. Instead of should make a deposit of
doing so, it recited that in P10,000.00, Luzon did not make
consideration of a certain loan, the such a deposit, the verbal
principal had executed a Deed of testimony of Delfin Santiago,
Assignment. The recital of the loan in Manager of the Loans and
the amount of P40,000.00, Exhibit D Discounts Department, to the
and P60,000.00, Exhibit E, is merely a contrary notwithstanding. The
statement of the cause or documentary evidence was
consideration of the Deed of submitted to prove that was the
Assignment and not a statement of fact;
the obligation. The Deed of
3) Delfin Santiago finally
Assignment necessarily was executed
admitted that what was
for a consideration, otherwise, it
guaranteed was not the loan but
would be null and void. The obligation
the Deed of Assignment.
recited in the surety bonds, Exhibits D
and E, is not the loan, but the Deed of
Delfin Santiago testified as follows:
Assignment; and that precisely was
what was guaranteed by Luzon in the

37
 Q Did you inform the
Luzon Surety Company, Inc. of your
actuation on this fact, that is in your giving
Mr. Depusoy portions of the payments
made by the GSIS to the Philippine
National Bank pursuant to the Deed of
Assignment?
A No, because I
understand that the Luzon Surety
Company, Inc. stands as surety on that
assignment on which the full payment of
the contract is assigned to the payments.
(TSN, p. 54)
xxx xxx xxx
Q Usually Mr. Santiago,
it is the practice of the Philippine National
Bank in cases where a surety company
guarantees the account of the borrower,
the Philippine National Bank requires the
surety company to sign the promissory
note as a co-maker, is it not?
A In case the condition
is approved, the surety I remember very
well, the last accommodation given to Mr.
Depusoy . . . that was the condition, but
38
the Luzon Surety Company, Inc. did not
want to sign, so at the request of the
Luzon Surety Company, Inc. and Mr.
Depusoy, the approved accommodation
was modified in such a way as only to the
surety bond.
ATTY. NERI: If Your
Honor please. We object to the question, it
was not covered by the direct
examination.
COURT: Answer.
A Well, apparently that
was the intention because you decided to
sign jointly and severally the promissory
note.
Q And because that
was our intention the Philippine National
Bank agreed to that desire of Luzon Surety
Company, Inc. by issuing only a similar
surety bond and not signing as co-maker,
and jointly and severally on the promissory
note?
 ATTY. NERI: Objection ATTY. NERI: We refer to
Your Honor, the contract is the best the document, Your Honor.
evidence.
COURT: Sustained.
COURT: Answer.
(TSN, pp. 9-10, June
A As usual, as at the 26, 1959)
beginning, we take it that your bonding
the Deed of Assignment is the xxx xxx xxx
understanding that all payments for the
whole contract will go to us. (TSN, pp. 55- ATTY. NERI: Now, Mr.
57, July 21, 1958) Depusoy in his testimony stated that when
you received these amounts from the GSIS
xxx xxx xxx and issued credit memos . . . in favor of Mr.
Depusoy, you did not notify the Luzon
Q Did you read the Surety Company, Inc. of the fact of the
terms of the bond? issuance of this (sic) credit memos in favor
of Mr. Depusoy will you state to this
A Yes, sir, that's right. Honorable Court the reason why is that
you did not give notice to the Luzon Surety
Q And you further Company, Inc.?
noted in the bond it merely guaranteed
the deed of assignment, is that correct? of A I did not notify the
Mr. Depusoy? Luzon Surety Company, Inc. of this
transaction because the bond filed by the
A Yes, sir. Luzon Surety Company, Inc., but the terms
of the bond filed by Luzon Surety Company
ATTY. CRUZ: And not
is that they understand the transaction of
this particular loan, is it not?

39
Mr. Depusoy with the Philippine National plaintiff approving the
Bank. loan or credit
accommodation to
COURT: They Depusoy required that
understand the transaction to be. . . Depusoy should put up a
bond executed by the
WITNESS: . . . The Luzon Surety Company,
nature of the transaction with Mr. Depusoy Inc., Exhibits K-3, K-4 and
in the sense that as we . . . as appearing in K-5. The resolutions of the
this bond Exhibit D . . . all payments to be Board of Directors were
received by him from the Bureau of Public unilateral acts of the
Works in connection with the contract to plaintiff and were
secure the full and faithfully performance conditions imposed upon
on his part of the said agreement, the the debtor, Depusoy,
agreement referred to is the assignment of Luzon was not a party to
payment in connection with the contract of these resolutions and
Mr. Depusoy with the GSIS. under the rule of res inter
alios acta, they cannot
(TSN, pp. 27-29 June 1,
bind or prejudice Luzon in
1959)
the absence of evidence
that the terms of the
In support of his contention that the
resolutions had been
surety bond was intended to
brought to the attention of
guarantee the loan, the appellant
Luzon and that it had
gave the following grounds or
acceded thereto. All that
reasons:
the bond stated is that the
1) The resolution of the PNB required the principal
Board of Directors of the to give a good and
sufficient bond. There can

40
be no other consideration
for the execution of the
bonds other than stated
thereon in the absence of
allegation that they did
not express the true
intention of the parties.
2) Appellant contends that
the promissory notes and
the building contract
mentioned in the Deed of
Assignment became part
and parcel of the Deed of
Assignment under the
principle of incorporation
by reference. We agree
that the Deed of
Assignment became part
and parcel of the bond,
but to say that all
promissory notes,
overdrafts, and any other
kind of documents which
the PNB might require the
assignor to execute to
evidence the
aforementioned obligation
were also incorporated by
41
reference to the surety
bond and became
obligation of Luzon is to
include in the assignment,
covenants and obligations
beyond the contemplation
of the parties. The
appellant relies on the last
paragraph of the Deed of
Assignment which reads:
"This assignment shall be
irrevocable and subject to
the terms and conditions
of the promissory notes,
overdrafts, and any other
kind of document which
the PNB can require or
may require the assignor
to execute to evidence the
above-mentioned
obligation".
It is argued that under this stipulation,
Luzon guaranteed the payment of the
promissory notes which are the
subject of this action and also the
building contract between Depusoy,
its principal, and the Bureau of Public
Works. This is a very far-fetched
construction. This paragraph does not
impose any obligation upon Depusoy.
All that was required of Depusoy was
to execute such documents which
might be required by the PNB to
evidence the Deed of Assignment. The
words of the phrase "subject to" are
words of qualification and not of
contract (Cox vs. Vat 149, 110 pp. 96-
148 CCH 147) and means subject to,
meaning under the control, power or
dominion or subordinate to and not
being words of contract imposing
upon defendant no contractual
obligation (40 Words & Phrases 386-
389). What was evidently intended is
the Deed of Assignment when it
stated "subject to the terms and
conditions of the promissory notes
and overdrafts" was that any amount
received by the PNB would be applied
to the payment of the promissory
notes and overdrafts in accordance
with their terms and conditions as
they fell due because the Deed of
Assignment was executed not for the
purpose of making the PNB the owner
of all the monies received from the
GSIS, but as a security for the
42
payment of the debt of Depusoy
arising from the credit
accommodation granted to him by the
appellant. And that this was the
intention is evident from the fact that
upon receipt of the treasury warrants
and checks from the GSIS, the
appellant applied the same to the
payment of the debt of Depusoy
which was due with interest and the
remainder was credited to Depusoy's
current account. This balance was
subject to the free disposal of
Depusoy. Hence, out of the over P1
million received by the Loans &
Discounts Department of the
appellant, almost P800,000.00 were
credited to the current account of
Depusoy and only a little over
P200,000.00 was applied to his debt.
Appellant contends that since in the
Deed of Assignment, Depusoy
undertook to assign, transfer, and
convey to PNB all payments to be
received by him from his contract with
the Bureau of Public Works, Luzon had
thereby guaranteed the faithful
performance by Depusoy of his
building contract with the Bureau of
Public Works, and Depusoy having 3) Appellant also contends that under
defaulted in his building contract by Exhibits F and I, it can be seen that
reason of which the Bureau of Public what was really intended to be
Works rescinded the building contract, guaranteed by the surety agreement
the PNB did not receive from the GSIS was the payment of the loan. We
the full contract price of over P2 quote Exhibits F and I.
million. This indeed is a very far-
fetched construction of the contract. Relative to our above-
What was transferred or assigned by captioned bonds in the
Depusoy to the PNB were all amount of P40,000.00
payments to be received by him under dated May 28, 1956 and
the contract with the Bureau of Public September 24, 1956,
Works. Necessarily, what was to be respectively, please be
received by Depusoy depends upon advised that same is
his performance under the contract. hereby extended for a
As long as he faithfully performed the further period of six (6)
contract, he would receive from the months from January 31,
GSIS the amount due him. From the 1957. All other terms and
moment he defaulted and failed to conditions of our above-
comply with the terms of the contract, mentioned bonds shall
he would receive nothing and he could remain the same except
not assign what he did not have. To the period of expiration
argue that under the terms of the herein above mentioned.
Deed of Assignment, Luzon also These bonds also cover
guaranteed the faithful performance the new accommodation
of the building contract of Depusoy given our Principal.
with the Bureau of Public Works is
fanciful and wishful thinking. Relative to the above
numbered bonds, in the

43
 amount of P40,000.00 and
P60,000.00 dated May 28,
1956 and September 24,
1956, respectively, the
account secured thereby
having been reduced by
virtue of payments made
by our principal, which,
according to him has but a
balance of P75,000.00 we
have the honor to inform
you that we are agreeable
to the extension of further
credit to our principal to
the extent of the amount
of the said bonds, under
the same terms and
conditions thereof.
At first glance, from the statement in
Exhibit F, which reads: "This bond also
covers the new accommodation given
our principal", and in Exhibit I, that
"we are agreeable to the extension of
further credit to or principal to the
extent of the amount of the said
bond", it would appear that Luzon was
referring to the obligation of Depusoy
to pay the loan. But particular
44
attention must be paid to the
statement in Exhibit F that "all of the
terms and conditions of our above-
mentioned bonds shall remain the
same except the period of expiration
herein below mentioned". What was
really agreed by Luzon was the
extension of the duration of the surety
bond, for under the terms of the
bonds they expired six months from
their respective dates. Any statement
in Exhibit I that may be construed as
referring to the debt of Depusoy was
made only by an Asst. Manager who
evidently was not familiar with the
terms of the surety bond. It must be
noted that the surety bond was
executed by CS Rodriguez, General
Manager. Moreover, it cannot prevail
over the testimony of Delfin Santiago,
Manager of the Loans & Discounts
Department, that what was
guaranteed by the surety bond was
the Deed of Assignment.
It is also contended that if what was
intended to be guaranteed by Luzon is
the Deed of Assignment, the surety
bond guaranteed nothing, because
with the execution of the Deed of
Assignment, nothing thereafter
remained to be done. This is not true,
for the terms of the Deed of
Assignment, Depusoy authorized the
PNB to receive all monies due from
the Bureau of Public Works and to
endorse for deposit all instruments of
credit that might be issued in
connection with the payments therein
assigned. Under this stipulation, Luzon
guaranteed that all the monies due
Depusoy under his building contract
with the Bureau of Public Works
should be paid to the PNB. It is true
that all the checks and warrants
issued by the GSIS were to be made
payable to the PNB. But under the
arrangement between the PNB, GSIS,
and the Bureau of Public Works, and
Depusoy, it was Depusoy who
received the warrants or checks either
from the Bureau of Public Works or
from the GSIS, and Depusoy delivered
the same to the PNB. The PNB did not
take the trouble of going to the GSIS
or the Bureau of Public Works to get
the checks. One reason because the
PNB did not know when any amount
45
would be due. There is nothing then
that could prevent an arrangement
thereafter between Depusoy and the
GSIS, or the Bureau of Public Works to
make the checks payable to Depusoy,
and Depusoy from forging the
signature of the PNB and
appropriating the money. This would
be a violation of the Deed of
Assignment for which Luzon would be
liable.
It is not disputed that no payment was
made directly to Depusoy after the
Deed of Assignment. All amounts due
to Depusoy were paid to the PNB for
the account of Depusoy. It is true that
in accordance with Exhibit M, only
P1,063,408.91 were received by the
Loans and Discounts Department of
the plaintiff bank, and that of the total
amount of P1,309,461.89 paid by the
GSIS, P246,062.98 were paid for the
importation of construction materials.
As to the so-called 10% retention
fund, there is no evidence that the
Bureau of Public Works had retained
any amount. In any case what was
assigned was "all payments to be
received" under the building contract,
and the 10% retention was not to be
received by Depusoy until certain
conditions had been met.
In its eight assignment of error, the
appellant contends that the lower
court in not admitting proof of the
amount actually received by the PNB
and the letter of the GSIS, Exhibit Q
(sic). Aside from the purely technical
reason for their rejection, their
admission cannot affect the result.
Exhibit Q is a letter of the General
Manager of the GSIS to plaintiff
advising plaintiff of the rescission of
the building contract. Exhibits Q, P, P-
1 and P-2 are statements of the
amounts received by plaintiff's foreign
department. There is no evidence that
the GSIS had paid any amount to
Depusoy in violation of the Deed of
Assignment. Not a single cent had
been received directly by Depusoy
from the GSIS or the Bureau of Public
Works.
xxx xxx xxx
46
We agree with the appellant that the
trial court erred in not sentencing
Estanislao Depusoy to pay attorney's
fees equivalent to 10% of the amount
due. This is expressly provided for in
the promissory notes, and as it does
not appear to be unreasonable, the
stipulation of the parties should be
given effect. 8
Its motion for reconsideration 9 having been
denied by the respondent Court of Appeals in its
resolution of 1 February 1971, 10 petitioner filed
the instant petition on 3 March 1971 asserting
therein that:
. . . the Decision and the Resolution of
respondent COURT (Annexes A and B)
are both not in accord with the
evidence, the law, and jurisprudence
on the matter.
I. THE SURETY BONDS COVER THE
PRINCIPAL LOANS, THE SURETY
THEREBY BECOMING LIABLE UPON
DEFAULT OF THE LATTER.
II. EVEN ASSUMING ARGUENDO THAT
THE BONDS SECURE ONLY THE DEED
 OF ASSIGNMENT, STILL THE SURETY IS
LIABLE FOR FAILURE OF THE
PRINCIPAL TO COMPLY WITH THE
TERMS OF SUCH DEED.
III. THE DISPOSITIVE PORTION OF THE
DECISION SHOULD BE AMENDED TO
THE END THAT PRIVATE RESPONDENT
RESPONDENTS BE ADJUDGED LIABLE
FOR ATTORNEY'S FEES. 11
In support of its petition, petitioner practically
summoned the same arguments which it relied
upon before the Court of Appeals.
On 3 March 1971 private respondent filed a
motion to dismiss the petition 12 on the following
grounds:
1. That the petition is without merit;
2. That the question raised therein are
too unsubstantial to require
consideration; and
3. That the question raised are
factual.
In the resolution of 8 March 1971 this Court
dismissed the petition for being factual and for
47
lack of merit; 13however, upon motion for
reconsideration 14 this Court reconsidered the
resolution and gave due course to the
petition. 15The petitioner was then required to
submit its Brief, 16 which it complied with on 12
July 1971 . 17 Private respondent LSCI filed its brief
on 10 August 1971. 18 Private respondent Depusoy
did not file any.
Except for the third assigned error, We find no
merit in this petition. The issues raised are factual.
The findings of facts of the Court of Appeals can
withstand the most incisive scrutiny. They are
sufficiently supported by the evidence on record
and the conclusions drawn therefrom do not
justify a departure from the deeply rooted and
well settled doctrine that findings of facts of the
Court of Appeals are conclusive on this
Court, 19 considering that the recognized
exceptions thereto 20 do not come to the rescue of
petitioner.
We are in full accord with the conclusion of the
trial court and the Court of Appeals that the bonds
executed by private respondent LSCI were to
guarantee the faithful performance of Depusoy of
his obligation under the Deed of Assignment and
not to guarantee the payment of the loans or the
debt of Depusoy to petitioner to the extent of
P100,000.00. The language of the bonds is clear,
explicit and unequivocal. It leaves no room for
interpretation. Article 1370 of the Civil Code
provides:
If the terms of a contract are clear and
leave no doubt upon the intention of
the contracting parties, the literal
meaning of its stipulations shall
control.
Besides, even if there had been any doubt on the
terms and conditions of the surety agreement, the
doubt should be resolved in favor of the surety. As
concretely put in Article 2055 of the Civil Code, "A
guaranty is not presumed, it must be expressed
and cannot extend to more than what is stipulated
therein."
In the recent case of Umali, et al. vs. Court of
Appeals, et al., 21 We reiterated the unrippled rule
that the liability of the surety is measured by the
terms of the contract, and, while he is liable to the
full extent thereof, such liability is strictly limited
to that assumed by its terms. 22
In La Insular vs. Machuca Go Tanco, et al., supra.,
this Court held:
48
It is undoubtedly true that the law
looks upon the contract of suretyship
with a jealous eye, and the rule is
settled that the obligations of the
surety cannot be extended by
implication beyond its specified limits.
Article 1827 of the Civil Code so
discloses (Uy Aloc vs. Cho Jan Ling, 27
Phil. Rep., 427); and with this doctrine
the common law is accordant. As was
said by Justice Story in Miller vs.
Stewart (9 Wheat. 680; 6 L. ed., 189):
Nothing can be clearer, both upon
principles and authority, than the
doctrine that the liability of a surety is
not to be extended, by implication,
beyond the terms of his contract. To
the extent and in the manner, and
under the circumstances pointed out
in his obligation, he is bound, and no
farther.
As earlier adverted to, there is merit in the third
assigned error. The paragraph immediately
preceding the decretal portion of the decision of
respondent Court of Appeals reads as follows:
 We agree with the appellant that the
trial court erred in not sentencing
Estanislao Depusoy to pay attorney's
fees equivalent to 10% of the amount
due. This is expressly provided for in
the promissory notes, and as it does
not appear to be unreasonable, the
stipulation of the parties should be
given effect.
The dispositive portion of the questioned decision
should then be modified in the sense that the
"10% interest" indicated therein should be
considered and understood as and for attorney's
fees.
WHEREFORE, with the above modification, the
Decision of the Court of Appeals of 12 December
1970 in CA-G.R. No. 36615-R is AFFIRMED, with
costs against petitioner.
SO ORDERED. Fernan, C.J., Gutierrez, Jr., Feliciano
and Bidin, JJ., concur.

Republic of the Philippines praying that the Decision1of the Court of Appeals
SUPREME COURT (CA), promulgated on July 30, 2008, and the
Manila Resolution2 dated June 1, 2009, denying
petitioner's motion for reconsideration thereof, be
THIRD DIVISION reversed and set aside.

G.R. No. 188539 March 12, 2014

MARIANO LIM, Petitioner,

vs.
SECURITY BANK CORPORATION,* Respondent.

DECISION

PERALTA, J.:

This deals with the Petition for Review on

Certiorari under Rule 45 of the Rules of Court

49
Petitioner executed a Continuing Suretyship in
favor of respondent to secure "any and all types of
credit accommodation that may be granted by the
bank hereinto and hereinafter" in favor of Raul
Arroyo for the amount of P2,000,000.00 which is
covered by a Credit Agreement/Promissory
Note.3 Said promissory note stated that the
interest on the loan shall be 19% per annum,
compounded monthly, for the first 30 days from
the date thereof, and if the note is not fully paid
when due, an additional penalty of 2% per month
of the total outstanding principal and interest due
and unpaid, shall be imposed.
In turn, the Continuing Suretyship4 executed by
petitioner stipulated that:
3. Liability of the Surety. - The liability of the
Surety is solidary and not contingent upon the
pursuit of the Bank of whatever remedies it may
have against the Debtor or the collaterals/liens it
may possess. If any of the Guaranteed Obligations
is not paid or performed on due date (at stated
maturity or by acceleration), the Surety shall,
without need for any notice, demand or any other
act or deed, immediately become liable therefor
and the Surety shall pay and perform the same.5
Guaranteed Obligations are defined in the same
document as follows:
a) "Guaranteed Obligations" - the obligations of
the Debtor arising from all credit accommodations
50
extended by the Bank to the Debtor, including
increases, renewals, roll-overs, extensions,
restructurings, amendments or novations thereof,
as well as (i) all obligations of the Debtor
presently or hereafter owing to the Bank, as
appears in the accounts, books and records of the
Bank, whether direct or indirect, and (ii) any and
all expenses which the Bank may incur in
enforcing any of its rights, powers and remedies
under the Credit Instruments as defined
hereinbelow.6
The debtor, Raul Arroyo, defaulted on his loan
obligation. Thereafter, petitioner received a Notice
of Final Demand dated August 2, 2001, informing
him that he was liable to pay the loan obtained by
Raul and Edwina Arroyo, including the interests
and penalty fees amounting to P7,703,185.54,
and demanding payment thereof. For failure of
petitioner to comply with said demand,
respondent filed a complaint for collection of sum
of money against him and the Arroyo spouses.
Since the Arroyo spouses can no longer be
located, summons was not served on them,
hence, only petitioner actively participated in the
case.
After trial, the Regional Trial Court of Davao (RTC)
rendered judgment against petitioner.7 The
dispositive portion of the RTC Decision reads as
follows:
Wherefore, judgment is hereby rendered ordering
defendant Lim to pay the following sums.
1. The principal sum of two million pesos
plus nineteen percent interest of the
outstanding principal interest due and
unpaid to be computed from January 28,
1997 until fully paid, plus two percent
interest per month as penalty to be
computed from February 28, 1997 until fully
paid.
2. Four hundred thousand pesos as
attorney's fees.
3. Thirty thousand pesos as litigation
expenses.
SO ORDERED.8
Petitioner appealed to the CA, but the appellate
court, in its Decision dated July 30, 2008, affirmed
the RTC judgment with the modification that
interest be computed from August 1, 1997; the
penalty should start only from August 28, 1997;
the award of attorney's fees is set at 10% of the
total amount due; and the award for litigation
expenses increased to P92,321.10.9
Petitioner's motion for reconsideration of the CA
Decision was denied per Resolution dated June 1,
2009.
51
Petitioner then elevated the matter to this Court
via a petition for review on certiorari, where the
main issue is whether petitioner may validly be
held liable for the principal debtor's loan obtained
six months after the execution of the Continuing
Suretyship.
The other issues, such as the proper computation
of the total indebtedness and the amount of
litigation expenses are factual matters that had
been satisfactorily addressed by the CA, to wit: (1)
the CA ruled that respondent should recompute
the total amount due, since the proceeds from the
foreclosure of the real estate and chattel
mortgages were deducted only on June 20, 2001,
when the public auctions were conducted on
August 26, 1998 and September 7, 1999,
respectively, thus, the amount of the proceeds
from the foreclosure of the mortgaged properties
should have been deducted from the amount of
indebtedness on the date the public auction was
held; and (2) the CA likewise pointed out that as
can be seen from the Legal Fees Form,10 the
litigation expense incurred by respondent
was P92,321.10, the amount it paid as filing fee. It
is hornbook principle that this Court is not a trier
of facts, hence, such issues will not be revisited by
this Court in the present petition. With regard to
the propriety of making petitioner a hostile
witness, respondent is correct that the issue
cannot be raised for the first time on appeal.
Thus, the Court will no longer address these
issues which had been improperly raised in this
petition for review on certiorari.
The main issue deserves scant consideration, but
the matter of the award of attorney's fees
deserves reexamination.
The nature of a suretyship is elucidated in
Philippine Charter Insurance Corporation v.
Petroleum Distributors & Service Corporation11 in
this wise:
A contract of suretyship is an agreement whereby
a party, called the surety, guarantees the
performance by another party, called the principal
or obligor, of an obligation or undertaking in favor
of another party, called the obligee. Although the
contract of a surety is secondary only to a valid
principal obligation, the surety becomes liable for
the debt or duty of another although it possesses
no direct or personal interest over the obligations
nor does it receive any benefit therefrom. This
was explained in the case of Stronghold Insurance
Company, Inc. v. Republic-Asahi Glass
Corporation, where it was written:
The surety's obligation is not an original and direct
one for the performance of his own act, but
merely accessory or collateral to the obligation
contracted by the principal. Nevertheless,
although the contract of a surety is in essence
secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal
52
is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the
principal.
xxxx
Thus, suretyship arises upon the solidary binding
of a person deemed the surety with the principal
debtor for the purpose of fulfilling an obligation. A
surety is considered in law as being the same
party as the debtor in relation to whatever is
adjudged touching the obligation of the latter, and
their liabilities are interwoven as to be
inseparable. x x x.12
In this case, what petitioner executed was a
Continuing Suretyship, which the Court described
in Saludo, Jr. v. Security Bank Corporation13 as
follows:
The essence of a continuing surety has been
highlighted in the case of Totanes v. China
Banking Corporation in this wise:
Comprehensive or continuing surety agreements
are, in fact, quite commonplace in present day
financial and commercial practice. A bank or
financing company which anticipates entering into
a series of credit transactions with a particular
company, normally requires the projected
principal debtor to execute a continuing surety
agreement along with its sureties. By executing
such an agreement, the principal places itself in a
position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each
financing or credit accommodation extended to
the principal debtor.14
The terms of the Continuing Suretyship executed
by petitioner, quoted earlier, are very
clear.1wphi1 It states that petitioner, as surety,
shall, without need for any notice, demand or any
other act or deed, immediately become liable and
shall pay "all credit accommodations extended by
the Bank to the Debtor, including increases,
renewals, roll-overs, extensions, restructurings,
amendments or novations thereof, as well as (i) all
obligations of the Debtor presently or hereafter
owing to the Bank, as appears in the accounts,
books and records of the Bank, whether direct or
indirect, and
(ii) any and all expenses which the Bank may
incur in enforcing any of its rights, powers and
remedies under the Credit Instruments as defined
hereinbelow."15 Such stipulations are valid and
legal and constitute the law between the parties,
as Article 2053 of the Civil Code provides that "[a]
guaranty may also be given as security for future
debts, the amount of which is not yet known; x x
x." Thus, petitioner is unequivocally bound by the
terms of the Continuing Suretyship. There can be
no cavil then that petitioner is liable for the
principal of the loan, together with the interest
53
and penalties due thereon, even if said loan was
obtained by the principal debtor even after the
date of execution of the Continuing Suretyship.
With regard to the award of attorney's fees, it
should be noted that Article 2208 of the Civil Code
does not prohibit recovery of attorney's fees if
there is a stipulation in the contract for payment
of the same. Thus, in Asian Construction and
Development Corporation v. Cathay Pacific Steel
Corporation (CAPASCO),16 the Court, citing Titan
Construction Corporation v. Uni-Field Enterprises,
Inc.,17 expounded as follows:
The law allows a party to recover attorney's fees
under a written agreement. In Barons Marketing
Corporation v. Court of Appeals, the Court ruled
that:
[T]he attorney's fees here are in the nature of
liquidated damages and the stipulation therefor is
aptly called a penal clause. It has been said that
so long as such stipulation does not contravene
law, morals, or public order, it is strictly binding
upon defendant. The attorney's fees so provided
are awarded in favor of the litigant, not his
counsel.
On the other hand, the law also allows parties to a
contract to stipulate on liquidated damages to be
paid in case of breach. A stipulation on liquidated
damages is a penalty clause where the obligor
assumes a greater liability in case of breach of an
obligation. The obligor is bound to pay the
stipulated amount without need for proof on the
existence and on the measure of damages caused
by the breach.18
However, even if such attorney's fees are allowed
by law, the courts still have the power to reduce
the same if it is unreasonable. In Trade &
Investment Corporation of the Philippines v.
Roblett Industrial Construction Corp.,19 the Court
equitably reduced the amount of attorney's fees
to be paid since interests and penalties had
ballooned to thrice as much as the principal debt.
That is also the case here. The award of attorney's
fees amounting to ten percent (10%) of the
principal debt, plus interest and penalty charges,
would definitely exceed the principal amount;
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45848 November 9,1977
TOWERS ASSURANCE
CORPORATION, petitioner,
vs.
ORORAMA SUPERMART, ITS OWNER-
PROPRIETOR, SEE HONG and JUDGE
54
thus, making the attorney's fees manifestly
exorbitant. Hence, we reduce the amount of
attorney's fees to ten percent (10%) of the
principal debt only.
WHEREFORE, the petition is PARTIALLY GRANTED.
The Decision of the Court of Appeals, dated July
30, 2008, in CA-G.R. CV No. 00462, is AFFIRMED
with MODIFICATION in that the award of attorney's
fees is reduced to ten percent (10%) of the
principal debt only.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
BENJAMIN K. GOROSPE, Presiding Judge,
Court of First Instance of Misamis Oriental,
Branch I, respondents.
Benjamin Tabique & Zosimo T. Vasalla for
petitioner.
Rodrigo F. Lim, Jr. for private respondent.
AQUINO, J.:
This case is about the liability of a surety in a
counterbond for the lifting of a writ of preliminary
attachment.
On February 17, 1976 See Hong, the proprietor of
Ororama Supermart in Cagayan de Oro City, sued
the spouses Ernesto Ong and Conching Ong in the
Court of First Instance of Misamis Oriental for the
collection of the sum of P 58,400 plus litigation
expenses and attorney's fees (Civil Case No.
4930).
See Hong asked for a writ of preliminary
attachment. On March 5, 1976, the lower court
issued an order of attachment. The deputy sheriff
attached the properties of the Ong spouses in
Valencia, Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on
March 11, 1976 a counterbond in 'the amount of P
58,400 with Towers Assurance Corporation as
surety. In that undertaking, the Ong spouses and
Towers Assurance Corporation bound themselves
to pay solidarity to See Hong the sum of P 58,400.
On March 24, 1976 the Ong spouses filed an
answer with a counterclaim. For non-appearance
at the pre- trial, the Ong spouses were declared in
default.
55
On October 25, 1976, the lower court rendered a
decision, ordering not only the Ong spouses but
also their surety, Towers Assurance Corporation,
to pay solidarily to See Hong the sum of P 58,400.
The court also ordered the Ong spouses to pay P
10,000 as litigation expenses and attorney's fees.
Ernesto Ong manifested that he did not want to
appeal. On March 8, 1977, Ororama Supermart
filed a motion for execution. The lower court
granted that motion. The writ of execution was
issued on March 14 against the judgment debtors
and their surety. On March 29, 1977, Towers
Assurance Corporation filed the instant petition for
certiorari where it assails the decision and writ of
execution.
We hold that the lower court acted with grave
abuse of discretion in issuing a writ of execution
against the surety without first giving it an
opportunity to be heard as required in Rule 57 of
tie Rules of Court which provides:
SEC. 17. When execution returned
unsatisfied, recovery had upon bound.
If the execution be returned
unsatisfied in whole or in part, the
surety or sureties on any
counterbound given pursuant to the
 provisions of this rule to secure the
payment of the judgment shall
become charged on such
counterbound, and bound to pay to
the judgment creditor upon demand,
the amount due under the judgment,
which amount may be recovered from
such surety or sureties after notice
and summary hearing in the same
action.
Under section 17, in order that the judgment
creditor might recover from the surety on the
counterbond, it is necessary (1) that execution be
first issued against the principal debtor and that
such execution was returned unsatisfied in whole
or in part; (2) that the creditor made a demand
upon the surety for the satisfaction of the
judgment, and (3) that the surety be given notice
and a summary hearing in the same action as to
his liability for the judgment under his
counterbond.
The first requisite mentioned above is not
applicable to this case because Towers Assurance
Corporation assumed a solidary liability for the
56
satisfaction of the judgment. A surety is not
entitled to the exhaustion of the properties of the
principal debtor (Art. 2959, Civil Code; Luzon Steel
Corporation vs. Sia, L-26449, May 15, 1969, 28
SCRA 58, 63).
But certainly, the surety is entitled to be heard
before an execution can be issued against him
since he is not a party in the case involving his
principal. Notice and hearing constitute the
essence of procedural due process. (Martinez vs.
Villacete 116 Phil. 326; Insurance & Surety Co.,
Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200, Luzon
Surety Co., Inc. vs. Beson, L-26865-66, January 30.
1970. 31 SCRA 313).
WHEREFORE, the order and writ of execution,
insofar as they concern Towers Corporation, are
set aside. The lower court is directed to conduct a
summary hearing on the surety's liability on its
counterbound. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio,
Concepcion, Jr. and Santos, JJ., concur.
 Republic of the Philippines 09-1022-DP entitled Abdulgani Salik, et al,
SUPREME COURT v. Pan Pacific Overseas and Recruiting
Manila Services and Finman General Assurance
Corporation, which directed herein
SECOND DIVISION petitioner to pay jointly and severally with
Pan Pacific the claims of herein private
G.R. No. 84084 August 20, 1990 respondents amounting to P25,000.00 and
2) the Order dated June 7, 1988, which
FINMAN GENERAL ASSURANCE
denied petitioner's motion for
CORPORATION, petitioner,
reconsideration (Rollo, p. 2).
vs.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI The facts of the case are as follows:
KUBA GANDHI PUA, DAVID MALANAO, THE
ADMINISTRATOR, PHILIPPINE OVERSEAS AND Abdulgani Salik et al., private respondents,
EMPLOYMENT ADMINISTRATION, THE allegedly applied with Pan Pacific Overseas
SECRETARY OF LABOR AND Recruiting Services, Inc. (hereinafter
EMPLOYMENT, respondents. referred to as Pan Pacific) on April 22, 1987
and were assured employment abroad by a
David I. Unay, Jr. for petitioner. certain Mrs. Normita Egil. In consideration
thereof, they allegedly paid fees totalling
Kamid D. Abdul for private respondents.
P30,000.00. But despite numerous
assurances of employment abroad given by
Celia Arandia and Mrs. Egil, they were not
PARAS, J.: employed (Ibid., p. 15).

This is a petition for certiorari seeking to Accordingly, they filed a joint complaint with
annul 1) the Order dated March 28, 1988 of the Philippine Overseas Employment
the Honorable Secretary of Labor and Administration (herein referred to as POEA)
Employment in POEA, LRO/RRD Case No. 87- against Pan Pacific for Violation of Articles

57
32 and 34(a) of the Labor Code, as
amended, with claims for refund of a total
amount of P30,000.00 (Ibid.).
The POEA motu proprio impleaded and
summoned herein petitioner surety Finman
General Assurance Corporation (hereinafter
referred to as Finman), in the latter's
capacity as Pan Pacific's bonding company.
Summons were served upon both Pan Pacific
and Finman, but they failed to answer.
On October 9, 1987, a hearing was called,
but only the private respondents appeared.
Despite being deemed in default for failing
to answer, both Finman and Pan Pacific were
still notified of the scheduled hearing. Again
they failed to appear. Thus, ex-parte
proceedings ensued.
During the hearing, herein private
respondents reiterated the allegations in
their complaint that they first paid
P20,000.00 thru Hadji Usop Kabagani for
which a receipt was issued signed by
Engineer Arandia and countersigned by Mrs.
Egil and a certain Imelda who are allegedly
employed by Pan Pacific; that they paid
58
another P10,000.00 to Engr. Arandia who did
not issue any receipt therefor; that the total
payment of P30,000.00 allegedly represents
payments for herein private respondents in
the amount of P5,000.00 each, and
Abdulnasser Ali, who did not file any
complaint against Pan Pacific (Ibid., pp. 15-
16).
Herein private respondents presented as
their witness, Hadji Usop Kabagani who they
Identified as the one who actually financed
their application and who corroborated their
testimonies on all material points including
the non-issuance of a receipt for P10,000.00
by Engr. Arandia.
Herein petitioner, Finman, in an answer
which was not timely filed, alleged, among
others, that herein private respondents do
not have a valid cause of action against it;
that Finman is not privy to any transaction
undertaken by Pan Pacific with herein
private respondents; that herein private
respondents claims are barred by the
statute of frauds and by the fact that they
executed a waiver; that the receipts
presented by herein private respondents are
mere scraps of paper; that it is not liable for
the acts of Mrs. Egil that Finman has a
cashbond of P75,000.00 only which is less
than the required amount of P100,000.00;
and that herein private respondents should
proceed directly against the cash bond of
Pan Pacific or against Mrs. Egil (Ibid., pp.
1617).
On March 18,1988, the Honorable Franklin
M. Drilon, then the Secretary of Labor and
Employment, upon the recommendation of
the POEA hearing officer, issued an Order,
the dispositive portion of which reads:
WHEREFORE, premises
considered, both respondents are
hereby directed to pay jointly and
severally the claims of
complainants, as follows:
1. Abdulgani Salik P5,000.00
2. Balabagan Ampilan 5,000.00
3. Ali Kuba 5,000.00
4. Gandhi Dua 5,000.00
5. David Malanao 5,000.00
59
Based on the records of this
Administration, respondent
agency is presently serving a
total period of suspension of
seventeen (1 7) months imposed
in three (3) separate orders
issued on June 2, 1987, August
17, 1987 and September 23,
1987. Under the new schedule of
penalties published on January
21, 1987 in the Philippine
Inquirer, the penalty of
cancellation shall be imposed
when the offender has been
previously penalized with
suspension the total period of
which is 12 months or more.
Moreover, the penalty imposable
in the case at bar is two (2)
months suspension for each count
of violation or a total period of
suspension of ten (10) months as
the acts were committed in April
1987. Thus, whether under the
old schedule of penalties which
required a total period of
suspension of twenty-four (24)
months for cancellation to be
imposed or under the new
 schedule which provides for a
twelve (12) month total
suspension period, the penalty of
cancellation may be properly
imposed upon the herein
respondent agency.
In view thereof, the license of Pan
Pacific Overseas Recruiting
Services is hereby cancelled,
effective immediately.
SO ORDERED. (Ibid., pp. 20-21).
A motion for reconsideration having been
denied (Ibid., p. 22), herein petitioner
instituted the instant petition for certiorari,
raising the following assigned errors:
I OVERSEAS EMPLOYMENT
THE HONORABLE ADMINISTRATOR
AND THE HONORABLE, SECRETARY
OF LABOR ACTED WITH GRAVE
ABUSE OF DISCRETION
AMOUNTING TO LACK OF
JURISDICTION IN MOTU PROPRIO
IMPLEADING FINMAN AS CO-
RESPONDENT OF PAN PACIFIC IN
60
POEA LRO/RRD CASE NO. 87-09-
1022 DP WHICH WAS FILED BY
ABDULGANI SALIK, ET AL.;
II
THE HONORABLE SECRETARY OF
LABOR ACTED WITHOUT OR IN
EXCESS OF JURISDICTION AND
WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK
OF JURISDICTION IN DIRECTING
FINMAN TO PAY JOINTLY AND
SEVERALLY WITH PAN PACIFIC THE
CLAIMS OF PRIVATE
RESPONDENTS ON THE BASIS OF
THE SURETYSHIP AGREEMENT
BETWEEN FINMAN AND PAN
PACIFIC AND THE PHILIPPINE
ADMINISTRATION (POEA FOR
SHORT); AND
III
THE FINDINGS OF FACT MADE BY
THE POEA AND UPON WHICH THE
HONORABLE SECRETARY OF
LABOR BASED ITS QUESTIONED
 ORDERS ARE NOT SUPPORTED BY
SUBSTANTIAL EVIDENCE AND ARE
CONTRARY TO LAW. (Ibid., p. 101)
As required by this Court, herein public
respondents filed their memorandum on July
28, 1989 (Ibid., p. 84); while that of
petitioner and private respondents were
filed on September 11, 1989 (Ibid., p. 89)
and March 16, 1990 (Ibid., p. 120),
respectively.
The petition is devoid of merit.
In its first and second assigned errors,
petitioner maintains that POEA has no
jurisdiction to directly enforce the
suretyship undertaking of FINMAN (herein
petitioner) under the surety bond (Ibid., p.
104).
In the case at bar, it remains uncontroverted
that herein petitioner and Pan Pacific
entered into a suretyship agreement, with
the former agreeing that the bond is
conditioned upon the true and faithful
performance and observance of the bonded
principal (Pan Pacific) of its duties and
obligations. It was also understood that
61
under the suretyship agreement, herein
petitioner undertook itself to be jointly and
severally liable for all claims arising from
recruitment violation of Pan Pacific (Ibid., p.
23), in keeping with Section 4, Rule V, Book I
of the Implementing Rules of the Labor
Code, which provides:
Section 4. Upon approval of the
application, the applicant shall
pay to the Ministry (now
Department) a license fee of
P6,000.00, post a cash bond of
P50,000.00 or negotiable bonds
of equivalent amount convertible
to cash issued by banking or
financial institution duly endorsed
to the Ministry (now Department)
as well as a surety bond of
P150,000.00 from an accredited
bonding company to answer for
valid and legal claims arising
from violations of the conditions
of the license or the contracts of
employment and guarantee
compliance with the provisions of
the Code, its implementing rules
and regulations and appropriate
 issuances of the Ministry (now
Department). (Emphasis supplied)
Accordingly, the nature of Finman's
obligation under the suretyship agreement
makes it privy to the proceedings against its
principal (Pan Pacific). As such Finman is
bound, in the absence of collusion, by a
judgment against its principal even though
it was not a party to the proceedings Leyson
v. Rizal Surety and Insurance Co., 16 SCRA
551 (1966). Furthermore, in Government of
the Philippines v. Tizon (20 SCRA 1182
[1967]), this Court ruled that where the
surety bound itself solidarily with the
principal obligor the former is so dependent
on the principal debtor "that the surety is
considered in law as being the same party
as the debtor in relation to whatever is
adjudged touching the obligation of the
latter." Applying the foregoing principles to
the case at bar, it can be very well said that
even if herein Finman was not impleaded in
the instant case, still it (petitioner) can be
held jointly and severally liable for all claims
arising from recruitment violation of Pan
Pacific. Moreover, as correctly stated by the
Solicitor General, private respondents have
a legal claim against Pan Pacific and its
62
insurer for the placement and processing
fees they paid, so much so that in order to
provide a complete relief to private
respondents, petitioner had to be impleaded
in the case (Rollo, p. 87).
Furthermore, Finman contends that herein
respondent Secretary of Labor cannot
validly assume jurisdiction over the case at
bar; otherwise, proceedings will be
railroaded resulting in the deprivation of the
former of any remedial measures under the
law.
The records of the case reveal that herein
Finman filed a motion for reconsideration of
the adverse decision dated March 18, 1988
of respondent Secretary of Labor. In the said
motion for reconsideration, no jurisdictional
challenge was made (Ibid., p. 22). It was
only when it filed this petition that it
assailed the jurisdiction of the respondent
Secretary of Labor, and that of the POEA.
But then, it was too late. Estoppel had
barred herein petitioner from raising the
issue, regardless of its merits (Akay Printing
Press v. Minister of Labor and Employment,
140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and
respondent Secretary's actions in
impleading and directing herein petitioner
to pay jointly and severally with Pan Pacific
the claims of private respondents constitute
a grave abuse of discretion amounting to
lack of jurisdiction has no basis. (Ibid., p.
101.)
As regards the third assigned error, herein
petitioner maintains that the findings of fact
made by the POEA upon which respondent
Secretary of Labor based his questioned
Orders are not supported by substantial
evidence and are contrary to law, is likewise
untenable.
Herein petitioner, in raising this third issue,
is, in effect, asking this Court to review the
respondent Secretary's findings of facts.
Well-settled is the rule that findings of facts
of the respondent Secretary are generally
accorded great weight unless there was
grave abuse of discretion or lack of
jurisdiction in arriving at such findings
(Asiaworld Publishing House, Inc. vs. Ople,
152 SCRA 219 (1987).
63
In the case at bar, it is undisputed that when
the case was first set for hearing, only the
private respondents appeared, despite
summons having been served upon both
herein petitioner and Pan Pacific. This,
notwithstanding, both herein petitioner and
Pan Pacific were again notified of the
scheduled hearing, but, as aforestated they
also' failed to a pear (Rollo, p. 15).
Accordingly, owing to the absence of any
controverting evidence, respondent
Secretary of Labor admitted and considered
private respondents' testimonies and
evidence as substantial. Under the
circumstances, no justifiable reason can be
found to justify disturbance of the findings
of facts of the respondent Secretary of
Labor, supported as they are by substantial
evidence and in the absence of grave abuse
of discretion (Asiaworld Publishing House,
Inc. v. Ople, supra); and in line with the well
established principle that the findings of
administrative agencies which have
acquired expertise because their jurisdiction
is confined to specific matters are generally
accorded not only respect but at times even
finality. (National Federation of Labor Union
(NAFLU) v. Ople, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned
Orders of respondent Secretary of Labor are
hereby AFFIRMED in toto,
SO ORDERED.
SOUTH CITY HOMES
vs.
BA FINANCE CORPORATION, respondent.
Facts:
On January 17, 1983, Joseph L. G. Chua, President
of Fortune Motors Corporation, executed in favor
of plaintiff-appellant a Continuing Suretyship
Agreement, in which he "jointly and severally
unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to
BA Finance Corporation. On February 3, 1983,
Palawan Lumber Manufacturing Corporation
represented by Joseph L.G. Chua, George D. Tan,
Edgar C. Rodrigueza and Joselito C. Baltazar,
executed in favor of plaintiff-appellant a
Continuing Suretyship Agreement in which, said
corporation "jointly and severally unconditionally"
guaranteed the "full, faithful and prompt payment
and discharge of any and all indebtedness of
Fortune Motors Corporation to BA Finance
Corporation (Folder of Exhibits, pp. 19-20). On the
same date, South City Homes, Inc. represented by
64
Melencio-Herrera (Chairperson), Padilla and
Regalado, JJ., concur.
Sarmiento, J., is on leave.
Edgar C. Rodrigueza and Aurelio F. Tablante,
likewise executed a Continuing Suretyship
Agreement in which said corporation "jointly and
severally unconditionally" guaranteed the "full,
faithful and prompt payment and discharge of any
and all indebtedness" of Fortune Motors
Corporation to BA Finance Corporation.
Fortune Motors Corporation thereafter executed
trust receipts covering the motor vehicles
delivered to it by CARCO under which it agreed to
remit to the Entruster (CARCO) the proceeds of
any sale and immediately surrender the remaining
unsold vehicles. ). The drafts and trust receipts
were assigned to plaintiff-appellant, under Deeds
of Assignment executed by CARCO.
Upon failure of the defendant-appellant Fortune
Motors Corporation to pay the amounts due under
the drafts and to remit the proceeds of motor
vehicles sold or to return those remaining unsold
in accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes,
Inc., Aurelio Tablante, Palawan Lumber
Manufacturing Corporation, Joseph L. G. Chua,
George D. Tan and Joselito C. Baltazar (Folder of
Exhibits, pp. 29-37). Since the defendants-
appellants failed to settle their outstanding
account with plaintiff-appellant, the latter filed on
December 22, 1983 a complaint for a sum of
money with prayer for preliminary attachment,
with the Regional Trial Court of Manila.
Issue: WON respondent BAFC has a valid cause of
action for a sum of money following the drafts and
trust receipts transactions.
Held: As an entruster, respondent BAFC must first
demand the return of the unsold vehicles from
Fortune Motors Corporation, pursuant to the terms
of the trust receipts. Having failed to do so,
petitioners had no cause of action whatsoever
Palmares vs CA
FACTS
Pursuant to a promissory note, MB Lending
extended a 30k loan to Sps. Azarraga and
Estrella Palmares, payable on or before 12 May
1990, with compounded interest at 6% per annum
to be computed every 30 days from the date
thereof.
I, Mrs. Estrella Palmares, as the Co-
maker of the above-quoted loan, have
65
against Fortune Motors Corporation and the action
for collection of sum of money was, therefore,
premature.
A trust receipt is a security transaction intended
to aid in financing importers and retail dealers
who do not have sufficient funds or resources to
finance the importation or purchase of
merchandise, and who may not be able to acquire
credit except through utilization, as collateral, of
the merchandise imported or purchased.9 In the
event of default by the entrustee on his
obligations under the trust receipt agreement, it is
not absolutely necessary that the entruster cancel
the trust and take possession of the goods to be
able to enforce his rights thereunder.
fully understood the contents of this
Promissory Note for Short-Term Loan:
That as Co-maker, I am fully
aware that I shall be jointly and
severally or solidarily liable with the
above principal maker of this note;
 That in fact, I hereby agree that
M.B. LENDING CORPORATION may
demand payment of the above loan
from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the
payment of the note subject to the
same conditions above-contained.
Palmares and Sps. Azarraga were only able to pay
16.3k. MB Lending filed a complaint against
Palmares as the lone party-defendant, allegedly
by reason of Sps. Azarragas insolvency.
Palmares main contention was that she is to
be held liable only upon default of the
principal debtor Sps. Azarraga. She avers that
immediately after the loan matured, she offered
to settle the obligation, but MB Lending refused,
and instead informed her that they would try to
collect from Sps. Azarraga. In addition, partial
payment has been made.
RTC dismissed MB Lendings complaint
without prejudice to the filing of a separate action
for a sum of money against Sps. Azarraga. The
offer Palmares made to pay the obligation is
considered a valid tender of payment sufficient to
discharge her secondary liability on the
instrument. As co-maker, Palmares is only
secondarily liable on the instrument.
66
CA reversed RTC and declared
Palmares liable to pay MB Lending the
outstanding balance of 13.7k at 6% per month
computed from the date the loan was contracted
until fully paid, penalty charges, attorneys fees,
and costs. Palmares is a surety since she bound
herself to be jointly and severally liable with Sps.
Azarraga when she signed as co-maker. Therefore,
she is primarily liable and may be sued for the
entire obligation.
ISSUE & HOLDING
WON Palmares is a guarantor or a surety.
SURETY; primarily liable.
RATIO
Palmares expressly bound herself to be jointly and
severally or solidarily liable with Sps. Azarraga;
therefore, her liability is that of a surety. The rule
that ignorance of the contents of an instrument
does not ordinarily affect the liability of one who
signs it also applies to contracts of suretyship. The
mistake of a surety as to the legal effect of her
obligation is ordinarily no reason for relieving her
of liability.
 The undertaking to pay upon default of
the principal debtor does not automatically
remove it from the ambit of a contract of
suretyship. The second and third paragraphs of
the promissory note do not contain any other
condition for the enforcement of MB Lendings
right against Palmares. A contract of suretyship is
that wherein one lends his credit by joining in the
principal debtor's obligation, so as to render
himself directly and primarily responsible with
him, and without reference to the solvency of the
principal.
Several attendant factors support the
finding that Palmares is a surety.
When she was informed about the spouses
failure to pay, she immediately offered to
settle the account with MB Lending.
She presented the receipts of the payments
already made, which were all issued in her
name and of the Azarraga spouses. This can
only be construed to mean that the
payments made by the principal debtors
were considered by MB Lending as
creditable directly upon the account and
inuring to the benefit of Palmares.
A surety is bound equally and absolutely with
the principal, and as such is deemed an original
promisor and debtor from the beginning. In
67
suretyship, there is but one contract, and the
surety is bound by the same agreement which
binds the principal. The contract of a surety starts
with the agreement, which is precisely the
situation obtaining in this case.
A surety is usually bound with his principal
by the same instrument, executed at the same
time and upon the same consideration; he is an
original debtor, and his liability is immediate and
direct. Where a written agreement on the same
sheet of paper with and immediately following the
principal contract between the buyer and seller is
executed simultaneously therewith, providing that
the signers of the agreement agreed to the terms
of the principal contract, the signers were
"sureties" jointly liable with the buyer.
Re: Palmares argument that the complaint
was prematurely filed for lack of demand
UNMERITORIOUS
Palmares was saying that Sps. Azarraga cannot as
yet be considered in default, as MB Lending has
not yet made either a judicial or extrajudicial
demand. This argument fails. Paragraph (G) of the
note states that "should I fail to pay in accordance
with the above schedule of payment, I hereby
waive my right to notice and demand." Hence,
demand by the creditor is no longer necessary in
order that delay may exist since the contract itself
already expressly so declares. As a surety,
petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the
sureties is not necessary before bringing suit
against them, since the commencement of the
suit is a sufficient demand. A surety is not
even entitled, as a matter of right, to be given
notice of the principal's default. Inasmuch as
the creditor owes no duty of active diligence to
take care of the interest of the surety, his mere
failure to voluntarily give information to the surety
of the default of the principal cannot have the
effect of discharging the surety. The surety is
bound to take notice of the principal's default and
to perform the obligation.
The alleged failure of MB Lending to prove
the fact of demand on Sps. Azarraga is
immaterial. In the absence of a statutory or
contractual requirement, it is not necessary that
performance of his obligation be first demanded
of the principal, especially where demand would
have been useless; nor is it a requisite that the
principal be called on to account. A suretyship is a
direct contract to pay the debt of another. As an
original promisor and debtor from the
beginning, he is held ordinarily to know
every default of his principal.
68
Re: Palmares argument that the filing of the
complaint solely against her was improper
UNMERITORIOUS
Under NCC 1216, the creditor may proceed
against any one of the solidary debtors or
some or all of them simultaneously. In
accordance with the rule that, in the absence of
statute or agreement otherwise, a surety is
primarily liable, and with the rule that his proper
remedy is to pay the debt and pursue the
principal for reimbursement, the surety cannot at
law, unless permitted by statute and in the
absence of any agreement limiting the application
of the security, require the creditor or obligee,
before proceeding against the surety, to resort to
and exhaust his remedies against the principal,
particularly where both principal and surety are
equally bound.
MB Lendings mere failure to immediately
sue Palmares on her obligation does not
release her from liability.
Where a creditor refrains from proceeding
against the principal, the surety is not
exonerated. Mere want of diligence or
forbearance does not affect the creditor's
rights vis-a-vis the surety, unless the surety
requires him by appropriate notice to sue on
the obligation. In the absence of proof of
resultant injury, a surety is not discharged by the
creditor's mere statement that the creditor will not
look to the surety, or that he need not trouble
himself. The consequences of the delay, such as
the subsequent insolvency of the principal, or the
fact that the remedies against the principal may
be lost by lapse of time, are immaterial. The
raison d'tre for the rule is that there is
nothing to prevent the creditor from
proceeding against the principal at any
time.
Leniency shown to a debtor in default, by
delay permitted by the creditor without
change in the time when the debt might be
demanded, does not constitute an extension
of the time of payment, which would release
the surety.
In order to constitute an extension discharging the
surety:
It should appear that the extension was for
a definite period, pursuant to an enforceable
Estate of Hemady vs. Luzon Surety
Facts:
69
agreement between the principal and the
creditor
It was made without the consent of the
surety or with a reservation of rights with
respect to him
The contract must be one which precludes
the creditor from enforcing the principal
contract within the period during which he
could otherwise have enforced it, and which
precludes the surety from paying the debt
None of these elements are present here. The
mere fact that MB Lending gave Sps. Azarraga an
extended period of time within which to comply
with their obligation did not effectively absolve
Palmares from the consequences of her
undertaking. Besides, the burden is on the surety
Palmares to show that she has been discharged by
some act of the creditor MB Lending.
SC DECISION: Constrained to dismiss the
petition for lack of merit, but to except
therefrom the issue anent the propriety of
the monetary award adjudged to herein
respondent corporation.
Luzon Surety files a claim against the estate of
Hemady which the deceased guaranteed as
surety when still alive.
Luzon Surety filed a claim against the estate of
K.H. Hemady based on indemnity agreements
(counterbonds) subscribed by distinct principals
and by the deceased K.H. Hemady as surety
(solidary guarantor). As a contingent claim, Luzon
Surety prayed for the allowance of the value of
the indemnity agreements it had executed. The
lower court dismissed the claim of Luzon Surety
on the ground that whatever losses may occur
after Hemadys death, are not chargeable to his
estate, because upon his death he ceased to be a
guarantor.
Issue:
Whether or not a solidary guarantors liability is
extinguished by his death.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-13873 January 31, 1963
GENERAL INSURANCE and SURETY
CORPORATION, petitioner,
vs.
REPUBLIC OF THE PHILIPPINES and CENTRAL
LUZON EDUCATIONAL FOUNDATION,
INC., respondents.
70
Held:
The solidary guarantors liability is not
extinguished by his death, and that in such event,
the Luzon Surety Co., had the right to file against
the estate a contingent claim for reimbursement.
The contracts of suretyship entered into by K. H.
Hemady in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the
undertaking, nor by the stipulations of the
contracts themselves, nor by provision of law, his
eventual liability thereunder necessarily passed
upon his death to his heirs.
Guido Advincula for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
On May 15, 1954, the Central Luzon Educational
Foundation, Inc. and the General Insurance and
Surety Corporation posted in favor of the
Department of Education a bond, the terms of
which read as follows:
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, the Department of Education has
required the Central Luzon Educational
Foundation, Inc., operating the Sison &
Aruego Colleges, of Urdaneta, Pangasinan,
Philippines, an institution of learning to file a
bond to guarantee the adequate and
efficient administration of said school or
college and the observance of all
regulations prescribed by the Secretary of
Education and compliance with all
obligations, including the payment of the
salaries of all its teachers and employees,
past, present, and future, and the payment
of all other obligations incurred by, or in
behalf of said school.
NOW, THEREFORE, in compliance with said
requirement, we, CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC., operating
the Sison and Aruego Colleges, represented
Dr. Jose Aruego, its Vice-Chairman, as
principal, and the GENERAL INSURANCE AND
SURETY CORPORATION, a corporation duly
organized and existing under and by virtue
the laws of the Philippines, as surety, are
held and firmly bound, jointly and firmly,
unto the Department of Education of the
Republic of the Philippines in the sum of TEN
THOUSAND PESOS (P10,000.00) Philippine
currency, for the payment thereof we bind
ourselves, our heirs, executors,
71
administrators, successors, and assigns,
jointly and severally firmly by these
presents;
WHEN the Secretary of Education is satisfied
that said institution of learning had
defaulted in any of the foregoing particulars,
this bond may immediately thereafter be
declared forfeited and for the payment of
the amount above-specified, we bind
ourselves, our heirs, executors, successors,
administrators, and assigns, jointly and
severally.
We further bind ourselves, by these
presents, to give the Department of
Education at least sixty (60) days notice of
the intended withdrawal or cancellation of
this bond, in order that the Department can
take such action as may be necessary to
protect the interests of such teachers,
employees or creditors of the school and of
the Government.
LIABILITY of Surety under this bond will
expire on June 15, 1955, unless sooner
revoked.
 IN WITNESS WHEREOF, we signed this
present guarranty at the City of Manila,
Philippines, this 15th day of May, 1954.
On the same day, May 15, 1954, the Central
Luzon Educational Foundation, Inc., Teofilo Sison
and Jose M. Aruego executed an indemnity
agreement binding themselves jointly and
severally to indemnify the surety of "any
damages, prejudices, loss, costs, payments,
advances and expenses of whatever kind and
nature, including attorney's fees and legal costs,
which the COMPANY may, at any time sustain or
incur, as well as to reimburse to said COMPANY all
sums and amounts of money which the COMPANY
or its representatives shall or may pay or cause to
be paid or become liable to pay, on account of or
arising from the execution of the above mentioned
Bond."
On June 25, 1954, the surety advised the
Secretary of Education that it was withdrawing
and cancelling its bond. Copies of the letter were
sent to the Bureau of Private Schools and to the
Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the
bond, the Foundation was indebted to two of its
teachers for salaries, to wit: to Remedios Laoag, in
72
the sum of P685.64, and to H.B. Arandia, in the
sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been
refused, the Solicitor General, in behalf of the
Republic of the Philippines, filed a complaint for
the forfeiture of the bond, in the Court of First
Instance of Manila on July 11, 1956.
In due time, the surety filed its answer in which it
set up special defenses and a cross-claim against
the Foundation and prayed that the complaint be
dismissed and that it be indemnified by the
Foundation of any amount it might be required to
pay the Government, plus attorney's fees.
For its part, the Foundation denied the cross-claim
and contended that, because Remedios Laoag
owed Fr. Cinense the amount of P820.65, there
was no basis for the action; that the bond is illegal
and that the Government has no capacity to sue.
The surety also filed a third-party complaint
against Teofilo Sison and Jose M. Aruego on the
basis of the indemnity agreement. While
admitting the allegations of the third-party
complaint, Sison and Aruego claimed that because
of the cancellation and withdrawal of the bond,
the indemnity agreement ceased to be of force
and effect.
Hearing was held and on December 18, 1956, the
Court of First Instance rendered judgment holding
the principal and the surety jointly and severally
liable to the Government in the sum of P10,000.00
with legal interest from the date of filing of the
complaint, until the sum is fully paid and ordering
the principal to reimburse the surety whatever
amount it may be compelled to pay to the
Government by reason of the judgment, with
costs against both principal and the surety.
The surety filed a motion for reconsideration and a
request to decide the third-party complaint which
the trial court denied.
On appeal, the Court of Appeals rendered a
decision, the dispositive portion of which reads:
WHEREFORE, the appealed judgment is
hereby modified in the following manner:
(a) Ordering Central Luzon Educational
Foundation, Inc., and General Insurance and
Surety Corporation to pay jointly and
severally the Republic of the Philippines the
sum of P10,000.00, plus costs and legal
73
interests from July 11, 1956 until fully paid;
and
(b) Ordering Central Luzon Educational
Foundation, Inc., Teofilo Sison and Jose M.
Aruego to reimburse, jointly an severally,
the General Insurance and Surety
Corporation of all amounts it may be forced
to pay the Republic of the Philippines by
virtue of this judgment, plus costs and
P2,000.00 for counsel's fees.
From this decision, the surety appealed to this
Court by way of certiorari, raising questions of
law.1
In its first four assignments of error, the surety
contends that it was no longer liable on its bond
after August 24, 1954 (when the 60-day notice of
cancellation and withdrawal ended), or, at the
latest, after June 15, 1955. For support, the surety
invokes the following provisions of the bond:
WE, further bind ourselves, by these
presents to give the Department of
Education at least sixty (60) days notice of
the intended withdrawal or cancellation of
this bond, in order that the Department can
take such action as may be necessary to
 protect the interest of such teachers,
employees, Creditors to the government.
LIABILITY of the Surety under this bond will
expire on June 15, 1955, unless sooner
revoked.
On the other hand, the Government contends that
since the salaries of the teachers were due and
payable when the bond was still in force, the
surety has become liable on its bond from the
moment of its execution on May 15,1954.
We agree with this contention of the Government.
It must be remembered that, by the terms of the
bond the surety guaranteed to the Government
"compliance (by the Foundation) with all
obligations, including the payment of the salaries
of its teachers and employees, past, present and
future, and the payment of all other obligations
incurred by, or in behalf of said school." Now, it is
not disputed that even before the execution of the
bond the Foundation was already indebted to two
of its teachers for past salaries. From the moment,
therefore, the bond was executed, the right of the
Government to proceed against the bond accrued
because since then, there has been violation of
the terms of the bond regarding payment of past
74
salaries of teachers at the Sison and Aruego
Colleges. The fact that the action was filed only on
July 11, 1956 does not militate against this
position because actions based on written
contracts prescribe in ten years. (Art. 1144, par. 1,
Civil Code). The surety also cites our decision in
the case of Jollye v. Barcelon and Luzon Surety
Co., Inc., 68 Phil. 164 and National Rice & Corn
Corp. (NARIC) v. Rivera, et al., G.R. No. L-4023,
February 29, 1952. But there is nothing in these
cases that supports the proposition that the
liability of a surety for obligations arising during
the life of a bond ceases upon the expiration of
the bond.
In the Jollye case, the bond provided:
Whereas, the above bounded principal, on
13th day of February, 1933 entered into an
agreement with H. P. L. Jollye of Manila, P. I.,
to fully and faithfully refund to said Mr. H. P.
L. Jollye the above stated sum of P7,500
representing the purchase price of the 74
shares of the capital stock of the North
Electric Company (certificate No. 38) paid
by said Mr. H. P. L. Jollye to the undersigned
principal, Mr. Emeterio Barcelon, in the
event ofthe title thereto of said Mr. Barcelon
is invalidated by any judgement which may
 be rendered by the court of Cavite against
Vicente Diosomito or in the event that any
of the warranties contained in that certain
deed of sale executed by the undersigned
principal on this 13th day of February,
1933,be invalidated, a copy of which is
hereto attached and made an integralpart
hereof, market Exhibit A.
Wherefore, the parties respectfully pray that
the foregoing stipulation of facts be
admitted and approved by this Honorable
Court, without prejudice to the parties
adducing other evidence to prove their case
not covered by this stipulation of
facts. 1wph1.t
According to the bond, "the liability of Luzon
Surety Company, Inc. under this bond will expire
(12) months from date hereof." The date referred
to was February 13, 1933. This Court absolved the
surety of liability because the acts for which the
bond was posted happened after its expiration.
Thus, We held in that case:
... The acts provided therein by reason of
which the contract of suretyship was
executed could have taken place within the
stipulated period twelve months. Hence, the
75
parties fixed that period exactly at twelve
months, limiting thereby the obligation of
the appellee to answer for the payment to
the appellant of the aforesaid sum of
P7,500.00 to not more than the stipulated
period. . . .
Here, on the other hand, the right of the
Government to collect on the bond arose while the
bond was in force, because, as earlier noted, even
before the execution of the bond, the principal
had already been indebted to its teachers.
Neither does the NARIC case support the surety's
position. In that case, the bond provided that
This bond expires on March 20th, 1949 and
will be cancelled TEN DAYS after the
expiration, unless the surety is notified of
any existing obligation thereunder, or unless
the surety renews or extends it in writing for
another term.
and We held that giving notice of existing
obligation was a condition precedent to further
liability of the surety and that in default of such
notice, liability on the bond automatically ceased.
Similarly, in the case of Santos, et. al. v. Mejia, et
al., G.R. No. L-6383, December 29, 1953, the bond
provided that
Liability of the surety on this bond will
expire in THIRTEEN DAYS and said bond will
be cancelled 10 DAYS after its expiration
unless surety is notified of any existing
obligation thereunder.
and We held that the surety could not be held
liable because the bond was cancelled when no
notice of existing obligations was given within ten
days.
In the present case, there is no provision that the
bond will be cancelled unless the surety is notified
of any claim and so no condition precedent has to
be complied with by the Government before it can
bring an action. Indeed, the provision of the bond
in the NARIC and Santos cases that it would be
cancelled ten days after its expiration unless
notice of claim was given was inserted precisely
because, without such a provision, the surety's
liability for obligations arising while the bond was
in force would subsist even after its expiration.
Thus, in Pao Chuan Wek v. Nomorosa, 54 O.G. No.
11, 3490, We held that under a provision that the
76
surety "will not be liable for any claim not
discovered and presented to the company within
three months from the expiration of this bond and
that the obligee hereby waives his right to file any
court action against the surety after the
termination of the period of three months above
mentioned," the giving of notice is a condition
precedent to be complied with.
And suppose this action were filed while the bond
was in force, as the surety would have the
Government do, but the same remained pending
after June 15, 1955, would the surety suggest that
the judgment that may be rendered in such action
could no longer be enforced against it because
the bond says that its liability under it has
expired?
And what of the provision on 60-day notice? The
surety urges that all actions on the bond must be
brought within that period or they would all be
barred. The surety misread the provision. The 60-
day notice is not a period of prescription of action.
The provision merely means that the surety can
withdraw as in fact it did in this case even
before June 15, 1955 provided it gave notice of its
intention to do so at least 60 days in advance. If
at all, the condition is a limitation on the right of
the surety to withdraw rather than a limitation of
action on the bond. This is clear also from the
Manual of Information for Private Schools2 which
states that "The bond furnished by a school may
not be withdrawn by either or both the bondsmen
except by giving the Director of Private Schools
sixty days notice."
In its fifth assignment of error, the surety
contends:
1. That the bond is void for being contrary to
public policy insofar as it requires the surety to
pay P10,000.00 regardless of the amount of the
salaries of the teachers.3 It is claimed that to
enforce forfeiture of the bond for the full amount
would be to allow the Government to enrich itself
since the unpaid salaries of the teachers amount
to P1,318.84 only.
2. That, under Article 1311 of the Civil
Code,4 since teachers of Sison and Aruego
Colleges are not parties to the bond, "the bond is
not effective, and binding upon the obligors
(principal and surety) as far as it guarantees
payment of the 'past salaries' of the teachers of
said school." This is the same as saying that the
surety is not liable to teachers of Sison and
Aruego Colleges because the latter are not parties
to the bond nor are they beneficiaries of a
77
stipulation pour autrui. But this argument is based
on the false premise that the teachers are trying
to enforce the obligation of the bond, which is not
the case here. This is not an action filed by the
teachers against the surety. This is an action
brought by the Government, of which the
Department of Education is an instrumentality, to
hold the surety liable on its bond for the same has
been violated when the principal failed to comply
"with all obligations, including the payment of
salaries of its teachers, past, present and future."
There is nothing against public policy in forfeiting
the bond for the amount. The bond is penal in
nature. Article 1226 of the Code states that in
obligation with a penal clause, the penalty shall
substitute the indemnity for damages and the
payment of interests in case of non-compliance, if
there is no stipulation to the contrary, and the
party to whom payment is to be made is entitled
to recover the sum stipulated without need of
proving damages because one of the primary
purposes of a penalty clause is to avoid such
necessity. (Art. 1228, Civil Code; Lambert v. Fox,
26 Phil. 588; Palacios v. Municipality of Cavite, 12
Phil. 140; Manila Racing Club v. Manila Jockey
Club, 69 Phil. 55). The mere non-performance of
the principal obligation gives rise to the right to
the penalty, (IV Tolentino, Civil Code of the
Philippines, p. 247.)
In its first and second "alternative assignments of
error," the surety contends that it was released
from its obligation under the bond when on
February 4, 1955, Remedios Laoag and the
Foundation agreed that the latter would pay the
former's salaries, which were then already due, on
March 1, 1955. In support of this proposition, the
surety cites Article 2079 of the Code which
provides as follows:
An extension granted to the debtor by the
creditor without the consent of the
guarantor extinguishes the guaranty. . . .
But the above provision does not apply to this
case. The supposed extension of time was granted
not by the Department of Education or the
Government but by the teachers. As already
stated, the creditors on the bond are not the
teachers but the Department of Education or the
Government.
Even granting that an extension of time was
granted without the consent of the surety, still
that fact would not help the surety, because as
earlier pointed out, the Foundation was also
78
arrears in the payment of the salaries of H. B.
Arandia. The case of Arandia alone would be
enough basis for the Government to proceed
against the bond.
Lastly, in its third and fourth "alternative
assignments of error," the surety contends that it
cannot be made answer for more than the unpaid
salaries of H. B. Arandia, which it claimed
amounted to P720.00 only, because Article 2054
states that
A guarantor may bind himself for less, but
not for more than the principal debtor, both
as regards the amount and the onerous
nature of the conditions.
Should he have bound himself for more, his
obligations shall be reduced to the limits of
that of the debtor.
What We said about the penal nature of the bond
would suffice to dispose of this claim. For
whatever may be the amount of salaries due the
teachers, the fact remains that the condition of
the bond was violated and so the surety became
liable for the penalty provided for therein.
WHEREFORE, the decision of the Court of Appeals Padilla, Bautista Angelo, Labrador, Concepcion,
is hereby affirmed, with costs against the surety. Reyes, Barrera, Parades, Dizon and Makalintal, JJ.,
concur.
Bengzon, C.J., took no part.

THE HONGKONG & SHANGHAI BANKING CORP. vs. judgment annulling said mortgages with respect
ALDECOA & CO. to Zoilo. Both parties appealed from this decision
and the case was still pending in the Supreme
G.R. No. L-8437 March 23, 1915 Court when HSBC filed an action against Aldecoa
and Co. and its partners for the collection of a sum
of money and foreclosure of the mortgaged
FACTS: properties. Judgement was entered in favor of the
bank.

Aldecoa and Co. obtained a credit worth P450,000

from HSBC secured by a mortgage of shares and ISSUE:
real properties. On Dec. of 1906, the firm of Whether or not the action filed by the bank should
Aldecoa and Co. went into liquidation and be dismissed on the ground of lis pendens.
obtained another P50,000 from the bank upon the
condition that this would be covered by the
previous mortgage. In October 1908, Joaquin and
RULING:
Zoilo Ibaez de Aldecoa filed an action against the
No. A plea of the pendency of a prior action is not
bank for the purpose of annulling the mortgages
available unless the prior action is of such a
executed by them on the grounds that they were
character that, had a judgment been rendered
minors at the time incapable of creating a valid
therein on the merits, such a judgment would be
mortgage upon their real property. The Court of
conclusive between the parties and could be
First Instance dismissed the complaint as to
pleaded in bar of the second action.
Joaquin upon the ground that he had ratified those
mortgages after becoming of age, but entered a

79
In the instant case, the former suit is to annul the
mortgages while the other one is for the
foreclosure. If the final judgment in the former
action is that the mortgages be annulled, such an
adjudication will deny the right of the bank to
foreclose the mortgages. But a valid decree will
not prevent the bank from foreclosing them. In
such an event, the judgment would not be a bar
80
to the prosecution of the present action. The rule
is not predicated upon such a contingency. It is
applicable, between the same parties, only when
the judgment to be rendered in the action first
instituted will be such that, regardless of which
party is successful, it will amount to res
adjudicata against the second action.