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CREDIT TRANSACTIONS (Atty. Jazzie Sarona-Lozare)2ND EXAM COVERAGE COMPILATION OF CASES

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GUARANTY and SURETYSHIP

NATURE and EXTENT

ESCAO v. ORTIGAS

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 151953 Jn! "9# "$$%

SA&VADOR P. ESCAO and MARIO M. SI&OS# petitioner,vs.RA'AE& ORTIGAS# JR.#respondent.

D E C I S I O N

TINGA# J.:

The ain contention raised in this petition is that petitionersare not under obli!ation to reiburse respondent, a claithat can be easil" debun#ed. The ore perple$in! %uestionis &hether this obli!ation to repa" is solidar", as contendedb" respondent and the lo&er courts, or erel" 'oint asar!ued b" petitioners.

On () *pril +)-, Private Developent Corporation of thePhilippines PDCP/+ entered into a loan a!reeent &ith0alcon Minerals, Inc. 0alcon/ &hereb" PDCP a!reed toa#e available and lend to 0alcon the aount of1S23(-,---.--, for specific purposes and sub'ect to certainters and conditions.(On the sae da", three stoc#holders4officers of 0alcon, nael"5 respondent Rafael Orti!as, 6r.Orti!as/, 7eor!e *. Schole" and 7eor!e T. Schole"e$ecuted an *ssuption of Solidar" 8iabilit" &hereb" the"a!reed 9to assue in :their; individual capacit", solidar"liabilit" &ith :0alcon; for the due and punctual pa"ent9 of

the loan contracted b" 0alcon &ith PDCP.3

In the eantie,t&o separate !uaranties &ere e$ecuted to !uarantee thepa"ent of the sae loan b" other stoc#holders and officersof 0alcon, actin! in their personal and individual capacities.One 7uarant"


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coproise a!reeent &hereb" he a!reed to pa" the ban#P+,---,---.--. In e$chan!e, PDCP &aived or assi!ned infavor of Esca=o one4third +3/ of its entire clai in thecoplaint a!ainst all of the other defendants in the case.++

The coproise a!reeent &as approved b" the RTC in a6ud!ent+(dated @ 6anuar" +--,---.-- in

e$chan!e for PDCPs &aiver of its clais a!ainst hi. +>

In the eantie, after havin! settled &ith PDCP, Orti!aspursued his clais a!ainst Esca=o, Silos and Matti, on thebasis of the +)( 1nderta#in!. Fe initiated a third4part"coplaint a!ainst Matti and Silos,+@&hile he aintained hiscross4clai a!ainst Esca=o. In +>, Orti!as filed a otionfor Suar" 6ud!ent in his favor a!ainst Esca=o, Silosand Matti. On > October +>, the RTC issued the Suar"6ud!ent, orderin! Esca=o, Silos and Matti to pa" Orti!as,

'ointl" and severall", the aount of P+,3--,---.--, as &ell asP(-,---.-- in attorne"s fees.+AThe trial court ratiocinated

that none of the third4part" defendants disputed the +)(1nderta#in!, and that 9the ere denials of defendants &ithrespect to non4copliance of Orti!as of the ters andconditions of the 1nderta#in!, unaccopanied b" an"substantial fact &hich &ould be adissible in evidence at ahearin!, are not sufficient to raise !enuine issues of factnecessar" to defeat a otion for suar" 'ud!ent, even ifsuch facts &ere raised in the pleadin!s.9+)In an Order datedA March +@, the trial court denied the otion forreconsideration of the Suar" 6ud!ent and a&ardedOrti!as le!al interest of +(G per annu to be coputedfro () 0ebruar" +


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:PDCP;, S1RETIES :&ere to; reiburse OB8I7ORS for saidaounts &ithin seven A/ calendar da"s fro suchpa"ent.9(@

Petitioners clai that, contrar" to para!raph 3c/ of the1nderta#in!, Orti!as &as not 9ade to pa"9 PDCP theaount no& sou!ht to be reibursed, as Orti!as voluntaril"paid PDCP the aount of P+.3 Million as an aicablesettleent of the clais posed b" the ban# a!ainst hi.Fo&ever, the sub'ect clause in para!raph 3c/ actuall" reads9:i;n the event that an" of OB8I7ORS is for an" reason adeto pa" an" aount to PDCP $ $ $9(A *s pointed out b"Orti!as, the phrase 9for an" reason9 reasonabl" includes an"e$tra4'udicial settleent of obli!ation such as &hat Orti!ashad underta#en to pa" to PDCP, as it is indeed obvious thatthe phrase &as incorporated in the clause to render theeventual pa"ent adverted to therein unliited andun%ualified.

The interpretation posed b" petitioners &ould have held&ater had the 1nderta#in! ade clear that the ri!ht ofOrti!as to see# reiburseent accrued onl" after he haddelivered pa"ent to PDCP as a conse%uence of a final ande$ecutor" 'ud!ent. On the contrar", the clear intent of the1nderta#in! &as for petitioners and Matti to relieve theburden on Orti!as and his fello& 9OB8I7ORS9 as soon aspossible, and not onl" after Orti!as had been sub'ected to afinal and e$ecutor" adverse 'ud!ent.

Para!raph + of the 1nderta#in! en'oins petitioners to 9e$ert

all efforts to cause PDCP $ $ $ to &ithin a reasonable tierelease all the OB8I7ORS $ $ $ fro their !uarantees :sic; toPDCP $ $ $9() In the event that Orti!as and his fello&9OB8I7ORS9 could not be released fro their !uaranties,para!raph ( coits petitioners and Matti to cause theBoard of Directors of 0alcon to a#e a call on itsstoc#holders for the pa"ent of their unpaid subscriptionsand to pled!e or assi!n such pa"ents to Orti!as, et al., assecurit" for &hatever aounts the latter a" be held liableunder their !uaranties. In addition, para!raph + also a#esclear that nothin! in the 1nderta#in! 9shall preventOB8I7ORS, or an" one of the, fro theselvesne!otiatin! &ith PDCP $ $ $ for the release of their said

!uarantees :sic;.9(

There is no ar!uent to support petitioners position on theiport of the phrase 9ade to pa"9 in the 1nderta#in!, otherthan an undul" literalist readin! that is clearl" inconsistent&ith the thrust of the docuent. 1nder the Civil Code, thevarious stipulations of a contract shall be interpretedto!ether, attributin! to the doubtful ones that sense &hicha" result fro all of the ta#en 'ointl".3- 8i#e&iseapplicable is the provision that if soe stipulation of an"contract should adit of several eanin!s, it shall beunderstood as bearin!

that iport &hich is ost ade%uate to render it effectual. 3+*sa eans to effect the !eneral intent of the docuent torelieve Orti!as fro liabilit" to PDCP, it is his interpretation,not that of petitioners, that holds s&a" &ith this Court.

Neither do petitioners ipress us of the non4fulfillent of an"of the other conditions set in para!raph 3, as the" clai.0ollo&in! the !eneral assertion in the petition that Orti!asviolated the ters of the 1nderta#in!, petitioners add thatOrti!as 9paid PDCP B*NH the aount of P+.3 illion&ithout petitioners ESC*NO and SI8OSs #no&led!e and

consent.93(Para!raph 3a/ of the 1nderta#in! does ipose are%uireent that an" of the 9OB8I7ORS9 shall iediatel"infor 9S1RETIES9 if the" received an" deand forpa"ent of 0*8CONs obli!ations to PDCP, but thatre%uireent is reasoned 9so that the :S1RETIES; can tiel"ta#e appropriate easures933 presuabl" to settle theobli!ation &ithout havin! to burden the 9OB8I7ORS.9 Thisnotice re%uireent in para!raph 3a/ is ar#edl" &a" offfro the su!!estion of petitioners that Orti!as, after alread"havin! been ipleaded as a defendant in the collection suit,&as obli!ed under the +)( 1nderta#in! to notif" thebefore settlin! &ith PDCP.

The other ar!uents petitioners have offered to escapeliabilit" to Orti!as are siilarl" &ea#.

Petitioners ipu!n Orti!as for havin! settled &ith PDCP inthe first place. The" note that Orti!as had, in his ans&er,denied an" liabilit" to PDCP and had alle!ed that he si!nedthe *ssuption of Solidar" 8iabilit" not in his personalcapacit", but as an officer of 0alcon. Fo&ever, such position,accordin! to petitioners, could not be 'ustified since Orti!aslater voluntaril" paid PDCP the aount of P+.3 Million. Suchcircustances, accordin! to petitioners, aounted to

estoppel on the part of Orti!as.

Even as &e entertain this ar!uent at depth, its preisesare still erroneous. The Partial Coproise *!reeentbet&een PDCP and Orti!as e$pressl" stipulated thatOrti!ass offer to pa" PDCP &as conditioned 9&ithout:Orti!ass; adittin! liabilit" to plaintiff PDCP Ban#scoplaint, and to terinate and disiss the said case asa!ainst Orti!as solel".93"et such contention based onassuption cannot supersede the literal ters of the PartialCoproise *!reeent.

Petitioners further observe that Orti!as ade the pa"ent toPDCP after he had alread" assi!ned his obli!ation topetitioners throu!h the +)( 1nderta#in!. et the fact isPDCP did pursue a 'udicial clai a!ainst Orti!asnot&ithstandin! the 1nderta#in! he e$ecuted &ithpetitioners. Not bein! a part" to such 1nderta#in!, PDCP&as not precluded b" a contract fro pursuin! its claia!ainst Orti!as based on the ori!inal *ssuption of Solidar"8iabilit".

*t the sae tie, the 1nderta#in! did not preclude Orti!as

fro relievin! his distress throu!h a settleent &ith thecreditor ban#. Indeed, para!raph + of the 1nderta#in!e$pressl" states that 9nothin! herein shall preventOB8I7ORS, or an" one of the, fro theselvesne!otiatin! &ith PDCP $ $ $ for the release of their said
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!uarantees :sic;.93@ Sipl" put, the 1nderta#in! did not barOrti!as fro pursuin! his o&n settleent &ith PDCP. Neitherdid the 1nderta#in! bar Orti!as fro recoverin! fropetitioners &hatever aount he a" have paid PDCPthrou!h his o&n settleent. The stipulation that if Orti!as&as 9for an" reason ade to pa" an" aount to PDCP:,; $ $

$ S1RETIES shall reiburse OB8I7ORS for said aounts&ithin seven A/ calendar da"s fro such pa"ent93Aa#esit clear that petitioners reain liable to reiburse Orti!as forthe sus he paid PDCP.

Je no& turn to the set of ar!uents posed b" petitioners, inthe alternative, that is, on the assuption that the" areindeed liable.

Petitioners subit that the" could onl" be held 'ointl", notsolidaril", liable to Orti!as, claiin! that the 1nderta#in! didnot provide for e$press solidarit". The" cite *rticle +(-A of

the Ne& Civil Code, &hich states in part that 9:t;here is asolidar" liabilit" onl" &hen the obli!ation e$pressl" so states,or &hen the la& or the nature of the obli!ation re%uiressolidarit".9

Orti!as in turn ar!ues that petitioners, as &ell as Matti, are'ointl" and severall" liable for the 1nderta#in!, as thelan!ua!e used in the a!reeent 9clearl" sho&s that it is asuret" a!reeent93) bet&een the obli!ors Orti!as !roup/and the sureties Esca=o !roup/. Orti!as points out that the1nderta#in! uses the &ord 9S1RETIES9 althou!h thedocuent, in describin! the parties. It is further contended

that the principal ob'ective of the parties in e$ecutin! the1nderta#in! cannot be attained unless petitioners aresolidaril" liable 9because the total loan obli!ation can not bepaid or settled to free or release the OB8I7ORS if one oran" of the S1RETIES default fro their obli!ation in the1nderta#in!.93

In case, there is a concurrence of t&o or ore creditors or oft&o or ore debtors in one and the sae obli!ation, *rticle+(-A of the Civil Code states that aon! the, 9:t;here is asolidar" liabilit" onl" &hen the obli!ation e$pressl" so states,or &hen the la& or the nature of the obli!ation re%uiressolidarit".9 *rticle +(+- supplies further caution a!ainst thebroad interpretation of solidarit" b" providin!5 9Theindivisibilit" of an obli!ation does not necessaril" !ive rise tosolidarit". Nor does solidarit" of i tself ipl" indivisibilit".9

These Civil Code provisions establish that in case ofconcurrence of t&o or ore creditors or of t&o or oredebtors in one and the sae obli!ation, and in the absenceof e$press and indubitable ters characteri?in! theobli!ation as solidar", the presuption is that the obli!ationis onl" 'oint. It thus becoes incubent upon the part"alle!in! that the obli!ation is indeed solidar" in character toprove such fact &ith a preponderance of evidence.

The 1nderta#in! does not contain an" e$press stipulationthat the petitioners a!reed 9to bind theselves 'ointl" andseverall"9 in their obli!ations to the Orti!as !roup, or an"such ters to that effect. Fence, such obli!ation established

in the 1nderta#in! is presued onl" to be 'oint. Orti!as, asthe part" alle!in! that the obli!ation is in fact solidar", bearsthe burden to overcoe the presuption of 'ointness ofobli!ations. Je rule and so hold that he failed to dischar!esuch burden.

Orti!as places priar" reliance on the fact that thepetitioners and Matti identified theselves in the 1nderta#in!as 9S1RETIES9, a ter repeated no less than thirteen +3/ties in the docuent. Orti!as clais that such anner ofidentification sufficientl" establishes that the obli!ation ofpetitioners to hi &as 'oint and solidar" in nature.

The ter 9suret"9 has a specific eanin! under our CivilCode. *rticle (-


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to suret"ship contracts.


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utili?ation of the ter 9S1RETIES9 could not &or# to sucheffect, especiall" as it does not appear &ho e$actl" is theprincipal debtor &hose obli!ation is 9assured9 or9!uaranteed9 b" the suret".

Orti!as further ar!ues that the nature of the 1nderta#in!re%uires 9solidar" obli!ation of the Sureties,9 since the1nderta#in! e$pressl" see#s to 9reliev:e; obli!ors of an" andall liabilit" arisin! fro their said 'oint and severalunderta#in! &ith :0;alcon,9 and for the 9sureties9 to9irrevocabl" a!ree and underta#e to assue all of obli!orssaid !uarantees to PDCP.9>-Je do not doubt that a findin!of solidar" liabilit" aon! the petitioners &or#s to the benefitof Orti!as in the facilitation of these !oals, "et the1nderta#in! itself contains no stipulation or clause thatestablishes petitioners obli!ation to Orti!as as solidar".Moreover, the ais adverted to b" Orti!as do not b"theselves establish that the nature of the obli!ation

re%uires solidarit". Even if the liabilit" of petitioners and Matti&ere ad'ud!ed as erel" 'oint, the full relief andreiburseent of Orti!as arisin! fro his pa"ent to PDCP&ould still be accoplished throu!h the coplete e$ecutionof such a 'ud!ent.

Petitioners further clai that the" are not liable for attorne"sfees since the 1nderta#in! contained no such stipulation forattorne"s fees, and that the situation did not fall under theinstances under *rticle ((-) of the Civil Code &hereattorne"s fees are recoverable in the absence of stipulation.

Je disa!ree. *s Orti!as points out, the acts or oissions ofthe petitioners led to his bein! ipleaded in the suit filed b"PDCP. The 1nderta#in! &as precisel" e$ecuted as a eansto obtain the release of Orti!as and the Schole"s fro theirprevious obli!ations as sureties of 0alcon, especiall"considerin! that the" &ere alread" divestin! their shares inthe corporation. Specific provisions in the 1nderta#in!obli!ate petitioners to &or# for the release of Orti!as fro hissuret" a!reeents &ith 0alcon. Specific provisions li#e&iseandate the iediate repa"ent of Orti!as should he stillbe ade to pa" PDCP b" reason of the !uarant"a!reeents fro &hich he &as ostensibl" to be releasedthrou!h the efforts of petitioners. None of these provisions

&ere coplied &ith b" petitioners, and *rticle ((-)(/precisel" allo&s for the recover" of attorne"s fees 9:&;henthe defendants act or oission has copelled the plaintiff toliti!ate &ith third persons or to incur e$penses to protect hisinterest.9

0inall", petitioners clai that the" should not be liable forinterest since the 1nderta#in! does not contain an"stipulation for interest, and assuin! that the" are liable, thatthe rate of interest should not be +(G per annu, asad'ud!ed b" the RTC.

The seinal rulin! in Eastern Shippin! 8ines, Inc. v. Court of*ppeals>+ set forth the rules &ith respect to the anner ofcoputin! le!al interest5

I. Jhen an obli!ation, re!ardless of its source, i.e., la&,contracts, %uasi4contracts, delicts or %uasi4delicts isbreached, the contravenor can be held liable for daa!es.The provisions under Title KIII on 9Daa!es9 of the CivilCode !overn in deterinin! the easure of recoverabledaa!es.

II. Jith re!ard particularl" to an a&ard of interest in theconcept of actual and copensator" daa!es, the rate ofinterest, as &ell as the accrual thereof, is iposed, asfollo&s5

+. Jhen the obli!ation is breached, and it consists in thepa"ent of a su of one", i.e., a loan or forbearance ofone", the interest due should be that &hich a" have beenstipulated in &ritin!. 0urtherore, the interest due shall itselfearn le!al interest fro the tie it is 'udiciall" deanded. Inthe absence of stipulation, the rate of interest shall be +(G

per annu to be coputed fro default, i.e., fro 'udicial ore$tra'udicial deand under and sub'ect to the provisions of

*rticle ++@ of the Civil Code.

(. Jhen an obli!ation, not constitutin! a loan or forbearanceof one", is breached, an interest on the aount ofdaa!es a&arded a" be iposed at the discretion of thecourt at the rate of @G per annu. No interest, ho&ever,shall be ad'ud!ed on unli%uidated clais or daa!es e$cept&hen or until the deand can be established &ithreasonable certaint". *ccordin!l", &here the deand isestablished &ith reasonable certaint", the interest shall be!in

to run fro the tie the clai is ade 'udiciall" ore$tra'udiciall" *rt. ++@, Civil Code/ but &hen such certaint"cannot be so reasonabl" established at the tie the deandis ade, the interest shall be!in to run onl" fro the date the

'ud!ent of the court is ade at &hich tie %uantification ofdaa!es a" be deeed to have been reasonabl"ascertained/. The actual base for the coputation of le!alinterest shall, in an" case, be on the aount finall"ad'ud!ed.

3. Jhen the 'ud!ent of the court a&ardin! a su of one"becoes final and e$ecutor", the rate of le!al interest,&hether the case falls under para!raph + or para!raph (,above, shall be +(G per annu fro such finalit" until itssatisfaction, this interi period bein! deeed to be b" thenan e%uivalent to a forbearance of credit.>(

Since &hat &as the constituted in the 1nderta#in! consistedof a pa"ent in a su of one", the rate of interest thereonshall be +(G per annu to be coputed fro default, i.e.,fro 'udicial or e$tra'udicial deand. The interest rateiposed b" the RTC is thus proper. Fo&ever, thecoputation should be rec#oned fro 'udicial or e$tra'udicialdeand. Per records, there is no indication that Orti!asade an" e$tra'udicial deand to petitioners and Matti after

he paid PDCP, but on +< March +


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considered as the date of 'udicial deand fro &hich thecoputation of interest should be rec#oned.>3Since the RTCheld that interest should be coputed fro () 0ebruar"+ October +> isodified b" declarin! that petitioners and 6oseph M. Mattiare onl" 'ointl" liable, not 'ointl" and severall", to respondentRafael Orti!as, 6r. in the aount of P+,3--,---.--. TheOrder of the Re!ional Trial Court dated A March +@ isMODI0IED in that the le!al interest of +(G per annu on theaount of P+,3--,---.-- is to be coputed fro +< March+-G do&n pa"ent to be released after

subission of bonds

vi. RetentionSub'ect to +-G retention to be released afterthe pro'ect is accepted b" the o&ner

To !uarantee faithful copliance &ith their a!reeent, 8uc#"Star en!a!ed respondent Stron!hold &hich issued t&o (/bonds in favor of petitioner. The first, S1RET BOND 7+@/No. +>), dated Ma" , (--@, covers the su ofP>A>,---.--


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0IKE F1NDRED SEKENT 0IKE TFO1S*NDP>A>,---.--/ onl", Philippine Currenc".

JFERE*S, the Obli!ee re%uires said principal to !ive a!ood and sufficient bond in the above stated su to securethe full and faithful perforance on his part of saidunderta#in!s.

NOJ, TFERE0ORE, if the above bounden principal shall inall respects dul" and full" observe and perfor all andsin!ular the aforesaid :co;4venants, conditions anda!reeents to the true intent and eanin! thereof, then thisobli!ation shall be null and void, other&ise to reain in fullforce and effect.

8iabilit" of suret" on this bond &ill e$pire on Ma" -, (--Aand said bond &ill be cancelled five D*S after its e$piration,unless suret" is notified of and e$istin! obli!ations

hereunder.

$ $ $>

Jith respect to the second contract, PER0ORM*NCEBOND 7+3/ No. ++>3)), dated Ma" -, (--@, it covers thesu of P3,---.--.@Thus5

HNOJ *88 MEN B TFESE PRESENTS5

That &e, 81CH ST*R DRI88IN7 CONSTR1CTION of+@) *cacia St., Octa!on Indl., contractor, of Estate, Sub.,Pasi! Cit" Philippines, as principal and the STRON7FO8DINS1R*NCE COMP*N, INC. a corporation dul" or!ani?edand e$istin! under and b" virtue of the la&s of thePhilippines, &ith head office at Ma#ati, as Suret", are heldand firl" bound unto the *SSET B1I8DERSCORPOR*TION and to an" individual, fir, partnership,corporation or association suppl"in! the principal &ith laboror aterials in the penal su of TFREE F1NDRED 0ORT0IKE TFO1S*ND ON8 P3,---.--/, Philippine Currenc",for the pa"ent of &hich su, &ell and trul" to be ade, &ebind ourselves, our heirs, e$ecutors, adinistrators,successors and assi!ns, 'ointl" and severall", firl" b" these

presents.

The CONDITIONS O0 TFIS OB8I7*TION are as follo&s

JFERE*S the above bounden principal on the da" of, + entered into a contract &ith the *SSETB1I8DERS CORPOR*TION represented b"

, to full" and faithfull".

Copl" &ith the suppl" of labor, aterials, tools ande%uipent includin! technical supervision to drill one +/e$plorator" production &ell located at NI* *ve. cor. Olalia

St., Br!". Dela Pa?, *ntipolo Cit". This bond is callable ondeand.

JFERE*S, the liabilit" of the Suret" Copan" under thisbond shall in no case e$ceed the su of PESOS TFREE

F1NDRED 0ORT 0IKE TFO1S*ND ON8 P3,---.--/Philippine Currenc", inclusive of interest, attorne"s fee, andother daa!es, and shall not be liable for an" advances ofthe obli!ee to the principal.

JFERE*S, said contract re%uires the said principal to !ive a!ood and sufficient bond in the above4stated su to securethe full and faithfull perforance on its part of said contract,and the satisfaction of obli!ations for aterials used andlabor eplo"ed upon the &or#

NOJ TFERE0ORE, if the principal shall perfor &ell andtrul" and fulfill all the underta#in!s, covenants, ters,conditions, and a!reeents of said contract durin! theori!inal ter of said contract and an" e$tension thereof thata" be !ranted b" the obli!ee, &ith notice to the suret" anddurin! the life of an" !uarant" re%uired under the contract,and shall also perfor &ell and trul" and fulfill all the

underta#in!s, covenants, ters, conditions, and a!reeentsof an" and all dul" authori?ed odifications of said contractthat a" hereinafter be ade, &ithout notice to the suret"e$cept &hen such odifications increase the contract priceand such principal contractor or his or its sub4contractorsshall proptl" a#e pa"ent to an" individual, fir,partnership, corporation or association suppl"in! theprincipal of its sub4contractors &ith labor and aterials in theprosecution of the &or# provided for in the said contract,then, this obli!ation shall be null and void other&ise it shallreain in full force and effect. *n" e$tension of the period oftie &hich a" be !ranted b" the obli!ee to the contractor

shall be considered as !iven, and an" odifications of saidcontract shall be considered as authori?ed, &ith the e$pressconsent of the Suret".

The ri!ht of an" individual, fir, partnership, corporation orassociation suppl"in! the contractor &ith labor or aterialsfor the prosecution of the &or# hereinbefore stated, toinstitute action on the penal bond, pursuant to the provisionof *ct No. 3@)), is hereb" ac#no&led!e and confired. $ $ $

On Ma" (-, (--@, *BC paid 8uc#" Star P>A>,---.-- &ith(G &ithholdin! ta$/ as advance pa"ent, representin! >-Gof the contract price.A8uc#" Star, thereafter, coenced thedrillin! &or#. B" 6ul" +), (--@, 'ust a fe& da"s before thea!reed copletion date of @- calendar da"s, 8uc#" Starana!ed to accoplish onl" ten +-/ G of the drillin! &or#.On the sae date, petitioner sent a deand letter to 8uc#"Star for the iediate copletion of the drillin! &or#)&ith athreat to cancel the a!reeent and forfeit the bonds should itstill fail to coplete said pro'ect &ithin the a!reed period.

On *u!ust 3, (--@, *BC sent a Notice of Rescission ofContract &ith Deand for Daa!es to 8uc#" Star.Pertinentportions of said notice read5

Pursuant to para!raph + of the Ters and Conditions of theservice contract, notice is hereb" ade on "ou of therescission of the contract and accordin!l" deand is hereb"ade on "ou, &ithin seven A/ da"s fro receipt hereof5
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+/ to refund the do&n pa"ent of PFP>@3,>--.--, plusle!al interest thereon

(/ to pa" li%uidated daa!es e%uivalent to (+- of +G of thecontract price for ever" da" of dela", or a total ofPFP+3),---.--

3/ to pa" the aount !uaranteed b" "our perforance bondin the aount of PFP3,---.--

A>,---.-- as actualdaa!es plus le!al interest fro the filin! of the coplaint

(. to pa" plaintiff in the aount of PFP+--,---.-- asli%uidated daa!es

3. to pa" plaintiff in the aount of PFP>-,---.-- ase$eplar" daa!es

. to pa" the costs of the suit.

Defendant Stron!hold Insurance Copan", Inc.scopulsor" counterclai and cross4clai are disissed.+>

Fence, this petition.

Petitioner *BC pra"s for the reversal of the challen!eddecision based on the follo&in!

GROUNDS

A. T0! &o! Co, 2!o24 erredand n62,4ACTED

ARBITRARILY ,0 7an8!2, -a2 and av! a-2! o8d2+!,on# CONTRARY ,o a::4+a-4! 4a2 and!2,a-420!d 62:d!n+! n d!+4an ,0! ;automaticCANCELLATION; o8 !2:ond!n, S,on0o4da? D!2:,! !2+22on# ,0!! !@2,2 a +on,nn VALIDPRINCIPAL OBLIGATION aan,!!d - R!2:ond!n,+? R!2+22on do!2 NOT AFFECT ,0! 4a-4,!2 o8 ,0!R!2:ond!n, S,on0o4d a2 ,2 LIABILITIE$on ,2 2-6!+,-ond2 0av! a4!ad -!+o7! INTER'OVEN andIN$EPARABLE,0 ,0! 4a-4,!2 o8 ,2 Pn+:a4# ,0!Con,a+,o &+B S,a.

(. ,0 ,0! &o! Co,


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+4a72 and 7:o2! :on ,0! R!2:ond!n, ,0! :!na4,!2:ovd!d 8o nd! S!+,on "1 and " o8 ,0! In2an+!Cod!.+@

Essentiall", the priar" issue is &hether or not respondentinsurance copan", as suret", can be held liable under itsbonds.

The Court rules in the affirative.

Respondent, alon! &ith its principal, 8uc#" Star, bound itselfto the petitioner &hen it e$ecuted in its favor suret" andperforance bonds. The contents of the said contractsclearl" establish that the parties entered into a suret"a!reeent as defined under *rticle (-A>,---.--do&npa"ent that &as alread" advanced to it, respondent,as suret", becae solidaril" bound &ith 8uc#" Star for the

repa"ent of the said aount to petitioner. The clause, 9thisbond is callable on deand,9 stron!l" spea#s ofrespondents priar" and direct responsibilit" to thepetitioner.1avvphil

*ccordin!l", after liabilit" has attached to the principal, theobli!ee or, in this case, the petitioner, can e$ercise the ri!htto proceed a!ainst 8uc#" Star or respondent or both. *rticle+(+@ of the Ne& Civil Code states5

The creditor a" proceed a!ainst an" one of the solidar"debtors or soe or all of the siultaneousl". The deand

ade a!ainst one of the shall not be an obstacle to those&hich a" subse%uentl" be directed a!ainst the others, solon! as the debt has not been full" collected.

Contrar" to the trial courts rulin!, respondent insurancecopan" &as not autoaticall" released fro an" liabilit"&hen petitioner resorted to the rescission of the principalcontract for failure of the other part" to perfor itsunderta#in!. Precisel", the liabilit" of the suret" arisin! frothe suret" contracts coes to life upon the solidar" obli!orsdefault. It should be ephasi?ed that petitioner had tochoose rescission in order to prevent further loss that a"

arise fro the dela" of the pro!ress of the pro'ect. Jithout adoubt, 8uc#" Stars unsatisfactor" pro!ress in the drillin!&or# and its failure to coplete it in due tie aount to non4perforance of its obli!ation.

In fine, respondent should be ans&erable to petitioner onaccount of 8uc#" Stars non4perforance of its obli!ation as!uaranteed b" the perforance bond.

0inall", *rticle +(+A((of the Ne& Civil Code ac#no&led!esthe ri!ht of reiburseent fro a co4debtor the principal co4debtor, in case of suret"ship/ in favor of the one &ho paidthe suret"/. Thus, respondent is entitled to reiburseentfro 8uc#" Star for the aount it a" be re%uired to pa"petitioner arisin! fro its bonds.

JFERE0ORE, the 0ebruar" (A, (-- Decision of theRe!ional Trial Court, Pasi! Cit", Branch A+, is *00IRMED
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&ith MODI0IC*TION. Respondent Stron!hold Insurance ishereb" declared 'ointl" and severall" liable &ith 8uc#" Starfor the pa"ent of P>A>,---.-- and the pa"ent ofP3,---.-- on the basis of its perforance bond.

SO ORDERED.

CASTE&&VI DE HIGGINS v. SE&&NER

EN (ANC

G.R. No. 15)"5. Nov!7-! 5# 19"$.

CARMEN CASTE&&VI DE HIGGINS and HORACE &.HIGGINS# P)aiti##+!A""e))at+# v. GEORGE C. SE&&NER#

De#edat!A""e))ee.

o482on# o482on S+0aBo:8 8oA""e))at+.

44a72 '!! 8oA""e))ee.

D E C I S I O N

MA&CO&M# J. =

This is an action brou!ht b" plaintiffs to recover fro

defendant fro of P+-.---. The brief decision of the trialcourt held that the suit &as preature, and absolved thedefendant fro the coplaint, &ith the costs a!ainst theplaintiffs.

The basis of plaintiffs action is a letter &ritten b" defendant7eor!e C. Sellner to 6ohn T. Macleod, a!ent for Mrs. Forace8. Fi!!ins, on Ma" 3+, ++>, of the follo&in! tenor5

9DE*R SIR5 I hereb" obli!ate and bind "self, " heirssuccessors and assi!ns that if the proissor" note e$ecutedthe (th da" of Ma" ++> b" the He"stone Minin! Co J. F.Clar#e, and 6ohn Ma"e, 'ointl" and severall", in "our favorand due si$ onths after date for P+-,--- is not full" paid ataturit" &ith interest, I &ill, &ithin fifteen da"s after notice ofsuch default, pa" "ou in cash the su of P+-,--- andinterest upon "our surrenderin! to e the three thousandshares of stoc# of the He"stone Minin! Co. held b" "ou assecurit" for the pa"ent of said note.

9Respectfull",

S!d./ 97EO. C. SE88NER.9

Counsel for both parties a!ree that the onl" point at issue isthe deterination of defendants status in the transactionreferred to. Plaintiffs contend that he is a suret" defendantcontends that he is a !uarantor. Plaintiffs also adit that ifdefendant is a !uarantor, articles +)3-, +)3+, and +)3< ofthe Civil Code !overn.

In the ori!inal Spanish of the Civil Code no& in force in thePhilippine Islands, Title IK of Boo# IK is entitled 9De la0uen?a.9 The Spanish &ord 9fian?a9 is translated in theJashin!ton and Jalton editions of the Civil Code as9securit".9 90ian?a9 appears in the 0isher translation as

9suret"ship.9 The Spanish &ord 9fador9 is found in all of theEn!lish translations of the Civil Code as 9suret".9 The la& of!uarant" is not treated of b" that nae in the Civil Code,althou!h indirect reference to the sae is ade in the Codeof Coerce. In terinolo!" at least, no distinction is adein the Civil Code bet&een the obli!ation of a suret" and thatof a !uarantor.

*s has been done in the State of 8ouisiana, &here, li#e inthe Philippines, the substantive la& has a civil la& ori!in, &efeel free to suppleent the statutor" la& b" a reference tothe precepts of the la& erchant.

The points4of difference bet&een a suret" and a !uarantorare failiar to *erican authorities. * suret" and a !uarantorare ali#e in that each proises to ans&er for the debt ordefault of another. * suret" and a !uarantor are unli#e in thatthe suret" assues liabilit" as a re!ular part" to theunderta#in!, &hile the liabilit" of the !uarantor depends uponan independent a!reeent to pa" the obli!ation if thepriar" pa"or fails to do so. * suret" is char!ed as anori!inal proissor the en!a!eent of the !uarantor is acollateral underta#in!. The obli!ation of the suret" is priar"the obli!ation of the !uarantor is secondar". See 1. S. v.Karadero de la uinta :++;,


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responsibilit". Sellner is not bound &ith the principals b" thesae instruent e$ecuted at the sae tie and on thesae consideration, but his responsibilit" is a secondar" onefound in an independent collateral a!reeent. Neither isSellner 'ointl" and severall" liable &ith the principal debtors.

Jith particular reference, therefore, to appellantsassi!nents of error, &e hold that defendant Sellner is a!uarantor &ithin the eanin! of the provisions of the CivilCode.

There is also an e%uitable aspect to the case &hichreenforces this conclusion. The note e$ecuted b" the He"stone Minin! Copan" atured on Noveber (, [email protected] on the note &as not accepted b" the a#ers untilSepteber 3-, ++@. Jhen the note becae due, it isaditted that the shares of stoc# used as collateral securit"&ere sellin! at par that is, the" &ere &orth P3-,---. Notice

that the note had not been paid &as not !iven to thedefendant until 'ust about three "ears, after it atured and&hen the He"stone Minin! Copan" stoc# &as &orthless.Defendant, conse%uentl", throu!h the laches of plaintiff, haslost possible chance to recoup, throu!h the sale of the stoc#,an" aount &hich he i!ht be copelled to pa" as a suret"or !uarantor. The 9indul!ence,9 as this &ord is used in thela& of !uarant", of the creditors of the principal, asevidenced b" the acceptance of interest, and b" failureproptl" to notif" the !uarantor, a" thus have served todischar!e the !uarantor.

0or %uite different reasons, &hich, nevertheless, arrive at the

sae result, 'ud!ent is affired, &ith costs of this instancea!ainst the appellants. So ordered.

PA&MARES v. CA


Manila

SECOND DIKISION

G.R. No. 1"*9$ Ma+0 31# 199)

ESTRE&&A PA&MARES# petitioner,vs.COURT O' APPEA&S and M.(. &ENDINGCORPORATION# respondents.

REGA&ADO# J.:

Jhere a part" si!ns a proissor" note as a co4a#er andbinds herself to be 'ointl" and severall" liable &ith theprincipal debtor in case the latter defaults in the pa"ent ofthe loan, is such underta#in! of the forer deeed to be thatof a suret" as an insurer of the debt, or of a !uarantor &ho&arrants the solvenc" of the debtorL

Pursuant to a proissor" note dated March +3, +-, privaterespondent M.B. 8endin! Corporation e$tended a loan to thespouses Ose=a and Merl"n *?arra!a, to!ether &ithpetitioner Estrella Palares, in the aount of P3-,---.--pa"able on or before Ma" +(, +-, &ith copoundedinterest at the rate of @G per annumto be coputed ever"3- da"s fro the date thereof.1On four occasions after thee$ecution of the proissor" note and even after the loanatured, petitioner and the *?arra!a spouses &ere able topa" a total of P+@,3--.--, thereb" leavin! a balance ofP+3,A--.--. No pa"ents &ere ade after the last pa"enton Septeber (@, ++."

Conse%uentl", on the basis of petitioners solidar" liabilit"

under the proissor" note, respondent corporation filed acoplaint3 a!ainst petitioner Palares as the lone part"4defendant, to the e$clusion of the principal debtors, alle!edl"b" reason of the insolvenc" of the latter.

In her *ended *ns&er &ith Counterclai, petitioneralle!ed that soetie in *u!ust +-, iediatel" after theloan atured, she offered to settle the obli!ation &ithrespondent corporation but the latter infored her that the"&ould tr" to collect fro the spouses *?arra!a and that sheneed not &orr" about it that there has alread" been a partialpa"ent in the aount of P+A,-+-.-- that the interest of @G

per onth copounded at the sae rate per onth, as &ellas the penalt" char!es of 3G per onth, are usurious andunconscionable and that &hile she a!rees to be liable onthe note but onl" upon default of the principal debtor,respondent corporation acted in bad faith in suin! her alone&ithout includin! the *?arra!as &hen the" &ere the onl"ones &ho benefited fro the proceeds of the loan.

Durin! the pre4trial conference, the parties subitted thefollo&in! issues for the resolution of the trial court5 +/ &hatthe rate of interest, penalt" and daa!es should be (/&hether the liabilit" of the defendant herein petitioner/ ispriar" or subsidiar" and 3/ &hether the defendant EstrellaPalares is onl" a !uarantor &ith a subsidiar" liabilit" andnot a co4a#er &ith priar" liabilit".5

Thereafter, the parties a!reed to subit the case for decisionbased on the pleadin!s filed and the eoranda to be
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subitted b" the. On Noveber (@, +(, the Re!ionalTrial Court of Iloilo Cit", Branch (3, rendered 'ud!entdisissin! the coplaint &ithout pre'udice to the filin! of aseparate action for a su of one" a!ainst the spousesOse=a and Merl"n *?arra!a &ho are priaril" liable on theinstruent.*This &as based on the findin!s of the court a

quothat the filin! of the coplaint a!ainst herein petitionerEstrella Palares, to the e$clusion of the *?arra!a spouses,aounted to a dischar!e of a prior part" that the offer adeb" petitioner to pa" the obli!ation is considered a validtender of pa"ent sufficient to dischar!e a personssecondar" liabilit" on the instruent as co4a#er, is onl"secondaril" liable on the instruent and that the proissor"note is a contract of adhesion.

Respondent Court of *ppeals, ho&ever, reversed thedecision of the trial court, and rendered 'ud!ent declarin!herein petitioner Palares liable to pa" respondent

corporation5

+. The su of P+3,A--.-- representin! the outstandin!balance still due and o&in! &ith interest at si$ percent @G/per onth coputed fro the date the loan &as contracteduntil full" paid

(. The su e%uivalent to the stipulated penalt" of threepercent 3G/ per onth, of the outstandin! balance

3. *ttorne"s fees at (>G of the total aount due perstipulations


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these are t&o conflictin! provisions in the proissor" noteand the rule is that clauses in the contract should beinterpreted in relation to one another and not b" parts. Inother &ords, the second para!raph should not be ta#en inisolation, but should be read in relation to the thirdpara!raph.

In an attept to reconcile the supposed conflict bet&een thet&o provisions, petitioner avers that she could be held liableonl" as a !uarantor for several reasons. +irt, the &ords9'ointl" and severall" or solidaril" liable9 used in the secondpara!raph are technical and le!al ters &hich are not full"appreciated b" an ordinar" la"an li#e herein petitioner, a@>4"ear old house&ife &ho is li#el" to enter into suchtransactions &ithout full" reali?in! the nature and e$tent ofher liabilit". On the contrar", the &ordin!s used in the thirdpara!raph are easier to coprehend. Second, the la& loo#supon the contract of suret"ship &ith a 'ealous e"e and the

rule is that the obli!ation of the suret" cannot be e$tended b"iplication be"ond specified liits, ta#in! into considerationthe peculiar nature of a suret" a!reeent &hich holds thesuret" liable despite the absence of an" direct considerationreceived fro either the principal obli!or or the creditor.Third, the proissor" note is a contract of adhesion since it&as prepared b" respondent M.B. 8endin! Corporation. Thenote &as brou!ht to petitioner partiall" filled up, the contentsthereof &ere never e$plained to her, and her onl"participation &as to si!n thereon. Thus, an" apparentabi!uit" in the contract should be strictl" construed a!ainstprivate respondent pursuant to *rt. +3AA of the Civil Code.9

Petitioner accordin!l" concludes that her liabilit" should bedeeed restricted b" the clause in the third para!raph of theproissor" note to be that of a !uarantor.

Moreover, petitioner subits that she cannot as "et becopelled to pa" the loan because the principal debtorscannot be considered in default in the absence of a 'udicialor e$tra'udicial deand. It is true that the coplaint alle!esthe fact of deand, but the purported deand letters &erenever attached to the pleadin!s filed b" private respondentbefore the trial court. *nd, &hile petitioner a" haveaditted in her *ended *ns&er that she received a

deand letter fro respondent corporation soetie in+-, the sae did not effectivel" put her or the principaldebtors in default for the siple reason that the lattersubse%uentl" ade a partial pa"ent on the loan inSepteber, ++, a fact &hich &as never controverted b"herein private respondent.

0inall", it is ar!ued that the Court of *ppeals !ravel" erred ina&ardin! the aount of P(,A,


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ust, therefore, fail as it &as evidenced onl" b" her o&nuncorroborated and, e$pectedl", self4servin! alle!ations.1

Favin! entered into the contract &ith full #no&led!e of itsters and conditions, petitioner is estopped to assert thatshe did so under a isapprehension or in i!norance of theirle!al effect, or as to the le!al effect of the underta#in!. 15The rule that i!norance of the contents of an instruent doesnot ordinaril" affect the liabilit" of one &ho si!ns it alsoapplies to contracts of suret"ship. *nd the ista#e of asuret" as to the le!al effect of her obli!ation is ordinaril" noreason for relievin! her of liabilit".1*

Petitioner &ould li#e to a#e capital of the fact that althou!hshe obli!ated herself to be 'ointl" and severall" liable &iththe principal a#er, her liabilit" is deeed restricted b" theprovisions of the third para!raph of her contract &herein shea!reed 9that M.B. 8endin! Corporation a" deand

pa"ent of the above loan fro e in case the principala#er, Mrs. Merl"n *?arra!a defaults in the pa"ent of thenote,9 &hich a#es her contract one of !uarant" and notsuret"ship. The purported discordance is ore apparent thanreal.

* suret" is an insurer of the debt, &hereas a !uarantor is aninsurer of the solvenc" of the debtor.1%* suret"ship is anunderta#in! that the debt shall be paid a !uarant", anunderta#in! that the debtor shall pa".1)Stated differentl", asuret" proises to pa" the principals debt if the principal &illnot pa", &hile a !uarantor a!rees that the creditor, after

proceedin! a!ainst the principal, a" proceed a!ainst the!uarantor if the principal is unable to pa".19* suret" bindshiself to perfor if the principal does not, &ithout re!ard tohis abilit" to do so. * !uarantor, on the other hand, does notcontract that the principal &ill pa", but sipl" that he is ableto do so."$In other &ords, a suret" underta#es directl" forthe pa"ent and is so responsible at once if the principaldebtor a#es default, &hile a !uarantor contracts to pa" if,b" the use of due dili!ence, the debt cannot be ade out ofthe principal debtor."1

uintessentiall", the underta#in! to pa" upon default of theprincipal debtor does not autoaticall" reove it fro theabit of a contract of suret"ship. The second and thirdpara!raphs of the afore%uoted portion of the proissor" notedo not contain an" other condition for the enforceent ofrespondent corporations ri!ht a!ainst petitioner. It has notbeen sho&n, either in the contract or the pleadin!s, thatrespondent corporation a!reed to proceed a!ainst hereinpetitioner only i, and -hen the defaultin! principal hasbecoe insolvent. * contract of suret"ship, to repeat, is that&herein one lends his credit b" 'oinin! in the principaldebtors obli!ation, so as to render hiself directl" andpriaril" responsible &ith hi, and &ithout reference to thesolvenc" of the principal.""

In a desperate effort to e$onerate herself fro liabilit",petitioner erroneousl" invo#es the rule on trictiimi .uri,&hich holds that &hen the eanin! of a contract ofindenit" or !uarant" has once been 'udiciall" deterined

under the rule of reasonable construction applicable to all&ritten contracts, then the liabilit" of the suret", under hiscontract, as thus interpreted and construed, is not to bee$tended be"ond its strict eanin!."3The rule, ho&ever, &illappl" onl" after it has been definitel" ascertained that thecontract is one of suret"ship and not a contract of !uarant". It

cannot be used as an aid in deterinin! -hethera part"sunderta#in! is that of a suret" or a !uarantor.

Prescindin! fro these 'urisprudential authorities, there canbe no doubt that the stipulation contained in the thirdpara!raph of the controverted suret"ship contract erel"elucidated on and ade ore specific the obli!ation ofpetitioner as !enerall" defined in the second para!raphthereof. Resultantl", the theor" advanced b" petitioner, thatshe is erel" a !uarantor because her liabilit" attaches onl"upon default of the principal debtor, ust necessaril" fail forbein! incon!ruent &ith the 'udicial pronounceents adverted

to above.

It is a &ell4entrenched rule that in order to 'ud!e the intentionof the contractin! parties, their conteporaneous andsubse%uent acts shall also be principall" considered."Several attendant factors in that !enre lend support to ourfindin! that petitioner is a suret". 0or one, &hen petitioner&as infored about the failure of the principal debtor to pa"the loan, she iediatel" offered to settle the account &ithrespondent corporation. Obviousl", in her ind, she #ne&that she &as directl" and priaril" liable upon default of herprincipal. 0or another, and this is ost revealin!, petitioner

presented the receipts of the pa"ents alread" ade, frothe tie of initial pa"ent up to the last, &hich &ere allissued in her nae and of the *?arra!a spouses."5This canonl" be construed to ean that the pa"ents ade b" theprincipal debtors &ere considered b" respondent corporationas creditable directl" upon the account and inurin! to thebenefit of petitioner. The concoitant and siultaneouscopliance of petitioners obli!ation &ith that of herprincipals onl" !oes to sho& that, fro the ver" start,petitioner considered herself e%uall" bound b" the contract ofthe principal a#ers.

In this re!ard, &e need onl" to reiterate the rule that a suret"

is bound e%uall" and absolutel" &ith the principal,"*and assuch is deeed an ori!inal proisor and debtor fro thebe!innin!."%This is because in suret"ship there is but onecontract, and the suret" is bound b" the sae a!reeent&hich binds the principal.") In essence, the contract of asuret" starts &ith the a!reeent,"9 &hich is precisel" thesituation obtainin! in this case before the Court.

It &ill further be observed that petitioners underta#in! as co4a#er iediatel" follo&s the ters and conditionsstipulated bet&een respondent corporation, as creditor, andthe principal obli!ors. * suret" is usuall" bound &ith his

principal b" the sae instruent, e$ecuted at the sae tieand upon the sae consideration he is an ori!inal debtor,and his liabilit" is iediate and direct.3$Thus, it has beenheld that &here a &ritten a!reeent on the sae sheet ofpaper &ith and iediatel" follo&in! the principal contract
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bet&een the bu"er and seller is e$ecuted siultaneousl"there&ith, providin! that the si!ners of the a!reeent a!reedto the ters of the principal contract, the si!ners &ere9sureties9 'ointl" liable &ith the bu"er.31 * suret" usuall"enters into the sae obli!ation as that of his principal, andthe si!natures of both usuall" appear upon the sae

instruent, and the sae consideration usuall" supports theobli!ation for both the principal and the suret".3"

There is no erit in petitioners contention that the coplaint&as preaturel" filed because the principal debtors cannotas "et be considered in default, there havin! been no 'udicialor e$tra'udicial deand ade b" respondent corporation.Petitioner has a!reed that respondent corporation a"deand pa"ent of the loan fro her in case the principala#er defaults, sub'ect to the sae conditions e$pressed inthe proissor" note. Si!nificantl", para!raph 7/ of the notestates that 9should I fail to pa" in accordance &ith the above

schedule of pa"ent, I hereb" &aive " ri!ht to notice anddeand.9 Fence, deand b" the creditor is no lon!ernecessar" in order that dela" a" e$ist since the contractitself alread" e$pressl" so declares.33*s a suret", petitioneris e%uall" bound b" such &aiver.

Even if it &ere other&ise, deand on the sureties is notnecessar" before brin!in! suit a!ainst the, since thecoenceent of the suit is a sufficient deand.3On thispoint, it a" be &orth entionin! that a suret" is not evenentitled, as a atter of ri!ht, to be !iven notice of theprincipals default. Inasuch as the creditor o&es no dut" of

active dili!ence to ta#e care of the interest of the suret", hisere failure to voluntaril" !ive inforation to the suret" ofthe default of the principal cannot have the effect ofdischar!in! the suret". The suret" is bound to ta#e notice ofthe principals default and to perfor the obli!ation. Fecannot coplain that the creditor has not notifiedhi in the absence of a special a!reeent to that effect inthe contract of suret"ship.35

The alle!ed failure of respondent corporation to prove thefact of deand on the principal debtors, b" not attachin!copies thereof to its pleadin!s, is li#e&ise iaterial. In theabsence of a statutor" or contractual re%uireent, it is not

necessar" that pa"ent or perforance of his obli!ation befirst deanded of the principal, especiall" &here deand&ould have been useless nor is it a re%uisite, beforeproceedin! a!ainst the sureties, that the principal be calledon to account.3* The underl"in! principle therefor is that asuret"ship is a direct contract to pa" the debt of another. *suret" is liable as uch as his principal is liable, andabsolutel" liable as soon as default is ade, &ithout an"deand upon the principal &hatsoever or an" notice ofdefault.3% *s an ori!inal proisor and debtor fro thebe!innin!, he is held ordinaril" to #no& ever" default of hisprincipal.3)

Petitioner %uestions the propriet" of the filin! of a coplaintsolel" a!ainst her to the e$clusion of the principal debtors&ho alle!edl" &ere the onl" ones &ho benefited fro theproceeds of the loan. Jhat petitioner is tr"in! to ipl" is that

the creditor, herein respondent corporation, should haveproceeded first a!ainst the principal before suin! on herobli!ation as suret". Je disa!ree.

* creditors ri!ht to proceed a!ainst the suret" e$istsindependentl" of his ri!ht to proceed a!ainst the principal.391nder *rticle +(+@ of the Civil Code, the creditor a"proceed a!ainst an" one of the solidar" debtors or soe orall of the siultaneousl". The rule, therefore, is that if theobli!ation is 'oint and several, the creditor has the ri!ht toproceed even a!ainst the suret" alone.$Since, !enerall", itis not necessar" for the creditor to proceed a!ainst aprincipal in order to hold the suret" liable, &here, b" theters of the contract, the obli!ation of the suret" is the saethat of the principal, then soon as the principal is in default,the suret" is li#e&ise in default, and a" be suediediatel" and before an" proceedin!s are had a!ainst theprincipal.1Perforce, in accordance &ith the rule that, in the

absence of statute or a!reeent other&ise, a suret" ispriaril" liable, and &ith the rule that his proper reed" is topa" the debt and pursue the principal for reiburseent, thesuret" cannot at la&, unless peritted b" statute and in theabsence of an" a!reeent liitin! the application of thesecurit", re%uire the creditor or obli!ee, before proceedin!a!ainst the suret", to resort to and e$haust his reediesa!ainst the principal, particularl" &here both principal andsuret" are e%uall" bound."

Je a!ree &ith respondent corporation that its ere failure toiediatel" sue petitioner on her obli!ation does not release

her fro liabilit". Jhere a creditor refrains fro proceedin!a!ainst the principal, the suret" is not e$onerated. In other&ords, ere &ant of dili!ence or forbearance does not affectthe creditors ri!hts vi#a#vi the suret", unless the suret"re%uires hi b" appropriate notice to sue on the obli!ation.Such !ratuitous indul!ence of the principal does notdischar!e the suret" &hether !iven at the principals re%uestor &ithout it, and &hether it is "ielded b" the creditor throu!hs"path" or fro an inclination to favor the principal, or isonl" the result of passiveness. The ne!lect of the creditor tosue the principal at the tie the debt falls due does notdischar!e the suret", even if such dela" continues until theprincipal becoes insolvent.3*nd, in the absence of proof

of resultant in'ur", a suret" is not dischar!ed b" the creditorsere stateent that the creditor &ill not loo# to the suret",or that he need not trouble hiself.5The conse%uences ofthe dela", such as the subse%uent insolvenc" of theprincipal,*or the fact that the reedies a!ainst the principala" be lost b" lapse of tie, are iaterial.%

The raion d/0tre for the rule is that there is nothin! toprevent the creditor fro proceedin! a!ainst the principal atan" tie.)*t an" rate, if the suret" is dissatisfied &ith thede!ree of activit" displa"ed b" the creditor in the pursuit ofhis principal, he a" pa" the debt hiself and becoe

subro!ated to all the ri!hts and reedies of the creditor.9

It a" not be aiss to add that lenienc" sho&n to a debtor indefault, b" dela" peritted b" the creditor &ithout chan!e inthe tie &hen the debt i!ht be deanded, does not
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constitute an e$tension of the tie of pa"ent, &hich &ouldrelease the suret".5$ In order to constitute an e$tensiondischar!in! the suret", it should appear that the e$tension&as for a definite period, pursuant to an enforceablea!reeent bet&een the principal and the creditor, and that it&as ade &ithout the consent of the suret" or &ith a

reservation of ri!hts &ith respect to hi. The contract ustbe one &hich precludes the creditor fro, or at least hindershi in, enforcin! the principal contract &ithin the perioddurin! &hich he could other&ise have enforced it, and &hichprecludes the suret" fro pa"in! the debt.51

None of these eleents are present in the instant case.Keril", the ere fact that respondent corporation !ave theprincipal debtors an e$tended period of tie &ithin &hich tocopl" &ith their obli!ation did not effectivel" absolve here inpetitioner fro the conse%uences of her underta#in!.Besides, the burden is on the suret", herein petitioner, to

sho& that she has been dischar!ed b" soe act of thecreditor,5"herein respondent corporation, failin! in &hich &ecannot !rant the relief pra"ed for.

*s a final issue, petitioner clais that assuin! that herliabilit" is solidar", the interests and penalt" char!es on theoutstandin! balance of the loan cannot be iposed for bein!ille!al and unconscionable. Petitioner additionall" theori?esthat respondent corporation intentionall" dela"ed thecollection of the loan in order that the interests and penalt"char!es &ould accuulate. The stateent, li#e&isetraversed b" said respondent, is isleadin!.

In an affidavit53e$ecuted b" petitioner, &hich &as attachedto her petition, she stated, aon! others, that5

). Durin! the latter part of +-, I &as surprised to learn thatMerl"n *?arra!as loan has been released and that she hasnot paid the sae upon its aturit". I received a telephonecall fro Mr. *u!usto Banusin! of MB 8endin! inforin! eof this fact and of " liabilit" arisin! fro the proissor"note &hich I si!ned.

. I re%uested Mr. Banusin! to tr" to collect first fro Merl"n

and Ose=a *?arra!a. *t the sae tie, I offered to pa" MB8endin! the outstandin! balance of the principal obli!ationshould he fail to collect fro Merl"n and Ose=a *?arra!a.Mr. Banusin! advised e not to &orr" because he &ill tr" tocollect first fro Merl"n and Ose=a *?arra!a.

+-. * "ear thereafter, I received a telephone call fro thesecretar" of Mr. Banusin! &ho reinded that the loan ofMerl"n and Ose=a *?arra!a, to!ether &ith interest andpenalties thereon, has not been paid. Since I had noavailable funds at that tie, I offered to pa" MB 8endin! b"deliverin! to the a parcel of land &hich I o&n. Mr.Banusin!s secretar", ho&ever, refused " offer for the

reason that the" are not interested in real estate.

++. In March +(, I received a cop" of the suons and ofthe coplaint filed a!ainst e b" MB 8endin! before theRTC4Iloilo. *fter learnin! that a coplaint &as filed a!ainst

e, I instructed Sheila 7atia to !o to MB 8endin! andreiterate " first offer to pa" the outstandin! balance of theprincipal obli!ation of Merl"n *?arra!a in the aount ofP3-,---.--.

+(. Ms. 7atia tal#ed to the secretar" of Mr. Banusin! &horeferred her to *tt". Kenus, counsel of MB 8endin!.

+3. *tt". Kenus infored Ms. 7atia that he &ill consult Mr.Banusin! if " offer to pa" the outstandin! balance of theprincipal obli!ation loan ic/ of Merl"n and Ose=a

*?arra!a is acceptable. 8ater, *tt". Kenus infored Ms.7atia that " offer is not acceptable to Mr. Banusin!.

The purported offer to pa" ade b" petitioner can not bedeeed sufficient and substantial in order to effectivel"dischar!e her fro liabilit". There are a nuber ofcircustances &hich con'ointl" invei!h a!ainst her aforesaid

theor".

+. Respondent corporation cannot be faulted for notiediatel" deandin! pa"ent fro petitioner. It &aspetitioner &ho initiall" re%uested that the creditor tr" tocollect fro her principal first, and she offered to pa" onl" incase the creditor fails to collect. The dela", if an", &asoccasioned b" the fact that respondent corporation erel"ac%uiesced to the re%uest of petitioner. *t an" rate, there&as here no actual offer of pa"ent to spea# of but onl" acoitent to pa" if the principal does not pa".

(. Petitioner ade a second attept to settle the obli!ationb" offerin! a parcel of land &hich she o&ned. Respondentcorporation &as actin! &ell &ithin its ri!hts &hen it refused toaccept the offer. The debtor of a thin! cannot copel thecreditor to receive a different one, althou!h the latter a" beof the sae value, or ore valuable than that &hich isdue.5 The obli!ee is entitled to deand fulfillent of theobli!ation or perforance as stipulated. * chan!e of theob'ect of the obli!ation &ould constitute novation re%uirin!the e$press consent of the parties.55

3. *fter the coplaint &as filed a!ainst her, petitioner

reiterated her offer to pa" the outstandin! balance of theobli!ation in the aount of P3-,---.-- but the sae &asli#e&ise re'ected. *!ain, respondent corporation cannot beblaed for refusin! the aount bein! offered because it fell&a" belo& the aount it had coputed, based on thestipulated interests and penalt" char!es, as o&in! and duefro herein petitioner. * debt shall not be understood to havebeen paid unless the thin! or service in &hich the obli!ationconsists has been copletel" delivered or rendered, as thecase a" be.5* In other &ords, the prestation ust befulfilled copletel". * person enterin! into a contract has ari!ht to insist on its perforance in all particulars.5%

Petitioner cannot copel respondent corporation to acceptthe aount she is &illin! to pa" because the oent thelatter accepts the perforance, #no&in! its incopletenessor irre!ularit", and &ithout e$pressin! an" protest orob'ection, then the obli!ation shall be deeed full" coplied
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&ith.5)Precisel", this is &hat respondent corporation &antedto avoid &hen it continuall" refused to settle &ith petitioner atless than &hat &as actuall" due under their contract.

This not&ithstandin!, ho&ever, &e find and so hold that thepenalt" char!e of 3G per onth and attorne"s feese%uivalent to (>G of the total aount due are hi!hl"ine%uitable and unreasonable.

It ust be reebered that fro the principal loan ofP3-,---.--, the aount of P+@,3--.-- had alread" beenpaid even before the filin! of the present case. *rticle +((of the Civil Code provides that the court shall e%uitabl"reduce the penalt" &hen the principal obli!ation has beenpartl" or irre!ularl" coplied &ith b" the debtor. *nd, even ifthere has been no perforance, the penalt" a" also bereduced if it is ini%uitous or leonine.

In a case previousl" decided b" this Court &hich li#e&iseinvolved private respondent M.B. 8endin! Corporation, and&hich is substantiall" on all fours &ith the one at bar, &edecided to eliinate alto!ether the penalt" interest for bein!e$cessive and un&arranted under the follo&in!rationali?ation5

1pon the atter of penalt" interest, &e a!ree &ith the Courtof *ppeals that the econoic ipact of the penalt" interest ofthree percent 3 G/ per onth on total aount due butunpaid should be e%uitabl" reduced. The purpose for &hichthe penalt" interest is intended that is, to punish the

obli!or &ill have been sufficientl" served b" the effects ofcopounded interest. 1nder the e$ceptional circustancesin the case at bar, e.!., the ori!inal aount loaned &as onl"P+>,---.-- partial pa"ent of P),@--.-- &as ade on duedate and the heav" albeit still la&ful/ re!ular copensator"interest, the penalt" interest stipulated in the partiesproissor" note is ini%uitous and unconscionable and a"be e%uitabl" reduced further b" eliinatin! such penalt"interest alto!ether.59

*ccordin!l", the penalt" interest of 3G per onth bein!iposed on petitioner should siilarl" be eliinated.

0inall", &ith respect to the a&ard of attorne"s fees, thisCourt has previousl" ruled that even &ith an a!reeentthereon bet&een the parties, the court a" neverthelessreduce such attorne"s fees fi$ed in the contract &hen theaount thereof appears to be unconscionable orunreasonable.*$To that end, it is not even necessar" tosho&, as in other contracts, that it is contrar" to orals orpublic polic".*1 The !rant of attorne"s fees e%uivalent to(>G of the total aount due is, in our opinion, unreasonableand ioderate, considerin! the inial unpaid aountinvolved and the e$tent of the &or# involved in this sipleaction for collection of a su of one". Je, therefore, hold

that the aount of P+-,---.-- as and for attorne"s fee&ould be sufficient in this case.*"

JFERE0ORE, the 'ud!ent appealed fro is hereb"*00IRMED, sub'ect to the MODI0IC*TION that the penalt"

interest of 3G per onth is hereb" deleted and the a&ard ofattorne"s fees is reduced to P+-,---.--.

SO ORDERED.

MACHETTI v. HOSPICIO DE SAN JOSE


Manila

EN B*NC

G.R. No. &K1**** A:4 1$# 19""

ROMU&O MACHETTI#plaintiff4appelle,vs.

HOSPICIO DE SAN JOSE#defendant4appellee, and'IDE&ITY SURETY COMPANY O' THE PHI&IPPINEIS&ANDS#defendant4appellant

Ro and Laurence and ol,on Sc-ar*kop, ,or appellant2

3a4riel La " ,or appellee 5opicio de San 6oe2

o appearance ,or the other appellee2

OSTRAND# J.:

It appears fro the evidence that on 6ul" +A, ++@, oneRoulo Machetti, b" a &ritten a!reeent undertoo# toconstruct a buildin! on Calle Rosario in the cit" of Manila forthe Fospicio de San 6ose, the contract price bein! P@


19/85


1#

Fospicio de San 6ose therefore ans&ered the coplaint andpresented a counterclai for daa!es for the partialnoncopliance &ith the ters of the a!reeentaboveentioned, in the total su of PA+,3>-. *fter issue&as thus 'oined, Machetti, on petition of his creditors, &as,on 0ebruar" (A, ++), declared insolvent and on March


20/85


2$

obtained defendant 1CPB 7eneral Insurance Co., Inc.ssuret" bond dated 3 Deceber +, in favor of 7I8*T.

Durin! the period bet&een :sic; Septeber + and 6une(---, 7I8*T shipped and delivered to One Kirtual thepurchased products and e%uipent, as evidenced b" air&a"billsBill of 8adin! E$hibits 909, 904+9 to 904)9/. *ll of thee%uipent includin! the soft&are coponents for &hichpa"ent &as secured b" the suret" bond, &as shipped b"7I8*T and dul" received b" One Kirtual. 1nder anendorseent dated Deceber (3, + E$hibit 9E9/, thesuret" issued, &ith One Kirtuals conforit", an aendentto the suret" bond, *nne$ 9*9 thereof, correctin! its e$pir"date fro Ma" 3-, (--+ to 6ul" 3-, (--+.

One Kirtual failed to pa" 7I8*T the aount of 0our FundredThousand Dollars 1S2, (---, a deandletter E$hibit 979/ for pa"ent of the said aount of1S2, (--+. Fo&ever, defendant1CPB failed to settle the aount of 1S2+,(--,---.-- or apart thereof, hence, the instant coplaint.9> Ephases inthe ori!inal/

On (< *pril (--(, petitioner 7ilat Satellite Net&or#s, 8td.,filed a Coplaint@ a!ainst respondent 1CPB 7eneralInsurance Co., Inc., to recover the aounts supposedl"covered b" the suret" bond, plus interests and e$penses.

*fter due hearin!, the RTC rendered its Decision,A thedispositive portion of &hich is herein %uoted5

JFERE0ORE, preises considered, the Court hereb"renders 'ud!ent for the plaintiff, and a!ainst the defendant,orderin!, to &it5

+. The defendant suret" to pa" the plaintiff the aount ofOne Million T&o Fundred Thousand Dollars1S2+,(--,---.--/ representin! the principal debt under theSuret" Bond, &ith le!al interest thereon at the rate of +(Gper annu coputed fro the tie the 'ud!ent becoesfinal and e$ecutor" until the obli!ation is full" settled and

(. The defendant suret" to pa" the plaintiff the aount of0ort" 0our Thousand 0our Dollars and 0our Cents

1S2


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21

On Septeber (--), petitioner filed a Motion forReconsideration &ith Motion for Oral *r!uent. The otion&as denied for lac# of erit in a Resolution(-issued b" theC* on +@ Septeber (--.

Fence, the instant Petition.

On 3+ *u!ust (-+-, respondent filed a Coent(+on thePetition for Revie&. On (< Noveber (-+-, petitioner filed aRepl".((

ISS1ES

0ro the fore!oin!, &e reduce the issues to the follo&in!5

+. Jhether or not the C* erred in disissin! the case andorderin! petitioner and One Kirtual to arbitrate and

(. Jhether or not petitioner is entitled to le!al interest due tothe dela" in the fulfilent b" respondent of its obli!ationunder the Suret"ship *!reeent.

TFE CO1RTS R18IN7

The e$istence of a suret"ship a!reeent does not !ive thesuret" the ri!ht to intervene in the principal contract, nor canan arbitration clause bet&een the bu"er and the seller beinvo#ed b" a non4part" such as the suret".

Petitioner alle!es that arbitration la&s andate that no courtcan copel arbitration, unless a part" entitled to it applies forthis relief.(3This referral, ho&ever, can onl" be deandedb" one &ho is a part" to the arbitration a!reeent.(


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23

Purchase *!reeent, and that the e$tra'udicial deand ofpetitioner &as sent on > 6une (---,@+ &e a!ree &ith thelatter that interest ust start to run fro the tie petitionersent its first deand letter > 6une (---/, because theobli!ation &as alread" due and deandable at that tie.

Jith re!ard to the interest rate to be iposed, &e ta#e cuefro Nacar v. 7aller" 0raes,@( &hich odified the!uidelines established in Eastern Shippin! 8ines v. C*@3inrelation to Ban!#o Sentral4Monetar" Board Circular No. ASeries of (-+3/, to &it5

+. Jhen the obli!ation is breached, and it consists in thepa"ent of a su of one", i.e., a loan or forbearance ofone", the interest due should be that &hich a" have beenstipulated in &ritin!. 0urtherore, the interest due shall itselfearn le!al interest fro the tie it is 'udiciall"deanded.1 6une (---, its first date of e$tra 'udicial deand, untilthe satisfaction of the debt in accordance &ith the revised!uidelines enunciated in Nacar.

JFERE0ORE, the Petition for Revie& on Certiorari ishereb" 7R*NTED. The assailed Decision and Resolution ofthe Court of *ppeals in C*47.R. CK No. )(@3 areREKERSED. The Decision of the Re!ional Trial Court,

Branch +,---,---.--/ PhilippineCurrenc" and such interests, char!es and penalties ashereafter a" be specified.9

On 6anuar" A, +)+, follo&in! deand upon it, I1CP paid toManilaban# the su of P


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24

*triu filed this case in the court belo& a!ainst Inter4ResinIndustrial and Jille$ Plastic.

On *u!ust ++, +)(, Inter4Resin Industrial paid Interban#,&hich had in turn succeeded *triu, the su of P@)A,@--.--representin! the proceeds of its fire insurance polic" for thedestruction of its properties.

In its ans&er, Inter4Resin Industrial aditted that the9Continuin! 7uarant"9 &as intended to secure pa"ent to

*triu of the aount of P, +)), the trial court rendered 'ud!ent, orderin!Inter4Resin Industrial and Jille$ Plastic 'ointl" and severall"to pa" to Interban# the follo&in! aounts5

a/ P3, @--.-- to theplaintiff, until full pa"ent of the said aount

b/ 8i%uidated daa!es e%uivalent to +A) of the aount dueand

c/ *ttorne"s fees and e$penses of liti!ation e%uivalent to(-) of the total aount due.

Inter4Resin Industrial and Jille$ Plastic appealed to theCourt of *ppeals. Jille$ Plastic filed its brief, &hile Inter4Resin Industrial presented a 9Motion to Conduct Fearin! andto Receive Evidence to Resolve 0actual Issues and to Defer0ilin! of the *ppellants Brief.9 *fter its otion &as denied,Inter4Resin Industrial did not file its brief an"ore.

On 0ebruar" ((, ++, the Court of *ppeals rendered adecision affirin! the rulin! of the trial court.

Jille$ Plastic filed a otion for reconsideration pra"in! that itbe allo&ed to present evidence to sho& that Inter4ResinIndustrial had alread" paid its obli!ation to Interban#, but itsotion &as denied on Deceber @, ++5

The otion is denied for lac# of erit. Je denied defendant4appellant Inter4Resin Industrials otion for reception ofevidence because the situation or situations in &hich &ecould e$ercise the po&er under BP +( did not e$ist. Movanthere has not presented an" ar!uent &hich &ould sho&other&ise.

Fence, this petition b" Jille$ Plastic for the revie& of thedecision of 0ebruar" ((, ++ and the resolution ofDeceber @, ++ of the Court of *ppeals.

Petitioner raises a nuber of issues.

:+; The ain issue raised is &hether under the 9Continuin!7uarant"9 si!ned on *pril (, +A petitioner Jille$ Plastica" be held 'ointl" and severall" liable &ith Inter4ResinIndustrial for the aount paid b" Interban# to Manilaban#.

*s alread" stated, the aount had been paid b" Interban#spredecessor4in4interest, *triu Capital, to Manilaban#pursuant to the 9Continuin! Suret" *!reeents9 ade onDeceber +, +A). In den"in! liabilit" to Interban# for theaount, Jille$ Plastic ar!ues that under the 9Continuin!7uarant",9 its liabilit" is for sus obtained b" Inter4Resin

Industrial fro Interban#, not for sus paid b" the latter toManilaban# for the account of Inter4Resin Industrial. Insupport of this contention Jille$ Plastic cites the follo&in!portion of the 9Continuin! 7uarant"95

+or and in conideration o, the um o4tained and=or to 4e

o4tained 4y !TER#RES! !'>STR!AL C"R&"RAT!"8

hereina,ter re,erred to a the 'EBT"R=S8 ,rom you andor"our principals as a" be evidenced b" proissor" notes,c

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