AUTOCORP GROUP vs.

INTRA STRATA

Petitioner Autocorp Group secured 2 ordinary re-export bond, from private respondent Intra Strata
Assurance Corporation (ISAC) in favor of public respondent Bureau of Customs (BOC) to guarantee the
re-export of 2 automobiles
Petitioners executed and signed two Indemnity Agreements with identical stipulations in
favor of ISAC, agreeing to act as surety of the subject bonds. Petitioner Rodriguez signed the
Indemnity Agreements both as President of the Autocorp Group and in his personal capacity.

ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking with the
BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties due
thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur
on the said bonds.

Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds and/or liquidate the
entries or cancel the bonds, and pay the taxes and duties pertaining to the said items despite
repeated demands made by the BOC, as well as by ISAC. By reason thereof, the BOC considered the
two bonds, with a total face value of P1,034,649.00, forfeited.

Failing to secure from petitioners the payment of the face value of the two bonds, despite several
demands sent to each of them as surety under the Indemnity Agreements, ISAC filed with the RTC an
action against petitioners to recover the sum of P1,034,649.00, plus 25% thereof or P258,662.25 as
attorney’s fees. ISAC impleaded the BOC "as a necessary party plaintiff in order that the reward of
money or judgment shall be adjudged unto the said necessary plaintiff."

Petitioners filed a Motion to Dismiss on the grounds that

(1) the Complaint states no cause of action
(2) the BOC is an improper party.

The RTC denied petitioners’ Motion to Dismiss.

Petitioners thus filed their Answer to the Complaint, claiming that they sought permission from the
BOC for an extension of time to re-export the items covered by the bonds; that the BOC has yet to
issue an assessment for petitioners’ alleged default; and that the claim of ISAC for payment is
premature as the subject bonds are not yet due and demandable.

During the pre-trial conference, petitioners admitted the genuineness and due execution of Instrata
Bonds No. 5770 and No. 7154, but denied those of the corresponding Indemnity Agreements.

The parties agreed to limit the issue to "whether or not these bonds are now due and demandable."

The RTC rendered its Decision in favor of respondent ISAC

The Court of Appeals affirmed the RTC Decision, only modifying the attorney’s fees awarded:

SC RULING
The petition is without merit

Petitioners contend that their obligation to ISAC is not yet due and demandable. They cannot be
made liable by ISAC in the absence of an actual forfeiture of the subject bonds by the BOC and/or an
explicit pronouncement by the same bureau that ISAC is already liable on the said bonds.

In this case, there is yet no actual forfeiture of the bonds, but merely a recommendation of forfeiture,
for no writ of execution has been issued against such bonds. Hence, Civil Case No. 95-1584 was
prematurely filed by ISAC. Petitioners further argue that:

Secondly, there is no writ of forfeiture against Surety Bond No. 7154, there is likewise no evidence
adduced on record to prove that respondent Intra Strata has made legal demand against Surety Bond
No. 5770 neither is there a showing that respondent BOC initiated a demand or issued notice for its
forfeiture and/or confiscation.

The CA, directly addressed petitioners’ arguments by ruling that an actual forfeiture of the subject
bonds is not necessary for petitioners to be liable thereon to ISAC as surety under the Indemnity
Agreements.

According to the relevant provision of the Indemnity Agreements executed between petitioner and
ISAC, which reads:
[W]here the obligation involves a liquidated amount for the payment of which [ISAC] has become
legally liable under the terms of the obligation and its suretyship undertaking or by the demand of the
[BOC] or otherwise and the latter has merely allowed the [ISAC’s] aforesaid liability, irrespective of
whether or not payment has actually been made by the [ISAC], the [ISAC] for the protection of its
interest may forthwith proceed against [petitioners Autocorp Group and Rodriguez] or either of them
by court action or otherwise to enforce payment, even prior to making payment to the [BOC] which
may hereafter be done by [ISAC]

petitioners’ obligation to indemnify ISAC became due and demandable the moment the bonds
issued by ISAC became answerable for petitioners’ non-compliance with its undertaking with the
BOC. Stated differently, petitioners became liable to indemnify ISAC at the same time the bonds
issued by ISAC were placed at the risk of forfeiture by the BOC for non-compliance by petitioners
with its undertaking.

The subject bonds, became due and demandable upon the failure of petitioner Autocorp Group to
comply with its undertaking with the BOC, specifically to re-export the imported vehicles within the
period of 6 months from their date of entry. Since it issued the subject bonds, ISAC then also became
liable to the BOC. At this point, the Indemnity Agreements already give ISAC the right to proceed
against petitioners.

The Indemnity Agreements, gave ISAC the right to recover from petitioners at the time ISAC becomes
liable on the said bonds to the BOC, regardless of whether the BOC had actually forfeited the bonds.
The Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC
"WON payment has actually been made by the [ISAC]" and ISAC may proceed against petitioners by
court action or otherwise "even prior to making payment to the [BOC] which may hereafter be
done by [ISAC]."

Even when the BOC already admitted that it not only made a demand upon ISAC for the payment of
the bond but even filed a complaint against ISAC for such payment, such demand and complaint are
not necessary to hold petitioners liable to ISAC for the amount of such bonds. Petitioners’ attempts to
prove that there was no actual forfeiture of the subject bonds are completely irrelevant to the case at
bar.

It is worthy to note that petitioners did not impugn the validity of the stipulation in the Indemnity
Agreements allowing ISAC to proceed against petitioners the moment the subject bonds become due
and demandable, even prior to actual forfeiture or payment thereof. Even if they did so, the Court
would be constrained to uphold the validity of such a stipulation for it is but a slightly expanded
contractual expression of Article 2071 of the Civil Code which provides, inter alia, that the guarantor
may proceed against the principal debtor the moment the debt becomes due and demandable.
Article 2071 of the Civil Code provides:
Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within a specified period,
and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity,
unless it be of such nature that it cannot be extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the danger of
insolvency of the debtor.

Petitioners invoke the lack of demand on the part of ISAC before it instituted the Civil Case. Even if
proven true, such a fact does not carry much weight considering that demand, whether judicial or
extrajudicial, is not required before an obligation becomes due and demandable. A demand is only
necessary in order to put an obligor in a due and demandable obligation in delay, which in turn is for
the purpose of making the obligor liable for interests or damages for the period of delay.
Thus, unless stipulated otherwise, an extrajudicial demand is not required before a judicial demand,
i.e., filing a civil case for collection, can be resorted to.

Liability of petitioner Rodriguez

Petitioner Rodriguez posits that he is merely a guarantor, and that his liability arises only when the
person with whom he guarantees the credit, Autocorp Group in this case, fails to pay the obligation.
Petitioner Rodriguez invokes Art 2079 of the NCC on Extinguishment of Guaranty, which states:
Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the 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.

Petitioner Rodriguez argues that there was an amendment as to the effectivity of the bonds, and this
constitutes a modification of the agreement without his consent, thereby exonerating him from any
liability.We must take note at this point that petitioners have not presented any evidence of this
alleged amendment as to the effectivity of the bonds.
Even if there was indeed such an amendment, such would not cause the exoneration of
petitioner Rodriguez from liability on the bonds.

The CA, held that the use of the term guarantee in a contract does not mean that the contract is one
of guaranty. It thus ruled that both petitioners assumed liability as a regular party and obligated
themselves as original promissors, i.e., sureties, as shown in the ff provisions of the Indemnity
Agreement:
The CA concluded that since petitioner Rodriguez was a surety, Art 2079 of the NCC does not apply.
The CA further noted that both petitioners authorized ISAC to consent to the granting of an extension
of the subject bonds.
The CA committed a slight error on this point. The provisions of the Civil Code on Guarantee, other
than the benefit of excussion, are applicable and available to the surety. The Court finds no reason
why the provisions of Article 2079 would not apply to a surety.
This, however, would not cause a reversal of the Decision of the CA. The CA was correct that even
granting arguendo that there was a modification as to the effectivity of the bonds, petitioners would
still not be absolved from liability since they had authorized ISAC to consent to the granting of any
extension, modification, alteration and/or renewal of the subject bonds, as expressly set out in the
Indemnity Agreements:
The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent to the
granting of any extension, modification, alteration and/or renewal of the subject bonds.
There is nothing illegal in such a provision. An agreement whereby the sureties bound themselves to
be liable in case of an extension or renewal of the bond, without the necessity of executing another
indemnity agreement for the purpose and without the necessity of being notified of such extension or
renewal, is valid; and that there is nothing in it that militates against the law, good customs, good
morals, public order or public policy.
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of the CA which
affirmed with modification the Decision of the RTC is AFFIRMED in toto.
GIDWANI vs. DOMESTIC INSURANCE

Manufacturers' Bank granted Plastic Era a discounting line of P20K. To secure payment, Plastic Era
posted a surety bond for P20K issued by the Domestic Insurance. Plastic Era and the spouses
Gidwani executed an indemnity agreement whereby they bound themselves, jointly and severally, to
indemnify Domestic Insurance against all losses as having issued said surety bond.

DOMESTIC INSURANCE required PLASTIC ERA to give additional security. Sati Gidwani pledged to
DOMESTIC INSURANCE her shares of stock in 3 corporations, among which were 12k shares of the
Marinduque Iron Mines. This pledge agreement was to secure the fulfillment by PLASTIC ERA of its
undertaking to indemnify DOMESTIC INSURANCE from all losses.
The Marinduque iron mines was notified of the pledge and a 'stop transfer' notice was
entered in its books. Since then, any stock and cash dividends declared were delivered to
DOMESTIC INSURANCE.

PLASTIC ERA failed to pay Manufacturers Bank and as a result, the latter filed a claim against
DOMESTIC INSURANCE, which paid the sum of P20K to said bank.DOMESTIC INSURANCE filed an
action against PLASTIC ERA, Kishu Gidwani and Bhagwandas Gidwani, for the recovery of the sum of
P20k which DOMESTIC INSURANCE paid to the Manufacturers Bank.

The CFI rendered judgment in favor of DOMESTIC INSURANCE the sum of P20K, with interest
thereon at the rate of 12% per annum + attorney's fees. The decision provided that any amount
payable to the plaintiff in excess of P20k, including interest and attorney's fees would not be due until
one year from the finality of the judgment. Pursuant to a writ of execution, the Sheriff garnished the
liquidating dividends of Bhagwandas Gidwani in the Old Manila Club. One Gustav Real claimed to be
the assignee of said dividends, filed a suit in the City Court of Manila against the sheriff and
DOMESTIC INSURANCE for the recovery thereof. The City Court of Manila rendered judgment for
Gustav Real but DOMESTIC INSURANCE and the Sheriff appealed from the decision and the appealed
case is still pending before another branch of this court.

On October 1968, DOMESTIC INSURANCE requested Notary Public Manzano to sell at public auction
the shares pledged to it by Sati Gidwani for the satisfaction of the sum of P44,656.55. After the
corresponding notice had been given, all the pledged shares were sold at public auction for the sum
of P19,322.30 to DOMESTIC INSURANCE, which was the highest bidder.

On November 7, 1968, DOMESTIC INSURANCE surrendered to MARINDUQUE the certificate of stock

of the pledged shares and requested that they be cancelled and new certificates of stock issued in
its name. In due time, MARINDUQUE complied, but it only issued 232 and 46/100 shares in the
name of DOMESTIC INSURANCE, which was based on the adjusted new par value of P15.00 per share,
instead of the original par value of P0.10 per share.

On November 5,1968, the transfer agents of MARINDUQUE received two letters signed by the
spouses Gidwani. In the 1st letter, the spouses stated that they have assigned all their rights to
34,846 shares belonging to them in favor of Samuel Sharuff and request that the corresponding
notation be made thereof in the stock and transfer book of the corporation, with the promise,
however, that 'in due time ... the stock certificate duly accomplished and endorsed in favor of
Mr.Sharuff would be forwarded to MARINDUQUE.

In the 2nd letter, the Gidwani spouses stated that they were not yet able to recover the
corresponding stock certificates which they assigned to Samuel and so they requested that they be
and cancelled, and thereafter new ones be issued in lieu thereof in favor of Samuel.

At first, the stock transfer clerk refund to acknowledge receipt of the letters for the reason that the
corresponding stock tea had not been enclosed them- with. Later, she had a telephone conversation
with a party who introduced himself as Samuel. After talking for a time, the party claiming to be
Samuel was able to prevail upon the stock transfer clerk to receive the two letters and to prepare a
reply thereto along the line suggested by the former. The stock transfer-clerk typed the letter, after
which she signed it in behalf of the transfer agents of MARINDUQUE. In the third paragraph of the
letter, it was stated that a 'atop transfer' notation would be made in the records of the corporation
that the stock certificates in the name of either the Gidwani spouses would be cancelled only if the
instruction accompanying them was to issue new shares in the name of Samuel Sharuff.

On December 5, 1968, counsel for Samuel wrote the transfer agents of MARINDUQUE to cancel the
stock certificates issued in the name of DOMESTIC INSURANCE and to issue the new ones in the
name of samuel.
The transfer agents of MARINDUQUE declined to recall the shares issued in the name of the plaintiff
with the explanation that the stop order' notation made at the instance of Samuel had no basis
because the shares in question were pledged to DOMESTIC INSURANCE and the pledge had been
foreclosed, with the pledgee acquiring them at the auction sale.

As a result of this denial the Gidwani spouses joined by Samuel sued DOMESTIC INSURANCE and
MARINDUQUE, and in their complaint, the plaintiffs prayed that the pledge of the shares of Sati
Gidwani be declared to have been extinguished; that the sale of the pledged shares to DOMESTIC
INSURANCE was null all void, and that MARINDUQUE be to issue new shares in favor of Samuel.

The plaintiffs contend that the filing by DOMESTIC INSURANCE of an action based on the counter-
guaranty, and obtaining therein a judgment in its favor with a partial satisfaction thereof, released
the Hen of the plaintiff on the shares pledged to it by Sati Gidwani

Petitioners claimed that respondent Judge erred: (1) when he did not find and hold that the pledge
constituted on the subject shares of stock had already been extinguished and released at the time its
extrajudicial foreclosure was belatedly instituted by the pledgee; (2) when he did not invalidate for
being null and void the extrajudicial foreclosure of the pledge in question (3). when he did not find
and hold that since petitioner-pledgor Sati Gidwani continued to be the lawful owner of the subject
shares, her assignment thereof to Samuel was, therefore, valid and the same produced legal and
binding effects even as against the pledgee, Domestic Insurance (4) when he did not order
Marinduque Mining to cancel the certificates of stock illegally issued to Domestic Insurance and issue
new stock certificates to Samuel the assignee thereof; and (5) when he refused or failed to grant the
other relief prayed for in the complaint filed by herein petitioners.

The position of the petitioners that the pledge constituted on the subject shares was given as
security in favor of Domestic Insurance to guarantee the fulfillment of the obligation assumed by
Plastic Era, Bhagwandas Gidwani and Kishu Gidwani under the Indemnity Agreement which they
executed, jointly and severally, "to indemnify (Domestic Insurance) from and against all losses which
Domestic Insurance may incur of having became surety"

In its D.I.C.P. Surety Bond No. 04739 (Annex 1, Answer of Domestic Insurance); the pledge of the
shares of stock of Sati Gidwani to respondent Domestic Insurance was extinguished when the latter
sued Plastic Era, Bhagwandas Gidwani and Kishu Gidwani in the CFI to enforce the Indemnity
Agreement; and that when Domestic Insurance instituted the above action and obtained a
favorable judgment against the defendants, said respondent abandoned and waived its rights or
cause of action under the Pledge Agreement.

SC not persuaded. As aptly observed by the CFI, "there were 2 securities given to DOMESTIC
INSURANCE namely, the counter-guaranty agreement jointly executed by PLASTIC ERA, Kishu
Gidwani and Bhagwandas Gidwani and the second was the pledge of shares of stock made by Sati
Gidwani.
By paying to the Manufacturers Bank, DOMESTIC INSURANCE thereby was subrogated to the rights of
the former to demand for and collect payment of the amount due thereon from PLASTIC ERA. Had
DOMESTIC INSURANCE sued PLASTIC ERA under this cause of action, and assuming that the ruling in
the cited cases which referred to real estate and chattel mortgages would also be applicable where
the security given is pledge, then the plaintiff would thereafter be barred from enforcing its claim
against any of the securities given to it to guaranty the payment of the original obligation.
The indemnity agreement jointly signed by PLASTIC ERA and the pledge agreement of the shares
are the two securities, and as the creditor did not avail of the remedy to obtain a personal
judgment against the debtor, it is not barred to enforce its claim against both securities.

From the nature of the situation, DOMESTIC INSURANCE cannot prosecute its claim against the two
securities in one and the same action. The foreclosure of the pledged shares would not require an
action in court, whereas it would be necessary if the claim would be enforced under the indemnity
agreement. The Court is of the opinion and holds that the filing of a Civil Case and securing a
judgment therein against the counter-guarantors, did not release the lien of DOMESTIC INSURANCE
on the shares of stock of Sati B. Gidwani which were pledged in its favor. The pledge of the shares of
stock of Sati Gidwani did not release the obligation of the indemnitors. The pledge was an additional
security for the indemnification of the losses which Domestic Insurance did suffer under the surety
bond which it issued for Plastic Era.

The appealed decision is AFFIRMED in toto.

GENERAL INDEMNITY v. ALVAREZ

Appellee General Indemnity, filed a complaint against appellant Alvarez for the recovery of money
representing a loan allegedly taken by the alvarez from PNB. The payment of which General
guaranteed with an indemnity bond, and for which Alvarez, as counter-guaranty, executed in generals
favor a mortgage on his share in a parcel of land. The complaint alleged that the alvarez failed to pay
said loan to PNB. As a result, the bank deducted the amount thereof from generals deposit.

Alvarez admitted the loan and the execution of the mortgage, but denied knowledge of the payment
made by plaintiff to PNB. Alvarezs affirmative defense averred that the loan was secured by him only
in accommodation of Hao Lam, and that GI agreed not to take any steps against appellant and the
mortgage executed by him in GI’s favor until the latter had failed to obtain payment from Hao Lam.

Months later GI filed a motion for summary judgment, claiming that Alvarezs answer admitted the
genuineness and due execution of the mortgage presented no meritorious defense and that it was
entitled to a summary judgment in its favor, based on the affidavit of its comptroller Pedro Mendiola
Supporting the motion, which states
"That he is the Comptroller of the General Indemnity case; That he has personal knowledge of the
indebtedness of the alvarez. That he knows of his own personal knowledge that several demands
have been made upon the alvarez for the payment of the mentioned obligation to the GI, but despite
said demands, Alvarez has failed and refused and still fails and refuses to pay the same."

The lower court ruled in favor of GI. Alvarez filed for reconsideration but was denied.
Alvarez argues that the affirmative defense in his answer that he secured the loan in question only to
accommodate a 3rd party and that GI promised not to proceed against him until it had failed to
collect from said 3rd party, tenders genuine issues on the time and manner of payment of the
indebtedness in question, GI is correct in saying that said defense is immaterial to its right of recovery,
since the mortgage deed executed by appellant in its favor (the genuineness and due execution of
which appellant admitted in his answer) shows appellant to be the actual and only debtor, and
appellant is precluded from varying this representation by parol evidence.

However, there is merit in Alvarezs contention that there exists a controversy in the complaint as to
WON GI had actually paid Alvarezs obligation to PNB, a matter which should be decided in the
affirmative before GI, as surety, can claim reimbursement from Alvarez. GI asserts that this issue was
brought up by Alvarez for the 1st time on appeal and should be ignored; but contrary to GI’s assertion,
this question was brought up by Alvarez in his answer, when he specifically denied the allegation of
the complaint that the PNB deducted from Alvarezs deposit the loan in question, by the ff allegation
"3. . . . that he does not have sufficient knowledge or information to form a belief as to the truth of
the allegations regarding payments made by plaintiff to the P.N.B."

And as the affidavit of plaintiff’s comptroller Pedro R Mendiola, supporting the motion for summary
judgment simply relates to the amount of the loan in question and appellant’s failure to pay the same
to appellee inspite of repeated demands, but does not touch on the alleged payment made by
appellee to the bank, there was no necessity for appellant to submit counter-affidavits to show that
such payment had not been made. Appellee likewise contends that it is immaterial to its cause of
action against appellant whether or not it had actually paid the PNB, citing Art. 2071 of the New Civil
Code to the effect that a guarantor may proceed against the principal debtor, even before having paid,
when the debt has become demandable. The last paragraph of this same article, however, provides
that in such instance, the only action the guarantor can file against the debtor is "to obtain release
from the guaranty, or to demand a security that shall protect him from any proceeding by the creditor
and from the danger of insolvency of the debtor." An action by the guarantor against the principal
debtor for payment, before the former has paid the creditor, is premature.

The judgment appealed from is hereby set aside and the lower court is ordered to set anew this case
for trial on the sole issue of WON appellee General Indemnity Cohad already paid the loan in question
to the PNB, after which a new judgment shall be rendered.

CITIZEN SURETY v. INSURANCE CO.

petition to review the decision of the CA which reversed the decision of the CFI in a case involving a
claim for a sum of money against the estate of the late Ni Sarmiento, administered by her husband
Pascual M. Perez.

On December 4, 1959, The CSurety issued two (2) surety bonds to guarantee compliance by the
principal Pascual 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, Ni 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 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 it may
be made to pay under the surety bonds. Pascual M. Perez therefore executed a deed of assignment
of his stock of lumber with a total value of P400k. On April 12, 1960, a second real estate mortgage
was further executed in favor of the CSurety to guarantee the fulfillment of said obligation.

Pascual M. Perez Enterprises failed to comply with Singer Sewing Machine. Consequently, CSurety
was compelled to pay and despite several demands, Pascual M. Perez Enterprises failed to reimburse
the petitioner for the losses it sustained.

CSurety filed a claim for sum of money against the estate of the late Ni 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.

the CFI rendered judgment in favor of CSurety.

the CA dismissed the claim of the CSurety. against the estate of the late Ni Sarmiento.
The main issue is WON administrator’s had been extinguished by reason of the execution of the
deed of assignment.

It is the general rule that when the words of a contract are plain and readily understandably]e, there
is no room for construction thereof. However, this is only a general rule and it admits exceptions.

Pascual Perez executed an instrument denominated as "Deed of Assignment."

The document speaks of an assignment where there seems to be a complete conveyance of the
stocks of lumber to CSurety, 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.

"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. In order to judge the intention of the parties, their
contemporaneous and subsequent acts shall be principally considered.

CSurety issued the two (2) surety bonds in behalf of the Pascual M. Perez Enterprises to guaranty
fulfillment 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.

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 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 and eventually cancelled.
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 was because
the obligation under the indemnity bonds still existed. It was not yet extinguished when the deed
of assignment was executed on. 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 Csurety company paid Singer on the basis
of the two surety bonds it had issued in behalf of Pascual Perez Enterprises. Perez in turn was able to
indemnify CSurety for its payment to Singer in the amount of P55,600.00 thus leaving a balance of
only P88,400.00.

Csurety company was more than adequately protected. Lumber worth P400k was assigned to it as
collateral. A second real estate mortgage was also given by Perez although it was later cancelled
obviously because the 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.

With respect to the claim for interests 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 P400k 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, attorney’s fees cannot be charged, despite the express stipulation on the
matter in the contract, there was no failure on the part of the assignor to comply with the obligation
of refunding. 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.’"

WHEREFORE, the petition is hereby DISMISSED. For the reasons abovestated, the claim of Citizens’
Surety and Insurance Co., Inc., against the estate of Ni Sarmiento is DISMISSED.

EZOBEL vs. CA

This petition for review on certiorari seeks the reversal of the decision of the CA which affirmed the
Order of the RTC, denying petitioner's Motion to Dismiss the complaint

Respondent spouses Claveria, doing business under the name "Agro Brokers," applied for a loan with
respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) to finance the purchase of (2)
maritime barges and one tugboat, which would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses execute a chattel mortgage over the (3)
vessels to be acquired and that a continuing guarantee be executed by EZobel in favor of SOLIDBANK.
The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a
Continuing Guaranty were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence
SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment,
against respondents spouses and petitioner.

EZOBEL moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code. It argued that it has lost its right to be
subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is
not a guarantor but a surety.

The trial court finds the ground of the motion to dismiss without merit. The provisions of the
document are clear, plain and explicit. Defendant E. Zobel, Inc. signed as surety. Even though the
title of the document is "Continuing Guaranty", the Court's interpretation is not limited to the title
alone but to the contents and intention of the parties more specifically if the language is clear and
positive. The obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will
not apply as it is only for those acting as guarantor.

In fact, in the letter of the spouses and Zobel to the plaintiff it is requesting that the chattel mortgage
on the vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is
covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter, it said
that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is rendered
unnecessary and redundant.

With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the
proper government agency, i.e. with the Office of the Collector of Customs or with the Register of
Deeds makes the obligation a guaranty, the same merits a scant consideration and could not be taken
by this Court as the basis of the extinguishment of the obligation of the defendant corporation to the
plaintiff as surety. The chattel mortgage is an additional security and should not be considered as
payment of the debt in case of failure of payment. The same is true with the failure to register,
extinction of the liability would not lie.
the CA which affirmed the Order of the RTC, denying petitioner's Motion to Dismiss the complaint

ISSUES:
(1) Art 2080 of the Civil Code which provides: "The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor they cannot be subrogated to the
rights, mortgages, and preferences of the latter," is not applicable to petitioner;
(2) petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety;
(3) that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.

Resolving the issue of WON petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK
as a guarantor or a surety. It appears that the contract executed by EZOBEL in favor of SOLIDBANK,
albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent
spouses. This can be seen in the following stipulations.
For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address . . .
(hereinafter called the Borrower), for the payment of which the undersigned is now obligated to you
as surety and in order to induce you, in your discretion, at any time or from time to time hereafter,
to make loans or advances or to extend credit in any other manner to, or at the request or for the
account of the Borrower, either with or without purchase or discount, or to make any loans or
advances evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness . . . upon which the Borrower is or may become liable as
maker, endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby
guarantee, the punctual payment, at maturity or upon demand, to you of any and all such
instruments, loans, advances, credits and/or other obligations herein before referred to, and also any
and all other indebtedness of every kind which is now or may hereafter become due or owing to you
by the Borrower, together with any and all expenses which may be incurred by you in collecting all or
any such instruments or other indebtedness or obligations hereinbefore referred to, and or in
enforcing any rights hereunder, and also to make or cause any and all such payments to be made
strictly in accordance with the terms and provisions of any agreement (g), express or implied, which
has (have) been or may hereafter be made or entered into by the Borrower in reference thereto,
regardless of any law, regulation or decree, now or hereafter in effect which might in any manner
affect any of the terms or provisions of any such agreements(s) or your right with respect thereto as
against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner
of payment by the Borrower of any such instruments, obligations or indebtedness; . . . (Emphasis Ours)

One need not look too deeply at the contract to determine the nature of the undertaking and the
intention of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK,
as a regular party to the undertaking and obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not
resort to all other legal remedies or exhaust respondent spouses' properties before it can hold
petitioner liable for the obligation.

The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is frequently employed in business transactions to
describe not the security of the debt but an intention to be bound by a primary or independent
obligation. As aptly observed by the trial court, the interpretation of a contract is not limited to the
title alone but to the contents and intention of the parties.
Having established that EZOBEL is a surety, Article 2080 of the Civil Code, relied upon by EZOBEL, finds
no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa, we have ruled
that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel
mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in
favor of SOLIDBANK, EZOBEL bound itself to the contract irrespective of the existence of any
collateral. It even released SOLIDBANK from any fault or negligence that may impair the contract.
In fine, we find the petition to be without merit as no reversible error was committed by respondent
Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED.
SO ORDERED.

ERMA INDUSTRIES v. SECURITY BANK

Petition for Review is an appeal from the CA which affirmed the Decision of the RTC which denied
petitioners' motion for reconsideration.

Erma obtained from SBC a credit facility, the conditions for which are embodied in the Credit
Agreement executed between the parties. On the same date, a Continuing Suretyship agreement
was executed in favor of SB, and signed by Spouses Marcelo and Spouses Luis. Under the CSA, the
sureties agreed to be bound by the provisions of the Credit Agreement and to be jointly and severally
liable with Erma in case the latter defaults in any of its payments with SB

Ff the execution of the 2 agreements, Erma obtained various peso and dollar denominated loans from
SB evidenced by promissory notes.The promissory notes uniformly contain the following stipulations:
1. Interest on the principal at varying rates (7.5% per annum for dollar obligation and 16.75% or
21% per annum on peso obligation);
2. Interest not paid when due shall be compounded monthly from due date;
3. Penalty charge of 2% per month of the total outstanding principal and interest due and unpaid; and
4. Attorney's fees equivalent to 20% of the total amount due plus expenses and costs of collection.

After default in the payment of loans, Erma, thru its President, Ernesto Marcelo, wrote a letter to
SB, requesting for the restructuring of the whole of Erma's obligations and converting it into a five-
year loan. A certain property valued at P12 million covered by TCT No. M-7021 and registered in the
name of petitioner Ernesto Marcelo was also offered as security. The title was received by SB and has
since then remained in its possession. Security Bank approved the partial restructuring of the loans
or only up to P5 million.

Erma reiterated its request for the restructuring of the entire obligation. Erma also stated that the
property they offered as collateral could answer for a far bigger amount than what SB had
recommended. Nevertheless, Erma suggested that it could add another property as additional
security so long as the entire obligation is covered.
Through a letter, SB demanded payment, from Erma and the sureties of Erma's outstanding peso and
dollar obligations.
SB filed a Complaint with the RTC for payment of Erma's outstanding loan obligation + interests and
penalties. Upon the filing of said Complaint and as "it became clear that the Bank would agree only
to partial restructuring," Erma requested the return of the TCT, However, Security Bank retained
possession of TCT M-7021.

After the case was reraffled, SB filed its Amended Complaint for Sum of Money praying that Erma,
Spouses Marcelo, and Spouses Ortiz be compelled to execute a Real Estate Mortgage in its favor
over the property covered by TCT M-7021.
In Erma and Spouses Marcelo's Amended Answer, a counterclaim against SB was included for the
return of said title to its rightful owner, petitioner Ernesto Marcelo. Spouses Ortiz, for their part,
essentially denied liability. Sergio claimed that he signed the Suretyship Agreement only as an
accommodation party and nominal surety; and his obligation, if any, was extinguished by novation
when the loan was restructured without his knowledge and consent. Margarita, on the other hand,
claimed that she signed the Suretyship Agreement only to signify her marital consent.

 The RTC rendered its Decision where it adjudged Erma liable to pay Security Bank inclusive of the
stipulated interest and penalty plus legal interest of 12% per annum until full payment is made.
Given Erma's partial payments of its loan obligation, and the serious slump suffered by its export
 business, the RTC considered iniquitous to still require Erma to pay 2% penalty per month and
legal interest on accrued interest. The RTC denied SB’s prayer for attorney's fees on the ground
that "there was no conscious effort to evade payment of the obligation." It likewise denied
Erma's prayer for attorney's fees.
Ernesto Marcelo and Sergio Ortiz-Luis were also held liable to Security Bank as sureties. Their spouses,
however, were not held liable as agreed only to signify their marital consent. The RTC further held
that there was no novation because the restructuring of Erma's loan obligation whether total or
partial, did not materialize. Consequently, Security Bank was ordered to return TCT No. M-7021 to
Spouses Marcelo.
 The CA affirmed the RTC Decision. It held that there was no perfected agreement on the
restructuring of the loans because Erma never complied with the condition to submit
documentary requirements and Erma did not accept the partial restructuring of the loan offered
by Security Bank.

On Sergio Ortiz's liability, the CA held that under the terms of the CSA, Sergio Ortiz undeniably bound
himself jointly and severally with Ernesto Marcelo for the obligations of Erma. Finally, the CA agreed
with the RTC that "the 2% penalty per month ... imposed by the SBC: on top of the 20% interest per
annum on the peso obligation and 7.5% interest per annum on the dollar obligation was
iniquitous" Consequently, the CA held that a straight 12% per annum interest on the total amount
due would be fair and equitable. In this regard, Erma's prayer to remand the case to the court a
quo for reception of additional evidence that would further reduce their outstanding obligation was
rejected by the CA on the grounds that Erma should have presented all evidence at the trial and that
it would unduly delay the case even further.

Erma and Spouses Marcelo filed their Petition for Review. The issues for resolution are:
First whether the CA and the RTC erred in finding that petitioners are liable to pay respondent Bank
inclusive of interests and penalty charges.
Second, whether the CA and the RTC erred in finding that petitioners are liable to pay respondent
Bank legal interest of twelve percent (12%) per annum until full payment is made;
Third, whether petitioners are entitled to attorney's fees; and
Fourth, whether the CA erred in holding respondent Sergio Ortiz - Luis, Jr. solidarily liable with the
petitioners to pay plus 12% legal interest.
Petition denied. The CA committed no error in affirming the decision of the RTC.

In its Amended Complaint, SB claimed for payment of the total outstanding peso obligation The Bank
additionally claimed for:
(1) Interest of 20% per annum on the peso obligation and 7.5% per annum on the dollar obligation
until fully paid;
(2) Penalty charges of 2% per month on the total outstanding obligation until fully paid;
(3) Legal interest on the accrued interest from the filing of the Complaint until fully paid; and
(4) Atty fees equivalent to 20% of total outstanding obligations, including interests and penalties.

The RTC denied SB’s additional claims for interests and penalty charges for being iniquitous, and
imposed instead a 12% legal interest on the total outstanding obligation. Agreeing with the RTC,
the CA explained that it would only be fair and equitable to impose a straight 12% per annum on
the total amount due rather than the 2% penalty per month on top of the 20% and 7.5% interest on
the peso and dollar obligation, respectively, being demanded by the Bank.

ERMA contends that since the RTC and CA found the stipulated interests and penalty charges to be
iniquitous, then the amounts against them (which already incorporated the interests and penalty
charges) should have been reduced to the actual unpaid principals of respectively, devoid of any
interests and penalty charges. ----SB counters that petitioners raise purely factual questions, which
are not proper in a Rule 45 petition before this Court; and petitioners' arguments were a mere rehash
of their arguments before the CA, which have already been judiciously passed upon. SBC are mistaken.

The RTC did not delete altogether the 2% monthly penalty charges and stipulated interests of 7.5%
(on the dollar obligations) and 20% (on peso obligations). The RTC, in fact, adjudged petitioner Erma
liable to pay, inclusive of the stipulated interest and penalty on the basis of Article 130849 of the Civil
Code and jurisprudential pronouncements on the obligatory force of contracts - not otherwise
contrary to law, morals, good customs or public policy - between contracting parties.
The stipulated 7.5% or 21% per annum interest constitutes the monetary or conventional interest for
borrowing money and is allowed under Article 1956 of the Civil Code. On the other hand, the penalty
charge of 2% per month accrues from the time of Erma's default in the payment of the principal
and/or interest on due date. This 2% per month charge is penalty or compensatory interest for the
delay in the payment of a fixed sum of money, which is separate and distinct from the conventional
interest on the principal of the loan. In this connection, this Court, construing Article 220954 of he
Civil Code, held that:
The appropriate measure for damages in case of delay in discharging an obligation consisting of the
payment of a sum or money, is the payment of penalty interest at the rate agreed upon; and in the
absence of a stipulation of a particular rate of penalty interest, then the payment of additional
interest at a rate equal to the regular monetary interest; and if no regular interest had been agreed
upon, then payment of legal interest or six percent (6%) per annum.

Further, the promissory notes provide for monthly compounding of interest: "Interest not paid when
due shall be compounded monthly from due date.” Compounding is sanctioned under Article 1959 of
the Civil Code: Article 1959. Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new interest.

What the RTC did was to stop the continued accrual of the 2% monthly penalty charges and to
thereafter impose instead a straight 12% per annum on the total outstanding amounts due. In
making this ruling, the RTC took into account the partial payments made by petitioners, their efforts
to settle/restructure their loan obligations and the serious slump in their export business. The RTC
held that, under those circumstances, it would be "iniquitous, and tantamount to merciless
forfeiture of property" if the interests and penalty charges would be continually imposed.
The RTC held: It is no longer disputed that defendant ERMA was paying interest on its loan obligation
until October 1994; that defendant ERMA exerted efforts to settle its obligation to SBC, as in fact it
proposed to SBC the restructuring of its loan; and delivered to SBC, TCT No. M-7021 to manifest its
sincere effort to settle the obligation by way of restructuring its loan obligation into five-year term
loan. Additionally, plaintiff ERMA's export business suffered serious slump in 1993 which prompted
it to seek a restructuring of its entire loan. Were it not for said financial crisis, defendant ERMA
would not have defaulted in the payment of its obligation, or at least the interest thereon.
Recognizing the predicament which ERMA found itself, it is considered iniquitous, and tantamount to
merciless forfeiture of property to require defendant ERMA to continue paying 2% penalty per
month as well as payment of legal interest upon all accrued interest after October 1994. This court
therefore finds plaintiff SBC not entitled to the recovery of the amount corresponding to 2% penalty
per month and to the legal interest on the accrued interest.

The RTC, as affirmed by the CA, acted in accordance with Article 1229 of the Civil Code, which allows
judges to equitably reduce the penalty when there is partial or irregular compliance with the principal
obligation, or when the penalty is iniquitous or unconscionable. Whether a penalty charge is
reasonable or iniquitous is addressed to the sound discretion of the courts and determined
according to the circumstances of the case. The reasonableness or unreasonableness of a penalty
would depend on such factors as "the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities, the standing and
relationship of the parties. In this case, the RTC and the CA found it reasonable to reduce the 2%
penalty charges, compounded monthly as to interests due and unpaid, to 12% per annum of the
total outstanding obligations, in light of petitioners' partial payments and their good faith to settle
their obligations. This reduction is essentially discretionary with the RTC and, in the absence of any
abuse of discretion will not be disturbed.

Also, there is no cogent reason to disturb the sums of money adjudged against ERMA in favor of SB.
The SC has held that factual determinations of the RTC, especially when adopted and confirmed by
the CA, are final and conclusive barring a showing that the findings were devoid of support or that a
substantial matter had been overlooked by the lower courts, which would have materially affected
the result if considered. This case does not fall within any of the recognized exceptions justifying a
factual review in a Rule 45 petition.

ERMA further asserts that they should be awarded attorney's fees for having been forced to defend
themselves in needless litigation.The Court is not persuaded. The award of attorney's fees under
Article 2208 of the Civil Code demands factual, legal and equitable justification. Even when a
claimant is compelled to litigate to defend himself/herself, still attorney's fees may not be awarded
where there is no sufficient showing of bad faith of the other party. It is well within SB right to
institute an action for collection and to claim full payment. Absent proof that SBC intended to
prejudice or injure petitioners, we find no basis to grant attorney's fees.

For his part, respondent Ortiz insists that he is not liable to SB because he merely signed the
Suretyship Agreement as an accommodation party being the Administrative VP of Erma at that time;
and there was novation of the Credit Agreement. Ortiz's position had been consistently rejected by
the RTC and CA. The lower courts found that while respondent Ortiz signed the Credit Agreement as
an officer of Erma, as shown by his signature under Erma Industries Inc. (Borrower), this does not
absolve him from liability because he subsequently executed a Continuing Suretyship
agreement wherein he guaranteed the "due and full payment and performance" of all credit
accommodations granted to Erma and bound himself solidarily liable with Ernesto Marcelo for the
obligations of Erma.

Further, respondent Ortiz's claim that he is a mere accommodation party is immaterial and does not
discharge him as a surety. He remains liable according to the character of his undertaking and the
terms and conditions of the Continuing Suretyship, which he signed in his personal capacity and not
in representation of Erma.
The Court has elucidated on the distinction between an accommodation and a compensated surety
and the reasons for treating them differently: The law has authorized the formation of corporations
for the purpose of conducting surety business, and the corporate surety differs significantly from the
individual private surety. First, unlike the private surety, the corporate surety signs for cash and not
for friendship. The private surety is regarded as someone doing a foolish act for praiseworthy motives;
the corporate surety, to the contrary, is in business to make a profit and charges a premium depending
upon the amount of guaranty and the risk involved. Second, the corporate surety, like an insurance
company, prepares the instrument, which is a type of contract of adhesion whereas the private surety
usually does not prepare the note or bond which he signs. Third, the obligation of the private surety
often is assumed simply on the basis of the debtor's representations and without legal advice, while
the corporate surety does not bind itself until a full investigation has been made. For these reasons,
the courts distinguish between the individual gratuitous surety and the vocational corporate surety.
In the case of the corporate surety, the rule of strictissimi juris is not applicable, and courts apply
the rules of interpretation . . . of appertaining to contracts of insurance.
The rule of strict construction of the surety contract is commonly applied to an accommodation
surety but is not extended to favor a compensated corporate surety.
The rationale of this doctrine is reasonable; an accommodation surety acts without motive of
pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by
imposing on the principal duties akin to those of a fiduciary. This cannot be said of a compensated
corporate surety which is a business association organized for the purpose of assuming classified
risks in large numbers, for profit and on an impersonal basis, through the medium of standardized
written contractual forms drawn by its own representatives with the primary aim of protecting its
own interests.

The nature and extent of Ortiz's liability are set out in clear and unmistakable terms in the CSA. Under
its express terms, respondent Ortiz, as surety, is "bound by all the terms and conditions of the credit
instruments."His liability is solidary with the debtor and co-sureties; and the surety contract remains
in full force and effect until full payment of Erma's obligations to the Bank. Ortiz's claim of novation
was likewise rejected by the lower courts. The RTC and the CA were in agreement that while there
were ongoing negotiations between Erma and Security Bank for the restructuring of the loan, the
same did not materialize. Erma offered to restructure its entire outstanding obligation and delivered
TCT No. M-7021 as collateral, to which SB counter-offered a partial restructuring or only up to
P5,000,000. This counter-offer was not accepted by Erma. There was no new contract executed
between the parties evidencing the restructured loan. Neither did Erma execute a real estate
mortgage over the property covered by TCT No. M-7021.

WHEREFORE, the Petition is DENIED. The Decision of the CA is Affiremed. SO ORDERED.

FGU INSURANCE V. SPOUSES ROXAS

Facts:
Spouses Floro and Eufemia Roxas entered into a contract with Rosendo P. Dominguez Jr. and Philtrust
Bank for the construction of their housing project. Philtrust Bank would finance the cost of materials
and supplies, while Dominguez would undertake the construction works.The contract stated that in
case of non-compliance by Dominguez, he would pay liquidated damages to Philtrust Bank and/or the
Spouses Roxas. Dominguez failed to complete the project within the stipulated period and demanded
an upward adjustment of the contract price. The Spouses Roxas also failed to make the agreed
payments and allegedly borrowed funds from the project for personal use. Dominguez filed a
complaint against the Spouses Roxas and Philtrust Bank, seeking payment and the annulment of the
contract.The trial court ruled in favor of Dominguez, but the Court of Appeals modified the decision.
The Court of Appeals held that FGU Insurance Corporation (FGU), as surety, was liable for the full
amount of the surety bond issued to Dominguez. The court also found the Spouses Roxas liable for
the unpaid amounts and awarded damages to Dominguez.

Issue:
Whether FGU is liable under the surety bond.
Whether the Spouses Roxas are entitled to liquidated damages.
Whether there is a factual basis for the award of damages to Dominguez.
Whether there is a possibility of offsetting liabilities between the Spouses Roxas and FGU.
Whether Philtrust Bank is liable for the unauthorized release of funds.

Ruling:
FGU is liable for the full amount of the surety bond issued to Dominguez.
The Spouses Roxas are not entitled to liquidated damages.
There is a factual basis for the award of damages to Dominguez.
There is a possibility of offsetting liabilities between the Spouses Roxas and FGU.
Philtrust Bank is liable for the unauthorized release of funds.

Ratio:
The liability of FGU under the surety bond is established based on the terms of the contract and the
obligations of the parties.
The Spouses Roxas are not entitled to liquidated damages because they failed to comply with their
obligations under the contract.
The award of damages to Dominguez is supported by the evidence presented during the trial.
The possibility of offsetting liabilities between the Spouses Roxas and FGU is allowed to ensure
fairness and equity in the resolution of the dispute.
Philtrust Bank is liable for the unauthorized release of funds because it failed to exercise due diligence
in the management of the construction project.

PGI vs. DNM

The liabilities of an insurer under the surety bond are not extinguished when the modifications in the
principal contract do not substantially or materially alter the principal’s obligations. The surety is
jointly and severally liable with its principal when the latter defaults from its obligations under the
principal contract.

petition for review on certiorari under Rule 45 of the Rules of Court, praying for the reversal of the
decision of the CA which set aside the decision2 of the RTC. In the assailed decision, The CA held
People's General Insurance Corporation and Million State Development Corporation jointly and
severally liable to respondent Doctors of New Millennium Holdings, Inc.

As found by the RTC and the CA, the facts are as follows.

Doctors of New Millennium Holdings, Inc. is a domestic corporation comprised of about 80

doctors. It entered into a construction and development agreement (signed agreement) with
Million State Development Corporation, a contractor, for the construction of a 200-bed capacity
hospital According to the terms of the signed agreement, DNM obliged itself to pay P10M to MSD at
the time of the signing of the agreement to commence the construction of the hospital. MSD was to
shoulder 95% of the project cost and committed itself to secure P385k within 25 banking days from
DNM’s initial payment, part of which was to be used for the purchase of the lot where the hospital
was to be constructed.

As part of the conditions prior to the initial payment, MSD submitted a surety bond of P10M to DNM.
The surety bond was issued by PGI, Doctors of New Millennium, on the other hand, made the initial
payment of P10,000,000.00.

MSD, however failed to comply with its obligation to secure P385k within 25 banking days from initial
payment. It faxed a letter to DNM explaining its delay was caused by its foreign creditors’ delay in
processing its application. DNM sent a formal demand letter to MSD for the remittance of the funds
to be used for the purchase of the lot and demanding for the cost of money from the time the
remittance was due. Instead of replying to the demand letter, MSD sent another letter explaining
that they would have their standby letter of credit within 15 banking days.

When MSD reneged on its obligations, DNM sent a demand letter to People’s General Insurance for
the return of its initial payment of P10M, in accordance with its surety bond. DNM sent another letter
to PGI, this time furnishing a copy to the Insurance Commission. The Insurance Commission referred
the matter to its Public Assistance and Investigation Division, which conducted conciliation
proceeding. After several conferences, PGI sent a letter to then Insurance Commissioner Ed Malinis,
stating that DNM surety claim was denied on the ground that the guarantee only extended to “the
full and faithful construction of a First Class 200 hospital bed building” and not to “the ‘funding’ of
the construction of the hospital.” As a result of the letter, the conciliation proceedings were
terminated, and DNM filed an administrative complaint for unfair claim settlement practice against
People’s General Insurance.

While the administrative complaint was pending before the Insurance Commission, DNM sent a
demand letter to MSD for the return of their initial payment of P10M Due to MSDs inaction, DNM
filed a complaint for breach of contract with damages with prayer for the issuance of preliminary
attachment against MSD and PGI with the RTC

In the proceedings before the trial court, MSD did not appear or submit any responsive pleading and
was declared in default. The RTC resolved the issues of the case only as to the remaining parties and
primarily involving the surety bond. DNM, thru its President, Dr.Alfonso, testified that the surety bond
was entered into to protect the release of the 10M initial mobilization fund. PGI, on the other hand,
thru its President, Liboro, testified that its liability was only limited to the construction of the hospital.
Mr. Liboro also argued that the terms of the surety bond were based on the Draft Construction and
Development Agreement (draft agreement). It alleged that without its knowledge and consent, DNM
and MSD substantially altered the conditions of the draft agreement by inserting the clause “or the
Project Owner’s waiver,” which appeared in the signed agreement.
Mr. Liboro claimed that they became aware of the alteration during the conciliation proceedings
before the Insurance Commission. the Insurance Commission rendered its decision on the
administrative complaint, finding that PGI engaged in unfair claim settlement practice under Section
241(1) of the Insurance Code. The Commission imposed a fine, the suspension of its certificate of
registration of its bond underwriter for six months, and the suspension of its authority to issue bonds
for six months.

The RTC rendered its decision finding only MSD liable. It discharged PGI from any liability on the
ground that the inclusion of the clause “or the Project Owner’s waiver” in the signed agreement
was a novation of the draft agreement. It found that DNM’s right under the surety bond can only be
exercised upon the fulfillment of the conditions provided for in the agreement.

Upon the denial of its motion for partial reconsideration, DNM filed an appeal with the CA, seeking
the reversal of the RTC’s finding that the surety was not liable. the CA rendered a decision granting
the appeal and holding PGI jointly and severally liable with MSD

The CA found that the surety bond was made to cover for the initial payment made by DNM. Citing
the Whereas Clause of the surety bond, it ruled that PGI guaranteed not only the construction of the
hospital but also secured the initial payment in case the contractor defaults.

The CA also ruled that the DNM’s waiver of the preconditions stated in Article XIII of the signed
agreement did not increase the surety’s risk since it has “absolutely no relation at all and are not
material to the undertaking of PGI to guarantee repayment.” PGI filed a motion for reconsideration,
which the CA denied

PGI argues that MSD furnished it a copy of the draft agreement with the assurance that the same
terms and conditions would be embodied in the signed agreement. It argues that when the parties
inserted the clause “or the Project Owner’s waiver,” it substantially altered the terms and conditions
of the contract as “they exponentially increase[d] the risk that petitioner was willing to take as surety.”
It explains that under the draft agreement, MSD “must hurdle certain stringent requirements” before
the P10M initial payment could be released to it. PGI also alleges that because of the disputed clause,
the initial payment was released to the contractor on the pretext that the preconditions were already
waived by DNM. It argues that the clause “effectively deprived [it] of the opportunity to objectively
assess the real risk of its undertaking and fix the reasonable rate of premium thereon.” This, it argues,
constituted an implied novation, which should automatically relieve it from its undertaking as a surety
as it makes its obligation more onerous.

DNM, on the other hand, argues that there was no novation since the draft agreement was not yet a
valid and binding contract between it and MSD. It alleged that MSD entered into a surety agreement
with PGI on the basis of the draft agreement without its knowledge. It also argues that if PGI
disagreed with the terms and conditions of the signed agreement, it should have informed DNM or
MSD of the matter since the premium payment of P158,792.50 remained in its possession, control,
and disposal.

the issue: whether the surety bond guaranteeing respondent DNM’s initial payment was impliedly
novated by the insertion of a clause in the principal contract, which waived the conditions for the
initial payment’s release. The petition is without merit

The principal contract of the suretyship is the signed agreement

The obligations of the surety to the principal under the surety bond are different from the obligations
of the contractor to the client under the principal contract. The surety guarantees the performance
of the contractor’s obligations. Upon the contractor’s default, its client may demand against the
surety bond even if there was no privity of contract between them. This is the essence of a surety
agreement.

The definition of a surety is provided for under the Civil Code, which states: 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.

In this case, the surety bond was executed “to guarantee the repayment of the downpayment” and
“to secure the full and faithful performance” of MSD. According to the terms of the bond, PGI
bound itself to be liable in the amount of P10M in the event that MSD defaults in its obligations.

PGI, however, contends that the inclusion of the clause “or the Project Owner’s waiver” in Article XIII
of the signed agreement made its obligations more onerous and, therefore, the surety must be
released from its bond.

A suretyship consists of two different contracts: (1) the surety contract and (2) the principal contract
which it guarantees. Since the insurer’s liability is strictly based only on the terms stated in the surety
contract in relation to the principal contract, any change in the principal contract, which materially
alters the principal’s obligations would, in effect, constitute an implied novation of the surety contract:

[A] surety is released from its obligation when there is a material alteration of the contract in
connection with which the bond is given, such as a change which imposes a new obligation on the
promising party, or which takes away some obligation already imposed, or one which changes the
legal effect of the original contract and not merely its form. A surety, however, is not released by a
change in the contract which does not have the effect of making its obligation more onerous.

PGI insists that the principal contract of the suretyship was the draft agreement since it was assured
by its principal that the draft would embody the same terms and conditions as the final signed
agreement. The insertion of the disputed clause in the signed agreement, it argues, “effectively
deprived petitioner of the opportunity to objectively assess the real risk of its undertaking and fix the
reasonable rate of premium thereon.” This argument is unmeritorious.

In his testimony before the trial court, Mr. Liboro, representing PGI, admitted that the signed copy of
the agreement was attached to the surety bond when it was returned to them by MSD and DNM
Mr. Liboro also admitted that they were not diligent in reviewing the documents presented to them
and merely relied on their principal’s assurances of the content of the documents

PGI, as the surety, had the responsibility to read through the terms of the principal contract; it
cannot simply rely on the assurances of its principal. It was petitioner’s duty to carefully scrutinize
the agreement since the Insurance Code mandates that its liability is determined strictly in
accordance with the provisions of the principal contract

Sec. 176. The liability of the surety or sureties shall be joint and several with the obligor and shall be
limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship
in relation to the principal contract between the obligor and the obligee.

If PGI had any objection to the terms of the signed agreement, it could have pointed it out before its
principal defaults and it becomes liable under the surety bond. The silence of PGI must be taken
against it since it was responsible for exerting diligence in the conduct of its affairs.

Even the Insurance Commission was aware that petitioner acted irresponsibly when it issued the
surety bond. The Commission, however, took notice of the laxity or irresponsible underwriting
practice of DNMS insurance companys bond underwriter when the latter did not require a collateral
security for this kind of bond considering that the business of suretyship is a very risky one. It would
have been easier for respondent company to settle the claim had there been a collateral given by the
principal when the latter defaulted from the obligation under the contract.

PGIs failure to notice the changes in the signed agreement was due to its own fault and not to any
deception on the part of DNM. DNM was not privy to the terms of the surety bond entered into by
PGI and MSD. If there were any changes in the contract that petitioner should have been aware of,
it was MSD, as its principal, which had the duty to inform them about the changes.
On the basis of PGI’s own admissions, the principal contract of the suretyship is the signed
agreement. The surety, therefore, is presumed to have acquiesced to the terms and conditions
embodied in the principal contract when it issued its surety bond. Accordingly, PGI cannot argue that
the insertion of the clause in the signed agreement constituted an implied novation of the obligation
which extinguished its obligations as a surety since there was nothing to novate
[I]n 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 new obligation be in every
point incompatible with each other. Novation of a contract is never presumed. In the absence of an
express agreement, novation takes place only when the old and the new obligations are
incompatible on every point.

Even if we were to assume, for the sake of argument, that the principal contract in the suretyship was
the draft agreement, the addition of the clause “or the Project Owner’s waiver” in the signed
agreement does not operate as a novation of petitioner’s liability under the surety bond.
The disputed clause is not material to PGI undertaking to guarantee DNMs initial payment
DNM’s waiver of the conditions set forth under the agreement does not substantially or materially
alter PGI’s obligation to guarantee the performance of its principal, MSD. These conditions, however,
only embody a portion of MSD obligations to DNM. PGI, as a surety, bound itself to guarantee the
repayment of the initial price in the event that MSD fails to perform not only the conditions under Art
13 but all its obligations under the signed agreement. The conditions under Art 13 of the signed
agreement refer only to the conditions that MSD was responsible for so that initial payment could be
disbursed to them. PGI failed to take into account that Art 13 must be read together with Art 9:
MSD’s obligations under the contract subsist regardless of whether respondent waives the conditions
for the release of the initial payment. Its obligation upon the release of the initial payment was for it
to “make available the funds constituting the Balance Payment 385K within (25) banking days from
payment by the Project Owner of the Initial Payment.” It is this performance of this obligation that
the surety primarily guarantees.

Even the Insurance Commission arrived at the same conclusion when it found that It appears from the
provisions of Art. 7 of the Agreement that the initial payment of P10M serves as a basis and a
reckoning for the“Contractor to make available the funds constituting the Balance Payment under
the following schedule: a) the amount of P385K within 25 days from payment by the Project Owner of
the Initial Payment xxx.”Considering that the contractor failed to provide for the Balance Payment
on the prescribed due date, he has the obligation to return what he has received so as not to unjustly
enrich himself at the expense of the other. It can be inferred[,] therefore, that the undertaking
pertains to the return of the initial payment of P10M

PGI cannot feign ignorance of MSD’s obligation to provide the funds for the balance since this
provision was present in both the draft agreement and the signed agreement. Since MSD failed to
fulfill its obligation, the surety becomes jointly and severally liable for the amount of the bond.

The award of attorney’s fees must be deleted

The RTC and CA awarded attorney’s fees to DNM without legal basis for the award.
The general rule is that attorneys fees cannot be recovered as part of damages because of the policy
that no premium should be placed on the right to litigate. They are not to be awarded every time a
party wins a suit. The power of the court to award attorneys fees under Article 220863 demands
factual, legal, and equitable justification. Even when a claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorneys fees may not be awarded where no
sufficient showing of bad faith could be reflected in a partys persistence in a case other than an
erroneous conviction of the righteousness of his cause.64

As DNM has not shown any justification as to its award of attorney’s fees, the same must be deleted.

WHEREFORE, the petition is DENIED. The decision of the CA is AFFIRMED with MODIFICATION. PGI is
held jointly and severally liable with MSD for the payment of P10M with legal interest of 12% per
annum from June 14, 1999 until June 30, 2013 and legal interest of 6% per annum from July 1, 2013
until fully paid.65 The award of P200,000.00 representing attorney’s fees and litigation expenses
is DELETED.

SO ORDERED.

TIDCORP v. ASPAC

Respondents (ASPAC) and (PICO) entered into a sub-contracting agreement, denominated as “200
KV Transmission Lines Contract No. 20-/80-II Civil Works & Electrical Erection,” with (ELPCO), as main
contractor, for the construction and erection of a double circuit bundle phase conductor
transmission line in the country of Libya. To finance its working capital requirements, ASPAC
obtained loans from foreign banks Banque Indosuez and PCI Capital (Hong Kong) Limited (PCI
Capital) which, upon the latter’s request, were secured by several Letters of Guarantee issued by
petitioner (TIDCORP), then Philippine Export and Foreign Loan Guarantee Corp., a gocc created for
the primary purpose of “guarantee[ing], with the prior concurrence of the Monetary Board, subject to
the rules and regulations that the Monetary Board may prescribe, approved foreign loans, in whole
or in part, granted to any entity licensed to engage in business in the Philippines.” Under the Letters
of Guarantee, TIDCORP irrevocably and unconditionally guaranteed full payment of ASPAC’s loan
obligations to Banque Indosuez and PCI Capital in the event of default by the latter.

As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC, PICO, and
ASPAC’s President, respondent (Balderrama) had to execute several Deeds of Undertaking, binding
themselves to jointly and severally pay TIDCORP for whatever liabilities it may incur. In the same
light, ASPAC, as principal debtor, entered into surety agreements (Surety Bonds) with Paramount,
Phoenix, Mega Pacific and Fortune (bonding companies), as sureties, also holding themselves
solidarily liable to TIDCORP, as creditor, for whatever damages or liabilities the latter may incur under
the Letters of Guarantee.

ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital, prompting
them to demand payment from TIDCORP under the Letters of Guarantee. The demand letter of
Banque Indosuez and PCI Capital was sent to TIDCORP. In turn, TIDCORP demanded payment from
Paramount, Phoenix, Mega Pacific, and Fortune under the Surety Bonds. TIDCORP’s demand letters
to the bonding companies were sent before the final expiration dates of all the Surety Bonds, but to
no avail.

Taking into account the moratorium request issued by the Minister of Finance of the Philippines
(where members of the international banking community were requested to grant government
financial institutions, such as TIDCORP, a 90-day roll over from their foreign debts), TIDCORP and its
various creditor banks, such as Banque Indosuez and PCI Capital, forged a Restructuring Agreement,
extending the maturity dates of the Letters of Guarantee.The bonding companies were not privy to
the Restructuring Agreement and, hence, did not give their consent to the payment extensions
granted by Banque Indosuez and PCI Capital, in favor of TIDCORP. Nevertheless, following new
payment schedules,TIDCORP fully settled its obligations under the Letters of Guarantee to both
Banque Indosuez and PCI Capital. Seeking payment for the damages and liabilities it had incurred
under the Letters of Guarantee and with its previous demands therefor left unheeded, TIDCORP
filed a collection case against: (a) ASPAC, PICO, and Balderrama on account of their obligations under
the deeds of undertaking; and (b) the bonding companies on account of their obligations under the
Surety Bonds.

RTC Ruling

RTC partially granted TIDCORP’s complaint and thereby found ASPAC, PICO, and Balderrama jointly
and severally liable to TIDCORP, but absolved the bonding companies from liability on the ground
that the moratorium request and the consequent payment extensions granted by Banque Indosuez
and PCI Capital in TIDCORP’s favor without their consent extinguished their obligations under the
Surety Bonds. As basis, the RTC cited Article 2079 of the Civil Code which provides that an extension
granted to the debtor by the creditor without the consent of the guarantor/surety extinguishes the
guaranty/suretyship, and, in this relation, added that the bonding companies “should not be held
liable as sureties for the extended period.”

Dissatisfied, TIDCORP and Balderrama filed separate appeals before the CA. For its part, TIDCORP
averred, that Article 2079 of the Civil Code is only limited to contracts of guaranty, and, hence,
should not apply to contracts of suretyship. Meanwhile, Balderrama theorized that the main
contractor’s (i.e., ELPCO) failure to pay ASPAC due to the war/political upheaval in Libya which further
resulted in the latter’s inability to pay Banque Indosuez and PCI Capital had the effect of releasing him
from his obligations under the Deeds of Undertaking.

The CA Ruling

the CA upheld the RTC’s ruling that the moratorium request “had the effect of an extension granted
to a debtor, which extension was without the consent of the guarantor, and thus released the surety
companies from their respective liabilities under the issued surety bonds” pursuant to Article 2079 of
the Civil Code. it noted that “the maturity of the foreign loans was extended as provided under
Section 4.01 of the Restructuring Agreement,” and that “said extension is beyond the expiry date[s] of
the surety bonds x x x and the maturity date of the principal obligations it purportedly secured, which
extension was without [the bonding companies’] consent,” The CA, however, modified the RTC
decision to the extent of holding ASPAC, PICO, and Balderrama liable to TIDCORP for attorney’s fees in
the reasonable amount of P2,000,000.00 since the payment of attorney’s fees was stipulated by the
parties in the Deed of Undertaking

The Issue Before the Court

The issue raised for the Court’s resolution is whether or not the CA erred in holding that the bonding companies’ liabilities to
TIDCORP under the Surety Bonds have been extinguished by the payment extensions granted by Banque Indosuez and PCI Capital
to TIDCORP under the Restructuring Agreement.

The Court’s Ruling

the Court finds that the payment extensions granted by Banque Indosuez and PCI Capital
to TIDCORP under the Restructuring Agreement did not have the effect of extinguishing
the bonding companies’ obligations to TIDCORP under the Surety Bonds, despite the fact
that said extensions were made without their consent. This is because Article 2079 of the
Civil Code refers to a payment extension granted by the creditor to the principal debtor
without the consent of the guarantor or surety. In this case, the Surety Bonds are suretyship
contracts which secure the debt of ASPAC, the principal debtor, under the Deeds of
Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur under the
Letters of Guarantee, within the bounds of the bonds’ respective coverage periods and
amounts. No payment extension was, however, granted by TIDCORP in favor of ASPAC in
this regard; hence, Article 2079 of the Civil Code should not be applied with respect to the
bonding companies’ liabilities to TIDCORP under the Surety Bonds.

The payment extensions granted by Banque Indosuez and PCI Capital pertain to TIDCORP’s
own debt under the Letters of Guarantee wherein it (TIDCORP) irrevocably and
unconditionally guaranteed full payment of ASPAC’s loan obligations to the banks in the
event of its (ASPAC) default. In other words, the Letters of Guarantee secured ASPAC’s loan
agreements to the banks. Under this arrangement, TIDCORP therefore acted as a
guarantor, with ASPAC as the principal debtor, and the banks as creditors.

it is clear that there are two sets of transactions that should be treated separately and
distinctly from one another following the civil law principle of relativity of contracts “which
provides that contracts can only bind the parties who entered into it, and it cannot favor or
prejudice a third person, even if he is aware of such contract and has acted with
knowledge thereof.” the Surety Bonds concern ASPAC’s debt to TIDCORP and not
TIDCORP’s debt to the banks, the payments extensions (which concern TIDCORP’s debt to
foreign banks and not ASPAC’s debt to TIDCORP) would not deprive the bonding companies
of their right to pay their creditor (TIDCORP) and to be immediately subrogated to the
latter’s remedies against the principal debtor (ASPAC) upon the maturity date.
It must be stressed that these payment extensions did not modify the terms of the Letters of
Guarantee but only provided for a new payment scheme covering TIDCORP’s liability to the
banks. TIDCORP’s claim is hereby granted and the CA’s ruling on this score consequently reversed.
the CA's dispositions on these matters are now deemed as final and executory.