GUARANTY & SURETYSHIP CASES

ATOK FINANCE CORPORATION vs. COURT OF APPEALS G.R. No. 80078. May 18, 1993

FACTS:

On 27 July 1979, private respondents Sanyu Chemical Corporation as principal and Sanyu Trading Corporation along with
individual private stockholders of Sanyu Chemical as sureties, executed a Continuing Suretyship Agreement in favor of
Atok Finance as creditor.

In 1981, Sanyu Chemical assigned its trade receivables outstanding to Atok Finance in consideration of receipt from Atok
Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared,
however, that the standard commercial practice was to grant an extension of up to one hundred twenty (120) days
without penalties.

In 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo
Halili before the Regional Trial Court of Manila to collect a sum of money plus penalty charges starting from 1 September
1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amounts due under the trade
receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim
had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended
that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its
execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

After trial the trial court rendered a decision in favor of Atok Finance. On appeal the CA reversed and set aside the
decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance.

ISSUE:

Whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of
the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed
without consideration and without a pre-existing principal obligation to sustain it.

Whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu
Chemical, executed in favor of petitioner, on the receivables thereby assigned.

HELD:

Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the
Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforced if not valid.
So, even if, as in this case, the agreement was for a continuing suretyship to include obligations enumerated in the
agreement, the same could not be enforced. First, because this contract, just like guaranty, cannot exist without a valid
obligation (Art. 2052, Civil Code); and, second, although it may be given as security for future debt (Art. 2053, C.C.), the
obligation contemplated in the case at bar cannot be considered 'future debt' as envisioned by this law.

There is no proof that when the suretyship agreement was entered into, there was a pre-existing obligation which
served as the principal obligation between the parties. Furthermore, the 'future debts' alluded to in Article 2053 refer to
debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the
case at bar where the obligation was acquired two years after the agreement."

A guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of
securing the performance of another obligation which is denominated as the principal obligation. It is also true that
Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." Nevertheless, a guaranty
may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a
natural obligation." Moreover, Article 2053 of the Civil Code states that a guaranty may also be given as security for
future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured."

Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial
practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its
sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this
is precisely what happened in the case at bar.

As regards the second issue, the contention of Sanyu Chemical was that Atok Finance had no cause of action under the
Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. It relied on
Article 1629 of the Civil Code which provides: In case the assignor in good faith should have made himself responsible
for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it
shall last for one year only, from the time of the assignment if the period had already expired. If the credit should be
payable within a term or period which has not yet expired, the liability shall cease one year after the maturity."

The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor
which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the
assignee as contended by the appellant. Applying the said law to the case at bar, the records disclose that none of the
assigned receivables had matured when the Deed of Assignment was executed.

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical.
Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the
assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical
received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from
the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the
return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such
receivables.

Article 1629 of the Civil Code is not material. The liability of Sanyu Chemical to Atok Finance rests not on the breach of
the warranty of solvency; the liability of Sanyu Chemical was not ex lege but rather ex contractu. Under the Deed of
Assignment, the effect of non-payment by the original trade debtors was a breach of warranty of solvency by Sanyu
Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned. In other
words, the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivables covered and
transferred by virtue of the Deed of Assignment. The obligations of individual private respondent officers and
stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations
of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of
Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the
Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and
enforceable cause of action against Sanyu Chemical and the other private respondents.

The Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals are hereby
REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court.

Ongsiako vs. The World Wide Insurance

FACTS:

Catalina de Leon executed in favor of Augusto V. Ongsiako a promissory note in the amount of P1,200.00, payable ninety
(90) days after date, with interest at 1 per cent per month. On the same date, a surety bond was executed by Catalina de
Leon, as principal, and the World Wide Insurance & Surety Co., Inc., as surety, whereby they bound to pay said amount
jointly and severally to Ongsiako. As the obligation was not paid on its date of maturity either by Catalina de Leon or by
the surety notwithstanding the demands made upon them, Ongsiako brought this action to recover the same from both
the principal and the surety. Judgment having been rendered for the plaintiff, both defendants appealed to the court of
first instance. After hearing, the court rendered judgment ordering Catalina de Leon to pay plaintiff the sum of
P1,200.00, with interest at the rate of 1 per cent per month from February 10, 1952, and the sum of P300.00 as
attorneys' fees, and costs. Defendant surety company was likewise ordered to pay to plaintiff the same judgment but
with the proviso that "execution should not issue against defendant The World-Wide Insurance & Surety Co., Inc., until a
return is made by the Sheriff upon execution against defendant Catalina de Leon showing that the judgment against her
remained unsatisfied in whole or in part; and provided, further, that defendant Catalina de Leon shall reimburse to
defendant Company whatever amount the latter might pay under this judgment together with such expenses as may be
necessary to effectuate said reimbursement." From this judgment, the surety company appealed and the case is now
before us because, as certified by the Court of Appeals, it only involves questions of law. Augusto V. Ongsiako, having
died in the meantime, was substituted by his special administrators Emmanuel Ongsiako and Severino Santiangco.

HELD:

The surety bond in question was executed in November 10, 1951 and among the important provisions it contains is the
following: that the principal and the surety "are held and firmly bound unto Dr. Augusto V. Ongsiako in the sum of One
Thousand Two Hundred Pesos (P1,200.00) for the payment of which well and truly to be made, we bind ourselves ...
jointly and severally, firmly by these presents" (and referring to the Promissory Note) "whose terms and conditions are
made parts hereof." In said bond there also appears a special condition which recites: "The Liability of the World-Wide
Insurance & Surety Co., Inc. under this bond will expire on February 10, 1952." The note therein referred to, on the other
hand, provides that the obligation is payable ninety days from date of issue, November 10, 1951, which means that its
date of maturity is February 10, 1952. The evidence shows that neither the principal nor the surety paid the obligation
on said date of maturity and immediately thereafter demands for payment were made upon them. Thus, it appears that
as early as February 12, 1952, or two days thereafter, the creditor wrote to the surety company a letter notifying it of
the failure of its principal to pay the obligation and requesting that it make good its guaranty under the bond which
demand was reiterated in subsequent letters. To these demands, the company merely set up the defense that it only
acted as a guarantor and as such its liability cannot be exacted until after the property of the principal shall have been
exhausted.

It therefore appears that appellant has no justification whatever to resist the claim of the plaintiff for in the judgment
appealed from it is precisely provided that execution of judgment should not issue against it until after it is shown that
the execution of the judgment against the principal has been returned by the sheriff unsatisfied, which was the only
excuse given by said appellant in not fulfilling its commitment under the bond. And yet it appealed from said judgment
just to put up the additional defense that its liability under the bond has already expired because of the condition that
its liability shall expire on February 10, 1952. Even if this were true, we consider however this stipulation as unfair and
unreasonable for it practically nullifies the nature of the undertaking assumed by appellant. It should be noted that the
principal obligation is payable ninety days from date of issue, which falls on February 10, 1952. Only on this date can
demand for payment be made on the principal debtor. If the debtor should fail to pay and resort is made to the surety
for payment on the next day, it would be unfair for the latter to allege that its liability has already expired. And yet such
is the stand taken by appellant. As the terms of the bond should be given a reasonable interpretation, it is logical to hold
that the liability of the surety attaches as soon as the principal debtor defaults, and notice thereof is given the surety
within reasonable time to enable it to take steps to protect its interest. This is what was done by appellee in the present
case. After all, the surety has a remedy under the law which is to foreclose the counterbond put up by the principal
debtor. This is in effect what was done by the lower court.

Wherefore, the decision appealed from is affirmed, with treble costs against appellant.

Citizen Surety and Insurance Co. vs. CA

FACTS:

Petitioner issued two (2) surety bonds to guarantee compliance by the principal Pascual M. Perez Enterprises of its
obligation under a "Contract of Sale of Goods" entered into with the Singer Sewing Machine Co. In consideration of the
issuance of the aforesaid bonds, Pascual M. Perez, in his personal capacity and as attorney-in-fact of his wife, Nicasia
Sarmiento and in behalf of the Pascual M. Perez Enterprises executed on the same date two (2) indemnity agreements
wherein he obligated himself and the Enterprises to indemnify the petitioner jointly and severally, whatever payments
advances and damage it may suffer or pay as a result of the issuance of the surety bonds.

In addition to the two indemnity agreements, Pascual M. Perez Enterprises was also required to put up a collateral
security to further insure reimbursement to the petitioner of whatever losses or liabilities it may be made to pay under
the surety bonds. Pascual M. Perez therefore executed a deed of assignment on the same day, December 4,1959, of his
stock of lumber with a total value of P400,000.00. On April 12, 1960, a second real estate mortgage was further
executed in favor of the petitioner to guarantee the fulfillment of said obligation.

Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods with Singer Sewing
Machine Co., Ltd. Consequently, the petitioner was compelled to pay, as it did pay, the fair value of the two surety
bonds in the total amount of P144,000.00. Except for partial payments in the total sum of P55,600.00 and
notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse the petitioner for the losses it
sustained under the said surety bonds.

The petitioner filed a claim for sum of money against the estate of the late Nicasia Sarmiento which was being
administered by Pascual M. Perez.

In opposing the money claim, Pascual M. Perez asserts that the surety bonds and the indemnity agreements had been
extinguished by the execution of the deed of assignment. The Court of First Instance of Batangas rendered judgment
considering that the estate of the late, Nicasia Sarmiento is jointly and severally liable to the Citizens' Surety and
Insurance Co., Inc., for the amount the latter had paid the Singer Sewing Machine Company, Ltd., the court hereby
orders the administrator Pascual M. Perez to pay the claimant the sum of P144,000.00, with interest at the rate of ten
(10%) per cent per annum from the date this claim was filed, until fully paid, minus the payments already made in the
amount of P55,600.00."

Both parties appealed to the Court of Appeals which reversed and set aside and another one entered dismissing the
claim of the Citizens' Surety and Insurance Co., Inc., against the estate of the late Nicasia Sarmiento.

HELD:

The main issue in this petition is whether or not the administrator's obligation under the surety bonds and indemnity
agreements 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 understandable, there is no room for
construction thereof (San Mauricio Milling Co. v. Ancheta, 105 SCRA 371). However, this is only a general rule and it
admits exceptions.

The respondent court stated that "by virtue of the execution of the deed of assignment ownership of administrator-
appellant's lumber materials had been transferred to the claimant-appellant and this amounted to dation in payment
whereby the former is considered to have alienated his property in favor of the latter in satisfaction of a monetary debt
(Artide 1245). As a consequence thereof, administrator-appellant's obligation under the surety bonds is thereby
extinguished upon the execution of the deed of assignment." This statement is not sustained by the records.

The transaction could not be dation in payment. As pointed out in the concurring and dissenting opinion of Justice
Edgardo L. Paras and the dissenting opinion of Justice Mariano Serrano when the deed of assignment was executed on
December 4, 1959, the obligation of the assignor to refund the assignee had not yet arisen. In other words, there was no
obligation yet on the part of the petitioner, Citizens' Surety and Insurance Company, to pay Singer Sewing Machine Co.
There was nothing to be extinguished on that date, hence, there could not have been a dation in payment.

The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the surety bonds
was automatically extinguished. The subsequent acts of the private respondent bolster the fact that the deed of
assignment was intended merely as a security for the issuance of the two bonds. Partial payments amounting to
P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under the two surety
bonds. Since later payments were made to pay the indebtedness, it follows that no debt was extinguished upon the
execution of the deed of assignment. Moreover, a second real estate mortgage was executed on April 12, 1960 and
eventually cancelled only on May 15, 1962. If indeed the deed of assignment extinguished the obligation, there was no
reason for a second mortgage to still have to be executed. We agree with the two dissenting opinions in the Court of
Appeals that the only conceivable reason for the execution of still another mortgage on April 12, 1960 was because the
obligation under the indemnity bonds still existed. It was not yet extinguished when the deed of assignment was
executed on December 4, 1959. The deed of assignment was therefore intended merely as another collateral security
for the issuance of the two surety bonds.

Recapitulating the facts of the case, the records show that the petitioner surety company paid P144,000.00 to Singer on
the basis of the two surety bonds it had issued in behalf of Pascual Perez Enterprises. Perez in turn was able to
indemnify the petitioner for its payment to Singer in the amount of P55,600.00 thus leaving a balance of only
P88,400.00.

The petitioner surety company was more than adequately protected. Lumber worth P400,000.00 was assigned to it as
collateral. A second real estate mortgage was also given by Perez although it was later cancelled obviously because the
P400,000.00 worth of lumber was more than enough guaranty for the obligations assumed by the petitioner. As pointed
out by Justice Paras in his separate opinion, the proper procedure was for Citizens' Insurance and Surety Co., to collect
the remaining P88,400.00 from the sales of lumber and to return whatever remained to Perez. We cannot order the
return in this decisions because the Estate of Mrs. Perez has not asked for any return of excess lumber or its value. There
appears to have been other transactions, surety bonds, and performance bonds between the petitioner and Perez
Enterprises but theseare extraneous matters which, the records show, have absolutely no bearing on the resolution of
the issues in this petition.

Antonio Garcia, Jr. vs. Court of Appeals, Lasal Development Corp. G.R. No. 80201, November 20, 1990

FACTS: Western Minolco Corporation (WMC) obtained from the Philippine Investments Systems Organization (PISO) two
loans for P2,500,000.00 and P1,000,000.00 for which it issued the corresponding promissory notes payable on May 30,
1977. On the same date, Antonio Garcia and Ernest Kahn executed a surety agreement binding themselves jointly and
severally for the payment of the loan of P2,500,000.00 on due date.

Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety agreement.
Garcia also failed to pay. Hence, on April 5, 1983, Lasal Development Corporation (to which the credit had been assigned
earlier by PISO) sued Garcia for recovery of the debt in the Regional Trial Court of Makati.

On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint stated no cause of action; (b) the suit
would result in unjust enrichment of the plaintiff because he had not received any consideration from PISO; (c) the
surety agreement violated the doctrine of the limited liability of corporations; and (d) the principal obligation had been
novated.

After considering the arguments and evidence of the parties, the trial court granted the motion and dismissed the
complaint on the ground that the surety agreement was invalid for absence of consideration.

The plaintiff moved for reconsideration and when this was denied elevated the matter to the Court of Appeals.

The petitioners first ground is that, as found by the trial court, the surety agreement was invalid because no
consideration had been paid to him by PISO for executing the contract and that the amount of the entire loan had been
received and enjoyed by WMC.

HELD:

Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be
answerable for the debt, default or miscarriage of another, known as the principal. The suretys obligation is not an
original and direct one for the performance of his own act, but merely accessory or collateral to the obligation
contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; 1 in
other words, he is directly and equally bound with the principal. The surety therefore becomes liable for the debt or
duty of another although he possesses no direct or personal interest over the obligations nor does he receive any
benefit therefrom. 2

The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration
received by the surety either from the principal obligor or from the creditor. A contract of surety, like any other contract,
must generally be supported by a sufficient consideration. However, the consideration necessary to support a surety
obligation need not pass directly to the surety; a consideration moving to the principal alone will suffice.

It follows from the above principles that Lasal would not be unjustly enriched if the petitioner were to be held liable for
the obligation contracted by WMC. The creditor would only be recovering the amount of its loan plus its increments. The
petitioner, for his part, can still go against WMC for the amount he may have to pay Lasal as assignee of the PISO credit.

Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he
signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally
bound.

In the surety contract, the petitioner not only consented to an extension in the payment of the obligation but even
waived his right to be notified of such extension, he cannot now claim that he has been released from his undertaking
because of the extension granted to the principal.ch

As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch and Redfern, 6
which was affirmed in the later case of the Bank of the Philippine Islands v. Albaladejo & Cia. 7 In the said cases, the
respective sureties claimed that since the creditor changed the rate of interest in the principal obligation without their
knowledge or consent, they were relieved from liability under their contract. It was held, however, that the change in
the rate of interest was merely a collateral agreement between the creditor bank and the principal debtor that did not
affect the surety. When the debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he
assumed was his alone and was separate and apart from the original contract. His agreement to pay the additional rate
of interest was an additional burden upon him and him only. That obligation in no way affected the original contract of
the surety, whose liability remained unchanged. 8

Thus, despite the compounding of the interest, the liability of the surety remains only up to the original uncompounded
interest, as stipulated in the promissory note, that is, 17% per annum, with a penalty charge of 2 1/2% per month until
full payment.

Concerning the issue of novation, there is failure of the petitioner to establish the validity of the new contract, an
essential requisite for the novation of a previous valid obligation.

Visayan Surety & Insurance Corp. vs CA

FACTS:

On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed with the Regional Trial Court, Laguna, Bian a
complaint against spouses Jun and Susan Bartolome, for replevin to recover from them the possession of an Isuzu
jeepney, with damages. Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and
unlawfully taken by defendants Jun and Susan Bartolome on December 8, 1992, while parked at their residence.

On February 8, 1993, plaintiffs filed a replevin bond through petitioner Visayan Surety & Insurance Corporation. The
contract of surety provided thus:

WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY & INSURANCE CORP., of Cebu, Cebu, with
branch office at Manila, jointly and severally bind ourselves in the sum of Three Hundred Thousand Pesos (P300,000.00)
for the return of the property to the defendant, if the return thereof be adjudged, and for the payment to the defendant
of such sum as he/she may recover from the plaintiff in the action.[3]
On February 8, 1993, the trial court granted issuance of a writ of replevin directing the sheriff to take the Isuzu jeepney
into his custody. Consequently, on February 22, 1993, Sheriff Arnel Magat seized the subject vehicle and turned over the
same to plaintiff spouses Ibajan.

On February 15, 1993, the spouses Bartolome filed with the trial court a motion to quash the writ of replevin and to
order the return of the jeepney to them.

On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a motion for leave of
court to intervene, stating that he has a right superior to the plaintiffs over the ownership and possession of the subject
vehicle.

On June 1, 1993, the trial court granted the motion to intervene.

On August 8, 1993, the trial court issued an order granting the motion to quash the writ of replevin and ordering plaintiff
Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan.

On August 31, 1993, the trial court ordered the issuance of a writ of replevin directing the sheriff to take into his custody
the subject motor vehicle and to deliver the same to the intervenor who was the registered owner.

On September 1, 1993, the trial court issued a writ of replevin in favor of intervenor Dominador Ibajan but it was
returned unsatisfied.

On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a motion/application for judgment against
plaintiffs bond.

On June 6, 1994, the trial court rendered judgement in favor of Dominador Ibajan and against Mila Ibajan and the
Visayan Surety and Insurance Corporation ordering them to pay the former jointly and severally the value of the subject
jeepney in the amount of P150,000.00 and such other damages as may be proved by Dominador Ibajan plus costs.

On June 28, 1994, Visayan Surety and Insurance Corporation and Mila Ibajan filed with the trial court their respective
motions for reconsideration.

On August 16, 1994, the trial court denied both motions.

On November 24, 1995, Visayan Surety and Insurance Corporation (hereafter Visayan Surety) appealed the decision to
the Court of Appeals.

On August 30, 1996, the Court of Appeals promulgated its decision affirming the judgment of the trial court.[9] On
September 19, 1996, petitioner filed a motion for reconsideration.[10] On December 2, 1996, the Court of Appeals
denied the motion for reconsideration for lack of merit. Hence, this petition.

ISSUE: whether the surety is liable to an intervenor on a replevin bond posted by petitioner in favor of respondents.

Respondent Dominador Ibajan asserts that as intervenor, he assumed the personality of the original defendants in
relation to the plaintiffs bond for the issuance of a writ of replevin.

Petitioner Visayan Surety contends that it is not liable to the intervenor, Dominador Ibajan, because the intervention of
the intervenor makes him a party to the suit, but not a beneficiary to the plaintiffs bond. The intervenor was not a party
to the contract of surety, hence, he was not bound by the contract.

HELD:

The petition is meritorious.

An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the matter in litigation, or
in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the court or of an officer thereof.
May an intervenor be considered a party to a contract of surety which he did not sign and which was executed by
plaintiffs and defendants?

It is a basic principle in law that contracts can bind only the parties who had entered into it; it cannot favor or prejudice
a third person.[15] Contracts take effect between the parties, their assigns, and heirs, except in cases where the rights
and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.

A contract of surety is an agreement where a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a third person called the obligee. Specifically,
suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be
answerable for the debt, default or miscarriage of another, known as the principal.

The obligation of a surety cannot be extended by implication beyond its specified limits. When a surety executes a bond,
it does not guarantee that the plaintiffs cause of action is meritorious, and that it will be responsible for all the costs that
may be adjudicated against its principal in case the action fails. The extent of a suretys liability is determined only by the
clause of the contract of suretyship. A contract of surety is not presumed; it cannot extend to more than what is
stipulated.

Since the obligation of the surety cannot be extended by implication, it follows that the surety cannot be held liable to
the intervenor when the relationship and obligation of the surety is limited to the defendants specified in the contract of
surety.

Philippine National Bank vs. CA

Estanislao Depusoy, doing business under the name of E.E. Depusoy Construction, and the Republic of the Philippines,
represented by the Director of Public Works, entered into a building contract, for the construction of the GSIS building
Depusoy to furnish all materials, labor, plans, and supplies needed in the construction. Depusoy applied for credit
accommodation with the plaintiff. This was approved by the Board of Directors in various resolutions subject to the
conditions that he would assign all payments to be received from the Bureau of Public Works of the GSIS to the bank,
furnish a surety bond, and the surety to deposit P10,000.00 to the plaintiff. The total accommodation granted to
Depusoy was P100,000.00. This was later extended by another P10,000.00 and P25,000.00, but in no case should the
loan exceed P100,000.00. In compliance with these conditions, Depusoy executed a Deed of Assignment of all money to
be received by him from the GSIS. Luzon thereafter executed two surety bonds, one for the sum of P40,000.00, and the
other for P60,000.00.

With the consent of Luzon, the bond was extended for another 6 months from January 31, 1957.

Under the credit accommodation granted by the plaintiff bank, Depusoy obtained several amounts from the bank. On
January 14, 1957, Depusoy received P50,000.00 from the bank which he promised to pay in installments on the dates
therein indicated. On January 17, 1957, he received another P50,000.00 under the same conditions as the promissory
note, except with respect to the time of payment. Under this arrangement all payments made by the GSIS were payable
to the Philippine National Bank. The treasury warrants or checks, however, were not sent directly to the plaintiff. They
were received by Depusoy, who in turn delivered them to the plaintiff bank. The plaintiff then applied the money thus
received, first, to the payment of the amount due on the promissory notes at the time of the receipt of the treasury
warrants or checks, and the balance was credited to the current account of Depusoy with the plaintiff bank. A total of
P1,309,461.89 were paid by the GSIS to the plaintiff bank for the account of Estanislao Depusoy. Of this amount,
P246,408.91 were paid according to Exhibit 1 for the importation of construction materials, and P1,063,408.91 were
received by the Loans and Discounts Department of the plaintiff bank.

Depusoy defaulted in his building contract with the Bureau of Public Works, and sometime in September, 1957, the
Bureau of Public Works rescinded its contract with Depusoy. No further amounts were thereafter paid by the GSIS to the
plaintiff bank. The amount of the loan of Depusoy which remains unpaid, including interest, is over P100,000.00.
Demands for payment were made upon Depusoy and Luzon, and as no payment was made.

Herein petitioner filed with the trial court a complaint (Civil Case No. 35163) against Estanislao Depusoy and private
respondent Luzon Surety Co. Inc. (LSCI).
HELD:

We are in full accord with the conclusion of the trial court and the Court of Appeals that the bonds executed by private
respondent LSCI were to guarantee the faithful performance of Depusoy of his obligation under the Deed of Assignment
and not to guarantee the payment of the loans or the debt of Depusoy to petitioner to the extent of P100,000.00. The
language of the bonds is clear, explicit and unequivocal. It leaves no room for interpretation. Article 1370 of the Civil
Code provides:

If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning
of its stipulations shall control.

Besides, even if there had been any doubt on the terms and conditions of the surety agreement, the doubt should be
resolved in favor of the surety. As concretely put in Article 2055 of the Civil Code, "A guaranty is not presumed, it must
be expressed and cannot extend to more than what is stipulated therein."

As earlier adverted to, there is merit in the third assigned error. The paragraph immediately preceding the decretal
portion of the decision of respondent Court of Appeals reads as follows:

We agree with the appellant that the trial court erred in not sentencing Estanislao Depusoy to pay attorney's fees
equivalent to 10% of the amount due. This is expressly provided for in the promissory notes, and as it does not appear to
be unreasonable, the stipulation of the parties should be given effect.

The dispositive portion of the questioned decision should then be modified in the sense that the "10% interest"
indicated therein should be considered and understood as and for attorney's fees.

Lim vs Security Bank Corp.

FACTS:

Petitioner executed a Continuing Suretyship in favor of respondent to secure "any and all types of credit accommodation
that may be granted by the bank hereinto and hereinafter" in favor of Raul Arroyo for the amount of P2,000,000.00
which is covered by a Credit Agreement/Promissory Note.3 Said promissory note stated that the interest on the loan
shall be 19% per annum, compounded monthly, for the first 30 days from the date thereof, and if the note is not fully
paid when due, an additional penalty of 2% per month of the total outstanding principal and interest due and unpaid,
shall be imposed.

The debtor, Raul Arroyo, defaulted on his loan obligation. Thereafter, petitioner received a Notice of Final Demand
dated August 2, 2001, informing him that he was liable to pay the loan obtained by Raul and Edwina Arroyo, including
the interests and penalty fees amounting to P7,703,185.54, and demanding payment thereof. For failure of petitioner to
comply with said demand, respondent filed a complaint for collection of sum of money against him and the Arroyo
spouses. Since the Arroyo spouses can no longer be located, summons was not served on them, hence, only petitioner
actively participated in the case.

After trial, the Regional Trial Court of Davao (RTC) rendered judgment against petitioner

ISSUE: whether petitioner may validly be held liable for the principal debtor's loan obtained six months after the
execution of the Continuing Suretyship.

HELD:

A contract of suretyship is an agreement whereby a party, called the surety, guarantees the performance by another
party, called the principal or obligor, of an obligation or undertaking in favor of another party, called the obligee.
Although the contract of a surety is secondary only to a valid principal obligation, the surety becomes liable for the debt
or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any
benefit therefrom.
This was explained in the case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, where it was
written:

The surety's obligation is not an original and direct one for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with the principal.

Thus, suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor for the
purpose of fulfilling an obligation. A surety is considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.

In this case, what petitioner executed was a Continuing Suretyship, which the Court described in Saludo, Jr. v. Security
Bank Corporation13 as follows:

The essence of a continuing surety has been highlighted in the case of Totanes v. China Banking Corporation in this wise:

Comprehensive or continuing surety agreements are, in fact, quite commonplace in present day financial and
commercial practice. A bank or financing company which anticipates entering into a series of credit transactions with a
particular company, normally requires the projected principal debtor to execute a continuing surety agreement along
with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected
series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate
surety contract or bond for each financing or credit accommodation extended to the principal debtor.

The terms of the Continuing Suretyship executed by petitioner, quoted earlier, are very clear. It states that petitioner, as
surety, shall, without need for any notice, demand or any other act or deed, immediately become liable and shall pay
"all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs, extensions,
restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or hereafter owing
to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all
expenses which the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as
defined hereinbelow."15 Such stipulations are valid and legal and constitute the law between the parties, as Article 2053
of the Civil Code provides that "[a] guaranty may also be given as security for future debts, the amount of which is not
yet known; x x x." Thus, petitioner is unequivocally bound by the terms of the Continuing Suretyship. There can be no
cavil then that petitioner is liable for the principal of the loan, together with the interest and penalties due thereon,
even if said loan was obtained by the principal debtor even after the date of execution of the Continuing Suretyship.

With regard to the award of attorney's fees, it should be noted that Article 2208 of the Civil Code does not prohibit
recovery of attorney's fees if there is a stipulation in the contract for payment of the same.

[T]he attorney's fees here are in the nature of liquidated damages and the stipulation therefor is aptly called a penal
clause. It has been said that so long as such stipulation does not contravene law, morals, or public order, it is strictly
binding upon defendant. The attorney's fees so provided are awarded in favor of the litigant, not his counsel.

On the other hand, the law also allows parties to a contract to stipulate on liquidated damages to be paid in case of
breach. A stipulation on liquidated damages is a penalty clause where the obligor assumes a greater liability in case of
breach of an obligation. The obligor is bound to pay the stipulated amount without need for proof on the existence and
on the measure of damages caused by the breach.

However, even if such attorney's fees are allowed by law, the courts still have the power to reduce the same if it is
unreasonable. That is also the case here. The award of attorney's fees amounting to ten percent (10%) of the principal
debt, plus interest and penalty charges, would definitely exceed the principal amount; thus, making the attorney's fees
manifestly exorbitant. Hence, we reduce the amount of attorney's fees to ten percent (10%) of the principal debt only.

TOWERS ASSURANCE CORPORATION vs. ORORAMA SUPERMART

Case: liability of a surety in a counterbond for the lifting of a writ of preliminary attachment
FACTS: See Hong, the proprietor of Ororama Supermart in Cagayan de Oro City, sued the spouses Ernesto Ong and
Conching Ong in the Court of First Instance of Misamis Oriental for the collection of the sum of P58,400 plus litigation
expenses and attorney's fees (Civil Case No. 4930).

He asked for a writ of preliminary attachment and the lower court issued an order of attachment. The deputy sheriff
attached the properties of the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.

To lift the attachment, the Ong spouses filed a counterbond in the amount of P58,400 with Towers Assurance
Corporation as surety. In that undertaking, the Ong spouses and Towers Assurance Corporation bound themselves to
pay solidarily to See Hong the sum of P58,400.

Ong Spouses failed to appearduring pre-trial, they were declared in default.

The lower court ordered the spouse and the surety to pay solidarily See Hong the sum of P58,400 plus P10,000 as
litigation expenses and attorney's fees.

Ernesto Ong manifested that he did not want to appeal. Ororama Supermart filed a motion for execution. It was granted
by the lower court. The writ of execution was issued against the judgment debtors and their surety. The, Towers
Assurance Corporation filed the instant petition for certiorari where it assails the decision and writ of execution.

ISSUE: WON surety is liable absence of showing that it was given opportunity to be heard.

HELD:

Lower court acted with grave abuse of discretion in issuing a writ of execution against the surety without first giving it an
opportunity to be heard as required in Rule 57 of the Rules of Court which provides:

"SEC. 17. When execution returned unsatisfied, recovers had upon bond. If the execution be returned unsatisfied in
whole or in part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the
payment of the judgment shall become charged on such counterbond, and bound to pay to the judgment creditor upon
demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the action."

Under section 17, in order that the judgment creditor might recover from the surety on the counterbond, it is necessary
(1) that execution be first issued against the principal debtor and that such execution was returned unsatisfied in whole
or in part; (2) that the creditor made a demand upon the surety for the satisfaction of the judgment, and (3) that the
surety be given notice and a summary hearing in the same action as to his liability for the judgment under his
counterbond.

The first requisite mentioned above is not applicable to this case because Towers Assurance Corporation assumed a
solidary liability for the satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties of the
principal debtor (Art. 2959) But certainly, the surety is entitled to be, heard before an execution can be issued against
him since he is not a party in the case involving his principal. The writ of is set aside. The lower court is directed to
conduct a summary hearing on the surety's liability on its counterbond. No costs.

FINMAN GENERAL ASSURANCE CORPORATION vs. ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA GANDHI PUA,
DAVID MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE
SECRETARY OF LABOR AND EMPLOYMENT

FACTS:

Abdulgani Salik et al. applied with Pan Pacific Overseas Recruiting Services, Inc. and were promised of employment by a
certain Mrs. Normita Egil. Allegedly, they had paid a sum totalling to P30,000 (placement fee). The promise was not
materialized however.
This lead to the filing of complaint for the claim of sum of money by the respondents before the Philippine Overseas
Employment Association (POEA). The petitioners as well impleaded Filman General Assurance Corporation, Pan Pacifics
bonding company.

Summons were served and yet petitioners failed to appear in every hearing. Thus, ex parte proceedings have ensued.

DOLE Hon. Franklin M. Drilon(DOLE Secretary) upon the recommendation of the POEA hearing officer, issued an Order
wherein both respondents are hereby directed to pay jointly and severally the claims of complainants which amounted
to P30, 000.

Pan Pacific Overseas Recruiting Services is hereby cancelled, effective immediately.

*MR by the petitioners was denied.

*Petitioners filed instead a motion for Certiorari under Rule 45

ISSUE/S:

I. WHETHER OR NOT impleading Finman as co-respondent of Pan Pacific was erroneous.

II. WHETHER OR NOT Finmanshould pay jointly and severally with Pan Pacific the claims of private respondents on
the basis of the suretyship agreement between Finman and Pan Pacific and the POEA

III. WHETHER OR NOT the findings of fact made by the POEA and upon which the Secretary of Labor based its
questioned orders are not supported by substantial evidence and are contrary to law.

HELD:

The petition is devoid of merit.

FIRST ISSUE:

Even if herein Finman was not impleaded in the instant case, still it (petitioner) can be held jointly and severally liable for
all claims arising from recruitment violation of Pan Pacific. Moreover, private respondents have a legal claim against Pan
Pacific and its insurer for the placement and processing fees they paid, so much so that in order to provide a complete
relief to private respondents, petitioner had to be impleaded in the case.

SECOND ISSUE:

In the case at bar, it remains uncontroverted that herein petitioner and Pan Pacific entered into a suretyship agreement,
with the former agreeing that the bond is conditioned upon the true and faithful performance and observance of the
bonded principal (Pan Pacific) of its duties and obligations.

The nature of Finman's obligation under the suretyship agreement makes it privy to the proceedings against its principal
(Pan Pacific). As such Finman is bound, in the absence of collusion, by a judgment against its principal even though it was
not a party to the proceedings. It was also understood that under the suretyship agreement, herein petitioner
undertook itself to be jointly and severally liable for all claims arising from recruitment violation of Pan Pacific.

THIRD ISSUE:

By raising this issue, petitioner is in effect questioning the Secretarys factual findings. Well-settled is the rule that
findings of facts of the respondent Secretary are generally accorded great weight unless there was grave abuse of
discretion or lack of jurisdiction in arriving at such findings. At times even, such findings are accorded with finality.

It can be remembered that in the series of hearings, the petitioners were consistently absent. Despite such, they are
given notice every hearing. In the absence of any controverting evidence, respondent Secretary of Labor admitted and
considered private respondents' testimonies and evidence as substantial. Under the circumstances, no justifiable reason
can be found to justify disturbance of the findings of facts of the respondent Secretary of Labor, supported as they are
by substantial evidence and in the absence of grave abuse of discretion.

SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER MANUFACTURING CORPORATION vs. BA
FINANCE CORPORATION

Facts:

On January 17, 1983, Joseph L. G. Chua, President of Fortune Motors Corporation, executed in favor of plaintiff-
appellant a Continuing Suretyship Agreement, in which he "jointly and severally unconditionally" guaranteed the "full,
faithful and prompt payment and discharge of any and all indebtedness" of Fortune Motors Corporation to BA Finance
Corporation. On February 3, 1983, Palawan Lumber Manufacturing Corporation represented by Joseph L.G. Chua,
George D. Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement in which, said corporation "jointly and severally unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation
(Folder of Exhibits, pp. 19-20). On the same date, South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio
F. Tablante, likewise executed a Continuing Suretyship Agreement in which said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and all indebtedness" of
Fortune Motors Corporation to BA Finance Corporation.

Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles delivered to it by CARCO
under which it agreed to remit to the Entruster (CARCO) the proceeds of any sale and immediately surrender the
remaining unsold vehicles. ). The drafts and trust receipts were assigned to plaintiff-appellant, under Deeds of
Assignment executed by CARCO.

Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due under the drafts and to
remit the proceeds of motor vehicles sold or to return those remaining unsold in accordance with the terms of the trust
receipt agreements, BA Finance Corporation sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio
Tablante, Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C. Baltazar (Folder
of Exhibits, pp. 29-37). Since the defendants-appellants failed to settle their outstanding account with plaintiff-appellant,
the latter filed on December 22, 1983 a complaint for a sum of money with prayer for preliminary attachment, with the
Regional Trial Court of Manila.

Issue:

WON respondent BAFC has a valid cause of action for a sum of money following the drafts and trust receipts
transactions.

Held:

As an entruster, respondent BAFC must first demand the return of the unsold vehicles from Fortune Motors
Corporation, pursuant to the terms of the trust receipts. Having failed to do so, petitioners had no cause of action
whatsoever against Fortune Motors Corporation and the action for collection of sum of money was, therefore,
premature.

A trust receipt is a security transaction intended to aid in financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the merchandise imported or purchased. In the event of
default by the entrustee on his obligations under the trust receipt agreement, it is not absolutely necessary that the
entruster cancel the trust and take possession of the goods to be able to enforce his rights thereunder.

PALMARES vs. CA

FACTS:
Private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together
with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with compounded
interest at the rate of 6% per annum to be computed every 30days from the date thereof. 1 On four occasions after the
execution of the promissory note and evenafter the loan matured, petitioner and the Azarraga spouses were able to pay
a total of P16,300.00,thereby leaving a balance of P13,700.00. No payments were made after the last payment on
September 26, 1991. 2Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent
corporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency of the latter.

FACTS 2:

Pursuant to a promissory note (PN), private respondent MB Lending Corp. (MB) extended a loan to the spouses Azarraga
together with petitioner amounting to P30k but debtors were able to pay only P16, 300. Consequently, on the basis of
petitioners solidary liability under the PN, MB filed a complaint against petitioner as the lone party defendant to the
exclusion of the principal debtors, allegedly due to the latters insolvency. Petitioner claimed that while she agreed to be
liable on the note upon default of the principal debtor, MB acted in bad faith in suing her alone without including the
Azarragas when they were the only ones who benefited from the loans proceeds. HELD: Petitioner expressly bound
herself to be jointly and severally liable with the principal maker of the note. The terms of the contract are clear, explicit
and unequivocal that petitioners liability is that of a surety. A surety is an insurer of the debt, a suretyship is an
undertaking that the debtor shall pay. A surety promises to pay the principals debt. If the principal will not pay, he
binds himself to perform if the principal does not, w/o regard to his ability to do so. In fine, a surety undertakes directly
for the payment and is so responsible at once if the principal debtor makes default. It has not been shown, either in the
contract or the pleadings that MB agreed to proceed against petitioner only if and when the defaulting principal has
become insolvent.

Issue: WON Palmares is liable

Held:

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter3, Title I of this Book
shall be observed. In such case the contract is called a suretyship. It is a cardinal rule in the interpretation of contracts
that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly bound herself to be jointly and
severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety.

In Palmares v. Court of Appeals on suretyship is instructive, thus:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay the principals debt if the
principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed
against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not,
without regard to his ability to do so. x x xIn other words, a surety undertakes directly for the payment and is so
responsible at once if the principal debtor makes default x x x.

Estate of K.H. Hemady vs Luzon Surety Co., Inc.

FACTS:

Luzon Surety filed a claim against the estate of K.H. Hemady based on indemnity agreements (counterbonds) subscribed
by distinct principals and by the deceased K.H. Hemady as surety (solidary guarantor). As a contingent claim, Luzon
Surety prayed for the allowance of the value of the indemnity agreements it had executed. The lower court dismissed
the claim of Luzon Surety on the ground that whatever losses may occur after Hemadys death, are not chargeable to
his estate, because upon his death he ceased to be a guarantor.
ISSUES: What obligations are transmissible upon the death of the decedent? Are contingent claims chargeable against
the estate?

HELD:

Under the present Civil Code (Article 1311), the rule is that Contracts take effect only as between the parties, their
assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. While in our successional system the responsibility of the heirs for the
debts of their decedent cannot exceed the value of the inheritance they receive from him, the principle remains intact
that these heirs succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the
New Civil Code expressly so provide, thereby confirming Article 1311.

In Mojica v. Fernandez, the Supreme Court ruled Under the Civil Code the heirs, by virtue of the rights of succession
are subrogated to all the rights and obligations of the deceased (Article 661) and can not be regarded as third parties
with respect to a contract to which the deceased was a party, touching the estate of the deceased x x x which comes in
to their hands by right of inheritance; they take such property subject to all the obligations resting thereon in the hands
of him from whom they derive their rights. The third exception to the transmissibility of obligations under Article 1311
exists when they are not transmissible by operation of law. The provision makes reference to those cases where the
law expresses that the rights or obligations are extinguished by death, as is the case in legal support, parental authority,
usufruct, contracts for a piece of work, partnership and agency. By contrast, the articles of the Civil Code that regulate
guaranty or suretyship contain no provision that the guaranty is extinguished upon the death of the guarantor or the
surety.

The contracts of suretyship in favor of Luzon Surety Co. not being rendered intransmissible due to the nature of the
undertaking, nor by stipulations of the contracts themselves, nor by provision of law, his eventual liability therefrom
necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable against
his estate. A contingent liability of a deceased person is part and parcel of the mass of obligations that must be paid if
and when the contingent liability is converted into a real liability. Therefore, the settlement or final liquidation of the
estate must be deferred until such time as the bonded indebtedness is paid.

GENERAL INSURANCE and SURETY CORPORATION vs. REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC.

FACTS:

On May 15, 1954, the Central Luzon Educational Foundation, Inc., and the General Insurance and Surety Corporation
posted in favor of the Department of Education a bond:

to guarantee the adequate and efficient administration of school or college (Sison & Aruego Colleges, of Urdaneta,
Pangasinan) and the observance of all regulations prescribed by the Secretary of Education and compliance with all
obligations, including the payment of the salaries of all its teachers and employees, past, present, and future, and the
payment of all other obligations incurred by, or in behalf of said school.

Here, Sison and Aruego Colleges operated by private respondent, as principal and
the GENERAL INSURANCE AND SURETY CORPORATION , as surety, are held end firmly bound, jointly and firmly, unto the
Department of Education of the Republic of the Philippines in the sum of TEN THOUSAND PESOS (P10,000.00) Philippine
currency , jointly and severally that said institution of learning had defaulted in any of the foregoing particulars, this
bond may immediately thereafter be declared forfeited, and to give the Department of Education at least sixty (60)
days notice of the intended withdrawal or cancellation of this bond LIABILITY of Surety under this bond will expire on
June 15, 1955, unless sooner revoked.

On the same day, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego executed an
indemnity agreement binding themselves jointly and severally to indemnify the surety to all sums and amounts of
money which the COMPANY or its representatives shall or may pay or cause to be paid or become liable to pay, on
account of or arising from the execution of the bond.
On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and cancelling its bond. It
appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers for salaries
namely Remedios Laoag and H.B Arandia in sum amounting to a total of P 1505.64.
Upon refusal of answering their demand, Solicitor General filed a complaint for the forfeiture of the bond on July 11,
1956. In due to surety the Foundation and prayed that the complaint be dismissed and that it be indemnified by the
Foundation of any amount it might be required to pay the Government, plus attorney's fees.
The Foundation denied their allegations and contends that they have no basis for the action and that the bond was
illegal and the government has no capacity to sue.
The surety also filed their 3rd party complaint on the basis of the indemnity agreement. Sison and Aruego claimed that
the indemnity agreement has ceased to b of force and effect upon the cancellation and withdrawal of the bond.
CFI: rendered judgment holding the principal and the surety jointly and severally liable to the Government in the sum of
P10,000, until fully paid and ordering the principal to reimburse the surety whatever amount it may be compelled to pay
to the Government by reason of the judgment.
CA: Modified. Ordering Central Luzon Educational Foundation, Inc., and General Insurance and Surety Corporation to
pay jointly and severally the Republic of the Philippines, the sum of P10,000.00, plus costs and legal interests from July
11, 1956 until fully paid; Ordering Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego to
reimburse, jointly and severally, the General Insurance and Surety Corporation of all amounts it may be forced to pay
the Republic of the Philippines by virtue of this judgment, plus costs and P2,000 for counsel's fees.
Hence this petition.
ISSUE:
WON the surety is no longer liable on its bond on August 24, 1054 (60-day notice of cancelation and withdrawal ended)
or at the latest, June 15, 1955 based on the agreement.

HELD:
The condition of the bond was violated and so the surety became liable for the penalty provided for therein. Regardless
may be the amount of salaries due the teachers.
Wherein, by the terms of the bond, the surety guaranteed to the Government "compliance (by the Foundation) with all
obligations, including the payment of the salaries of its teachers and employees, past, present and future, and the
payment of all other obligations incurred by, or in behalf of said school."
But there is nothing in these cases that supports the proposition that the liability of a surety for obligations arising
during the life of a bond ceases upon the expiration of the bond. (Jollye vs. Barcelon and Luzon Surety Co., Inc.,)
The right of the Government to collect on the bond arose while the bond was in force, because, as earlier noted, even
before the execution of the bond, the principal had already been in debt to its teachers.
Note: several cases were cited expressly provided in their agreement the period of liability of the surety..
In the present case, there is no provision that the bond will be cancelled unless the surety is notified of any claim and so
no condition precedent has to be complied with by the Government before it can bring an action.
The 60-day notice is also not a period of prescription of action. The provision merely means that the surety can
withdraw as in fact it did in this case even before June 15, 1955 provided it gave notice of its intention to do so at
least 60 days in advance.
Under Article 1311 of the Civil Code, since teachers of Sison and Aruego Colleges are not parties to the bond, "the bond
is not effective and binding upon the obligors (principal and surety) as far as it guarantees payment of the 'past salaries'
of the teachers of said school."
Also, this is not an action filed by the teachers against the surety. This is an action brought by the Government, of which
the Department of Education is an instrumentality, to hold the surety liable on its bond for the same has been violated
when the principal failed to comply "with all obligations, including the payment of salaries of its teachers, past, present
and future."
There is nothing against public policy in forfeiting the bond for the full amount. The bond is penal in nature.
Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary, and the party
to whom payment is to be made is entitled to recover the sum stipulated without need of proving damages because one
of the primary purposes of a penalty clause is to avoid such necessity. The mere non-performance of the principal
obligation gives rise to the right to the penalty.

The rule under Article 2079 which states that, An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty. . . .", cannot be applied in this case, the extension was not granted by the
DepEd or Government but by the teachers. As already stated, the creditors on the bond are not the teachers but the
Department of Education or the Government.
Article 2054 states that
"A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the
onerous nature of the conditions.
"Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor."
It is about the penal nature of the bond would suffice to dispose of this claim. The condition of the bond was violated and
so the surety became liable for the penalty provided for therein.
HE HONGKONG & SHANGHAI BANKING CORP. vs. ALDECOA & CO.

FACTS:

Aldecoa and Co. obtained a credit worth P450,000 from HSBC secured by a mortgage of shares and real properties. On
Dec. of 1906, the firm of Aldecoa and Co. went into liquidation and obtained another P50,000 from the bank upon the
condition that this would be covered by the previous mortgage. In October 1908, Joaquin and Zoilo Ibaez de Aldecoa
filed an action against the bank for the purpose of annulling the mortgages executed by them on the grounds that they
were minors at the time incapable of creating a valid mortgage upon their real property. The Court of First Instance
dismissed the complaint as to Joaquin upon the ground that he had ratified those mortgages after becoming of age, but
entered a judgment annulling said mortgages with respect to Zoilo. Both parties appealed from this decision and the
case was still pending in the Supreme Court when HSBC filed an action against Aldecoa and Co. and its partners for the
collection of a sum of money and foreclosure of the mortgaged properties. Judgement was entered in favor of the bank.

ISSUE:

Whether or not the action filed by the bank should be dismissed on the ground of lis pendens.

RULING:

No. A plea of the pendency of a prior action is not available unless the prior action is of such a character that, had a
judgment been rendered therein on the merits, such a judgment would be conclusive between the parties and could be
pleaded in bar of the second action.

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

Duran vs IAC

FACTS:

Petitioner Duran owned 2 parcels of land. She left the Philippines in June 1954 and returned in May 1966. On 1963, a
Deed of Sale was made in favor of the petitioners mother. On December 1965, Durans mother mortgaged the same
property to private respondent Erlinda Marcelo-Tiangco. When Duran came to know about the mortgage made by her
mother, she wrote the Register of Deeds informing the latter that she had not given her mother any authority to sell or
mortgage any of her properties in the Philippines. Meanwhile, foreclosure proceedings were initiated by Tiangco upon
the failure of Durans mother to redeem the mortgaged properties.

Duran claims that the Deed of Sale is a forgery, saying that at the time of its execution in 1963 she was in the United
States. Respondent Court ruled that there is a presumption of regularity in the case of a public document.

ISSUE:

Whether private respondent was a buyer in good faith and for value

HELD:

Yes. Good faith consists in the possessors belief that the person from who he received the thing was the owner of the
same and could convey his title (Arriola v. Gomez Dela Serna, 14 Phil. 627). Good faith, while it is always to be presumed
in the absence of proof to the contrary, requires a well-founded belief that the person from whom title was received
was himself the owner of the land, with the right to convey it (Santiago v. Cruz, 19 Phil. 148).

The mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to excite
suspicion, he is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing
on the face of the said certificate. Every person dealing with registered land may safely rely on the correctness of the
certificate of title issued therefore and the law will in no way oblige him to go behind the certificate to determine the
condition of the property. If the rule were otherwise, the efficacy and conclusiveness of the Torrens Certificate of Titles
would be futile and nugatory. Thus the rule is simple: the fraudulent and forged document of sale may become the root
of a valid title if the certificate has already been transferred from the name of the true owner to the name indicated by
the forger.

While it is true that under Article 2085 of the Civil Code, it is essential that the mortgagor be the absolute owner of the
property mortgaged, and while as between the daughter and her mother, it was the daughter who still owns the lots,
STILL insofar as innocent third persons are concerned the owner was already the mother inasmuch as she had already
become the registered owner.