THIRD DIVISION

[G.R. No. 138544. October 3, 2000.]

SECURITY BANK AND TRUST COMPANY, Inc., petitioner , vs. RODOLFO

M. CUENCA, respondent .

De Borja, Medialdea, Bello, Guevarra & Gerodias for petitioner.

Carpio Villaraza & Cruz for respondent.

SYNOPSIS

Petitioner Security Bank and Trust Co. (SBTC) granted Sta. Ines Melale Corporation
(SIMC) a credit line in the amount of eight million pesos (P8,000,000.00) to assist the latter
in meeting the additional capitalization requirements of its logging operations. As additional
security for the payment of the loan, respondent Rodolfo M. Cuenca executed an Indemnity
Agreement in favor of Petitioner SBTC whereby he bound himself jointly and severally with
SIMC in favor of the bank for the payment, upon demand and without the benefit of
excussion of whatever amount SIMC may be indebted to the bank. In 1989, SIMC
encountered difficulty in making the amortization payments on its loans and requested
SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMC's
request and signified its approval to the restructuring of the loan. SIMC defaulted in the
payment of its restructured loan obligations to SBTC despite repeated demands made upon
SIMC and respondent Cuenca. SBTC filed a complaint for collection of sum of money,
resulting, after trial on the merits, in a decision by the court a quo, holding respondent
Cuenca solidarity liable with SIMC for the amount of the loan. Respondent Cuenca
appealed to the Court of Appeals. The appellate court released Cuenca from liability,
holding that the 1989 loan restructuring agreement novated the prior Indemnity Agreement.
Accordingly, such novation extinguished the Indemnity Agreement. Hence, the present
petition. Petitioner contended that the 1989 Loan Agreement did not change the original loan
in respect to the parties involved or the obligations incurred. It adds that the terms of the
1989 Contract were "not more onerous." Since the original credit accommodation was not
extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

The Supreme Court affirmed the judgment of the Court of Appeals. According to the
Court, the requisites of novation are present in the case at bar, and as a result thereof the
1989 Loan Agreement extinguished the obligation obtained under the 1980 credit
accommodation. Said fact is evident from its explicit provision to "liquidate" the principal
and the interest of the earlier indebtedness. The Court also found some incompatibilities
between the 1989 Agreement and the 1980 original obligation which demonstrated that the
two cannot co-exist. While the 1980 credit accommodation had stipulated that the amount
of loan was not to exceed P8 million, the 1989 Agreement provided that the loan was P12.2
million. The Court stressed that a surety agreement, being an onerous undertaking, is
strictly construed against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the consent of the
surety to any material alteration in the principal loan agreement, or at least to notify it
thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in
excess of the amount or beyond the period stipulated in the original agreement, absent any
clear stipulation showing that the latter waived his right to be notified thereof, or to give
consent thereto.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; AGREEMENT IS

STRICTLY CONSTRUED AGAINST THE CREDITOR AND EVERY DOUBT IS RESOLVED
IN FAVOR OF THE SOLIDARY DEBTOR. — It has been held that a contract of surety
"cannot extend to more than what is stipulated. It is strictly construed against the creditor,
every doubt being resolved against enlarging the liability of the surety." Likewise, the Court
has ruled that "it is a well-settled legal principle that if there is any doubt on the terms and
conditions of the surety agreement, the doubt should be resolved in favor of the surety . . . .
Ambiguous contracts are construed against the party who caused the ambiguity." In the
absence of an unequivocal provision that respondent waived his right to be notified of or to
give consent to any alteration of the credit accommodation, we cannot sustain petitioner's
view that there was such a waiver.

2. REMEDIAL LAW; CIVIL PROCEDURE; MOTION FOR RECONSIDERATION;

N O T PRO FORMA JUST BECAUSE IT REITERATED THE AGREEMENTS EARLIER
PASSED UPON AND REJECTED BY THE APPELLATE COURT. — Respondent contends
that petitioner's Motion for Reconsideration of the CA Decision, in merely rehashing the
arguments already passed upon by the appellate court, was pro forma; that as such, it did
not toll the period for filing the present Petition for Review. Consequently, the Petition was
filed out of time. We disagree. A motion for reconsideration is not pro forma just because it
reiterated the arguments earlier passed upon and rejected by the appellate court. The Court
has explained that a movant may raise the same arguments, precisely to convince the
court that its ruling was erroneous. Moreover, there is no clear showing of intent on the part
of petitioner to delay the proceedings. In Marikina Valley Development Corporation v.
Flojo, the Court explained that a pro forma motion had no other purpose than to gain time
and to delay or impede the proceedings. Hence, "where the circumstances of a case do not
show an intent on the part of the movant merely to delay the proceedings, our Court has
refused to characterize the motion as simply pro forma."

3. ID.; ID.; PLEADINGS; MODES OF SERVICES AND FILING; MAY BE DONE

BY REGISTERED MAIL WHEN PERSONAL SERVICE WAS NOT PRACTICABLE. —
Respondent maintains that the present Petition for Review does not contain a sufficient
written explanation why it was served by registered mail. We do not think so. The Court
held in Solar Entertainment v. Ricafort that the aforecited rule was mandatory, and that
"only when personal service or filing is not practicable may resort to other modes be had,
which must then be accompanied by a written explanation as to why personal service or
filing was not practicable to begin with." In this case, the Petition does state that it was
served on the respective counsels of Sta. Ines and Cuenca "by registered mail in lieu of
personal service due to limitations in time and distance." This explanation sufficiently
shows that personal service was not practicable. In any event, we find no adequate reason
to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue
its cause.

4. CIVIL LAW; OBLIGATIONS; EXTINGUISHMENT OF; NOVATION;

REQUISITES. — Novation of a contract is never presumed. It has been held that "[i]n the
absence of an express agreement, novation takes place only when the old and the new
obligations are incompatible on every point." Indeed, the following requisites must be
established: (1) there is a previous valid obligation; (2) the parties concerned agree to a
new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.

5. ID.; SPECIAL CONTRACTS; SURETYSHIP; ALTERATION OF THE

PRINCIPAL CONTRACT WITHOUT THE CONSENT OF THE SURETY WILL RELEASE
HIM FROM LIABILITY. — Petitioner contends that Respondent Cuenca "impliedly gave his
consent to any modification of the credit accommodation or otherwise waived his right to be
notified of, or to give consent to, the same." Respondent's consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he held himself liable for the "credit
accommodation including [its] substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original credit accommodation
by the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of an old
contract and birth of another one . . . ." At the outset, we should emphasize that an
essential alteration in the terms of the Loan Agreement without the consent of the surety
extinguishes the latter's obligation. As the Court held in National Bank v. Veraguth , "[i]t is
fundamental in the law of suretyship that any agreement between the creditor and the
principal debtor which essentially varies the terms of the principal contract, without the
consent of the surety, will release the surety from liability."

6. ID.; ID.; ID.; SURETY CANNOT ASSUME AN OBLIGATION MORE

ONEROUS THAN THAT OF THE PRINCIPAL. — We reject petitioner's submission that
only Sta. Ines as the borrower, not respondent, was entitled to be notified of any
modification in the original loan accommodation. Following the bank's reasoning, such
modification would not be valid as to Sta. Ines if no notice were given; but would still be
valid as to respondent to whom no notice need be given. The latter's liability would thus be
more burdensome than that of the former. Such untenable theory is contrary to the principle
that a surety cannot assume an obligation more onerous than that of the principal. c EHSTC

7. ID.; ID.; ID.; CONTINUING SURETY; DEFINED; NOT APPLICABLE IN CASE

AT BAR. — Contending that the Indemnity Agreement was in the nature of a continuing
surety, petitioner maintains that there was no need for respondent to execute another
surety contract to secure the 1989 Loan Agreement. This argument is incorrect. That the
Indemnity Agreement is a continuing surety does not authorize the bank to extend the
scope of the principal obligation inordinately. In Dino v. CA , the Court held that "a
continuing guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof ." To repeat, in the present case, the Indemnity
Agreement was subject to the two limitations of the credit accommodation: (1) that the
obligation should not exceed P8 million, and (2) that the accommodation should expire not
later than November 30, 1981. Hence, it was a continuing surety only in regard to loans
obtained on or before the aforementioned expiry date and not exceeding the total of P8
million. Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under
the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have
guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and
which exceeded the stipulated P8 million ceiling.

DECISION

PANGANIBAN, J : p

Being an onerous undertaking, a surety agreement is strictly construed against the

creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules
of fair play require the creditor to obtain the consent of the surety to any material alteration
in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot
hold herein respondent liable for loans obtained in excess of the amount or beyond the
period stipulated in the original agreement, absent any clear stipulation showing that the
latter waived his right to be notified thereof, or to give consent thereto. This is especially
true where, as in this case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations were incurred. He was
thus no longer in a position to compel the debtor to pay the creditor and had no more
reason to bind himself anew to the subsequent obligations.

The Case

This is the main principle used in denying the present Petition for Review under Rule
45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision 1 of the Court
of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:

"WHEREFORE, the judgment appealed from is hereby amended in the

sense that defendant-appellant Rodolfo M. Cuenca [herein respondent] is
RELEASED from liability to pay any amount stated in the judgment.

"Furthermore, [Respondent] Rodolfo M. Cuenca's counterclaim is hereby

DISMISSED for lack of merit.

"In all other respect[s], the decision appealed from is AFFIRMED." 2

Also challenged is the April 14, 1999 CA Resolution, 3 which denied petitioner's
Motion for Reconsideration.

Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial Court
(RTC) of Makati City Branch 66) in Civil Case No. 93-1925, which disposed as follows:

"WHEREFORE, judgment is hereby rendered ordering defendants Sta.

Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally,
plaintiff Security Bank & Trust Company the sum of P39,129,124.73 representing
the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully
paid, and the sum of P100,000.00 as attorney's fees and litigation expenses and
to pay the costs.

SO ORDERED."
 The Facts

The facts are narrated by the Court of Appeals as follows: 5

"The antecedent material and relevant facts are that defendant-appellant

Sta. Ines Melale ('Sta. Ines') is a corporation engaged in logging operations. It
was a holder of a Timber License Agreement issued by the Department of
Environment and Natural Resources ('DENR').

"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted
appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight
[m]illion [p]esos (P8,000,000.00) to assist the latter in meeting the additional
capitalization requirements of its logging operations.

"The Credit Approval Memorandum expressly stated that the P8M Credit
Loan Facility shall be effective until 30 November 1981:

'JOINT CONDITIONS:

'1. Against Chattel Mortgage on logging trucks and/or

inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo
M. Cuenca.

'2. Submission of an appropriate Board Resolution authorizing

the borrowings, indicating therein the company's duly authorized
signatory/ies;

'3. Reasonable/compensating deposit balances in current

account shall be maintained at all times; in this connection, a Makati
account shall be opened prior to availment on lines;

'4. Lines shall expire on November 30, 1981 ; and

'5. The bank reserves the right to amend any of the

aforementioned terms and conditions upon written notice to the Borrower.'
(Italics supplied.)

"To secure the payment of the amounts drawn by appellant SIMC from the
above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23
December 1980 (Exhibit 'A') over some of its machinery and equipment in favor of
[Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17
December 1980 (Exhibit 'B') in favor of [Petitioner] SBTC whereby he solidarily
bound himself with SIMC as follows:

xxx xxx xxx

'Rodolfo M. Cuenca . . . hereby binds himself . . . jointly and

severally with the client (SIMC) in favor of the bank for the payment, upon
demand and without the benefit of excussion of whatever amount . . . the
client may be indebted to the bank . . . by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit
 accommodation(s) . . . . ' (Italics supplied).

"On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown
from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne
[h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC
duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit 'C').

"Sometime in 1985, [Respondent] Cuenca resigned as President and

Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant
Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled
'Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca '. Said
shares were bought by Adolfo Angala who was the highest bidder during the
public auction.

"Subsequently, appellant SIMC repeatedly availed of its credit line and

obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of
[s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100
[p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74178/85, DLS/74/760/85 DLS/74/12/86,
and DLS/74/47/86 to cover the amounts of the abovementioned additional loans
against the credit line.

"Appellant SIMC, however, encountered difficulty 6 in making the

amortization payments on its loans and requested [Petitioner] SBTC for a
complete restructuring of its indebtedness. SBTC accommodated appellant
SIMC's request and signified its approval in a letter dated 18 February 1988
(Exhibit 'G') wherein SBTC and defendant-appellant Sta. Ines, without notice to or
the prior consent of [Respondent] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to
extend to defendant-appellant Sta. Ines the following loans:

a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred

[t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal
portion of defendant-appellant Sta. Ines['] total outstanding indebtedness to
[Petitioner] Security Bank (cf. P. 1 of Exhibit 'G', Expediente, at Vol. II, p.
336; Exhibit '5- B-Cuenca', Expediente, at Vol. I, pp. 33 to 34) and

b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred

[t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due
interest and penalty portion of the indebtedness of defendant- appellant
Sta. Ines to [Petitioner] Security Bank (cf. Exhibit 'G', Expediente, at Vol. II,
p. 336; Exhibit '5- B-Cuenca,' Expediente, at Vol. II, p. 33 to 34).'

"It should be pointed out that in restructuring defendant-appellant Sta. Ines'

obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in
the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00),
which was the only loan incurred prior to the expiration of the P8M-Credit Loan
Facility on 30 November 1981 and the only one covered by the Indemnity
Agreement dated 19 December 1980 (Exhibit '3-Cuenca,' Expediente, at Vol. II, p.
331), was not segregated from, but was instead lumped together with, the other
l o a n s , i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and
DLS/74/47/86 (Exhibits 'D', 'E', and 'F', Expediente, at Vol. II, pp. 333 to 335)
obtained by defendant-appellant Sta. Ines which were not secured by said
Indemnity Agreement. HIEAc C

"Pursuant to the agreement to restructure its past due obligations to

[Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the
following promissory notes, both dated 09 March 1988 in favor of [Petitioner]
Security Bank:

PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 P8,800,000.00
RL/74/597/88 P3,400,000.00
_____________
TOTAL P12,200,000.00

(Exhibits 'H' and 'I', Expediente, at Vol. II, pp. 338 to 343).

"To formalize their agreement to restructure the loan obligations of

defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant
Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit '5-Cuenca,'
Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement
dated 31 October 1989 provides:

'1.01 Amount — The Lender agrees to grant loan to the Borrower in

the aggregate amount of TWELVE MILLION TWO HUNDRED
THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the 'Loan').
The loan shall be released in two (2) tranches of P8,800,000.00 for the first
tranche (the 'First Loan') and P3,400,000.00 for the second tranche (the
'Second Loan') to be applied in the manner and for the purpose stipulated
herein below.

'1.02. Purpose — The First Loan shall be applied to liquidate the

principal portion of the Borrower's present total outstanding indebtedness
to the Lender (the 'indebtedness') while the Second Loan shall be applied
to liquidate the past due interest and penalty portion of the Indebtedness.'
(Italics supplied.) (cf. p. 1 of Exhibit '5-Cuenca,' Expediente, at Vol. I, p. 33)

"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines

made further payments to [Petitioner] Security Bank in the amount of [o]ne
[m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00)
(Exhibits '8', '9-P-SIMC' up to '9-GG-SIMC,' Expediente, at Vol. II, pp. 38, 70 to
165)

"Appellant SIMC defaulted in the payment of its restructured loan

obligations to [Petitioner] SBTC despite demands made upon appellant SIMC
and CUENCA, the last of which were made through separate letters dated 5 June
1991 (Exhibit 'K') and 27 June 1991 (Exhibit 'L'), respectively.

"Appellants individually and collectively refused to pay the [Petitioner]

SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June
1993, resulting after trial on the merits in a decision by the court a quo, . . . from
 which [Respondent] Cuenca appealed."

Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan
Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta.
Ines. Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca,
who was then the Board chairman and president of Sta. Ines, had bound himself solidarily
liable for the payment of the loans secured by that credit accommodation. It noted that the
1989 Loan Agreement had been executed without notice to, much less consent from,
Cuenca who at the time was no longer a stockholder of the corporation. EACTSH

The appellate court also noted that the Credit Approval Memorandum had specified
that the credit accommodation was for a total amount of P8 million, and that its expiry date
was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained
prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines' obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor without the
consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished
the surety. CSHc DT

The CA also opined that the surety was entitled to notice, in case the bank and Sta.
Ines decided to materially alter or modify the principal obligation after the expiry date of the
credit accommodation.

Hence, this recourse to this Court. 7

The Issues

In its Memorandum, petitioner submits the following for our consideration: 8

"A. Whether or not the Honorable Court of Appeals erred in releasing

Respondent Cuenca from liability as surety under the Indemnity
Agreement for the payment of the principal amount of twelve million two
hundred thousand pesos (P12,200,000.00) under Promissory Note No.
RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88
dated 9 March 1988, plus stipulated interests, penalties and other charges
due thereon;

i. Whether or not the Honorable Court of Appeals erred in ruling that

Respondent Cuenca's liability under the Indemnity Agreement
covered only availments on SIMC's credit line to the extent of eight
million pesos (P8,000,000.00) and made on or before 30 November
1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that
the restructuring of SIMC's indebtedness under the P8 million credit
accommodation was tantamount to an extension granted to SIMC
without Respondent Cuenca's consent, thus extinguishing his
liability under the Indemnity Agreement pursuant to Article 2079 of
the Civil Code;
 iii. Whether or not the Honorable Court of appeals erred in ruling that
the restructuring of SIMC's indebtedness under the P8 million credit
accommodation constituted a novation of the principal obligation,
thus extinguishing Respondent Cuenca's liability under the
indemnity agreement;

B. Whether or not Respondent Cuenca's liability under the Indemnity

Agreement was extinguished by the payments made by SIMC;

C. Whether or not petitioner's Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently

complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure."

Distilling the foregoing, the Court will resolve the following issues: (a) whether the
1989 Loan Agreement novated the original credit accommodation and Cuenca's liability
under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of
and to give consent to any substitution, renewal, extension, increase, amendment,
conversion or revival of the said credit accommodation. As preliminary matters, the
procedural questions raised by respondent will also be addressed. SETAc C

The Court's Ruling

The Petition has no merit.

Preliminary Matters :

Procedural Questions

Motion for Reconsideration

Not Pro Forma

Respondent contends that petitioner's Motion for Reconsideration of the CA

Decision, in merely rehashing the arguments already passed upon by the appellate court,
was pro forma; that as such, it did not toll the period for filing the present Petition for
Review. 9 Consequently, the Petition was filed out of time. 10

We disagree. A motion for reconsideration is not pro forma just because it reiterated
the arguments earlier passed upon and rejected by the appellate court. The Court has
explained that a movant may raise the same arguments, precisely to convince the court
that its ruling was erroneous. 11

Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, 12 the Court explained
that a pro forma motion had no other purpose than to gain time and to delay or impede the
proceedings. Hence, "where the circumstances of a case do not show an intent on the part
of the movant merely to delay the proceedings, our Court has refused to characterize the
motion as simply pro forma." It held:

"We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of
 appeal, that doctrine should be applied reasonably, rather than literally. The right
to appeal, where it exists, is an important and valuable right. Public policy would
be better served by according the appellate court an effective opportunity to
review the decision of the trial court on the merits, rather than by aborting the right
to appeal by a literal application of the procedural rules relating to pro forma
motions for reconsideration." SaCDTA

Service by Registered Mail

Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

"SEC. 11. Priorities in modes of service and filing . — Whenever

practicable, the service and filing of pleadings and other papers shall be done
personally. Except with respect to papers emanating from the court, a resort to
other modes must be accompanied by a written explanation why the service or
filing was not done personally. A violation of this Rule may be cause to consider
the paper as not filed."

Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort 13 that the
aforecited rule was mandatory, and that "only when personal service or filing is not
practicable may resort to other modes be had, which must then be accompanied by a
written explanation as to why personal service or filing was not practicable to begin with."

In this case, the Petition does state that it was served on the respective counsels of
Sta. Ines and Cuenca "by registered mail in lieu of personal service due to limitations in
time and distance." 14 This explanation sufficiently shows that personal service was not
practicable. In any event, we find no adequate reason to reject the contention of petitioner
and thereby deprive it of the opportunity to fully argue its cause. AaECSH

First Issue :

Original Obligation Extinguished

by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil

Code, which reads as follows:

"ART. 1292. In order that an obligation may be extinguished by

another which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other."

Novation of a contract is never presumed. It has been held that "[i]n the absence of
an express agreement, novation takes place only when the old and the new obligations are
incompatible on every point." 15 Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3)
the old contract is extinguished; and (4) there is a valid new contract. 16
 Petitioner contends that there was no absolute incompatibility between the old and
the new obligations, and that the latter did not extinguish the earlier one. It further argues
that the 1989 Agreement did not change the original loan in respect to the parties involved
or the obligations incurred. It adds that the terms of the 1989 Contract were "not more
onerous." 17 Since the original credit accommodation was not extinguished, it concludes
that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation 18 obtained under the 1980
credit accommodation. This is evident from its explicit provision to "liquidate" the principal
and the interest of the earlier indebtedness, as the following shows: TaISDA

"1.02. Purpose. The First Loan shall be applied to liquidate the

principal portion of the Borrower's present total outstanding Indebtedness to the
Lender (the "Indebtedness") while the Second Loan shall be applied to liquidate
the past due interest and penalty portion of the Indebtedness." 19 (Italics
supplied.)

The testimony of an officer 20 of the bank that the proceeds of the 1989 Loan
Agreement were used "to pay-off" the original indebtedness serves to strengthen this ruling.
21

Furthermore, several incompatibilities between the 1989 Agreement and the 1980
original obligation demonstrate that the two cannot coexist. While the 1980 credit
accommodation had stipulated that the amount of loan was not to exceed P8 million, 22 the
1989 Agreement provided that the loan was P12.2 million. The periods for payment were
also different.

Likewise, the later contract contained conditions, "positive covenants" and "negative
covenants" not found in the earlier obligation. As an example of a positive covenant, Sta.
Ines undertook "from time to time and upon request by the Lender, [to] perform such further
acts and/or execute and deliver such additional documents and writings as may be
necessary or proper to effectively carry out the provisions and purposes of this Loan
Agreement." 23 Likewise, SIMC agreed that it would not create any mortgage or
encumbrance on any asset owned or hereafter acquired, nor would it participate in any
merger or consolidation. 24

Since the 1989 Loan Agreement had extinguished the original credit accommodation,
the Indemnity Agreement, an accessory obligation, was necessarily extinguished also,
pursuant to Article 1296 of the Civil Code, which provides: ADSIaT

"ART. 1296. When the principal obligation is extinguished in

consequence of a novation, accessory obligations may subsist only insofar as
they may benefit third persons who did not give their consent."

Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of
the P8 million original accommodation; it was not a novation. 25

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly
stipulated that its purpose was to "liquidate," not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility. Hence, his obligation as
a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which
specifically states that "[a]n extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. . . . . " In an earlier case, 26 the Court
explained the rationale of this provision in this wise:

"The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the surety's consent would deprive the
surety of his right to pay the creditor and to be immediately subrogated to the
creditor's remedies against the principal debtor upon the maturity date. The surety
is said to be entitled to protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the extended period."

Binding Nature of the

Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval
Memorandum in holding that the credit accommodation was only for P8 million, and that it
was for a period of one year ending on November 30, 1981. Petitioner objects to the
appellate court's reliance on that document, contending that it was not a binding agreement
because it was not signed by the parties. It adds that it was merely for its internal use.

We disagree. It was petitioner itself which presented the said document to prove the
accommodation. Attached to the Complaint as Annex A was a copy thereof "evidencing the
accommodation." 27 Moreover, in its Petition before this Court, it alluded to the Credit
Approval Memorandum in this wise:

"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC")

was granted by the Bank a credit line in the aggregate amount of Eight Million
Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization
requirements for its logging operations. For this purpose, the Bank issued a Credit
Approval Memorandum dated 10 November 1980."

Clearly, respondent is estopped from denying the terms and conditions of the P8
million credit accommodation as contained in the very document it presented to the courts.
Indeed, it cannot take advantage of that document by agreeing to be bound only by those
portions that are favorable to it, while denying those that are disadvantageous.

Second Issue:

Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca "impliedly

gave his consent to any modification of the credit accommodation or otherwise waived his
right to be notified of, or to give consent to, the same." 28 Respondent's consent or waiver
thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the
"credit accommodation including [its] substitutions, renewals, extensions, increases,
amendments, conversions and revival." It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes
cessation of an old contract and birth of another one . . . . " 29 aAc DSC

At the outset, we should emphasize that an essential alteration in the terms of the
Loan Agreement without the consent of the surety extinguishes the latter's obligation. As
the Court held in National Bank v. Veraguth, 30 "[i]t is fundamental in the law of suretyship
that any agreement between the creditor and the principal debtor which essentially varies
the terms of the principal contract, without the consent of the surety, will release the surety
from liability."

In this case, petitioner's assertion — that respondent consented to the alterations in

the credit accommodation — finds no support in the text of the Indemnity Agreement, which
is reproduced hereunder:

"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale
Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila
for and in consideration of the credit accommodation in the total amount of eight
million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under and by virtue
of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila
hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST
PRODUCTS CORP., . . . — hereinafter referred to as the CLIENT, with the
stipulated interests and charges thereon, evidenced by that/those certain
PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor
of the BANK hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment, upon demand and without
benefit of excussion of whatever amount or amounts the CLIENT may be
indebted to the BANK under and by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendment,
conversions and revivals of the aforesaid credit accommodation(s), as well as of
the amount or amounts of such other obligations that the CLIENT may owe the
BANK, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses arising
from any agreement or agreements that may have heretofore been made, or may
hereafter be executed by and between the parties thereto, including the
substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful
compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part hereof by
reference."

While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the P8 million limit
and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify
the nature and scope of the original credit accommodation, without informing or getting the
consent of respondent who was solidarily liable. Taking the bank's submission to the
extreme, respondent (or his successors) would be liable for loans even amounting to, say,
P100 billion obtained 100 years after the expiration of the credit accommodation, on the
ground that he consented to all alterations and extensions thereof. THIECD

Indeed, it has been held that a contract of surety "cannot extend to more than what is
stipulated. It is strictly construed against the creditor, every doubt being resolved against
enlarging the liability of the surety." 31 Likewise, the Court has ruled that "it is a well-settled
legal principle that if there is any doubt on the terms and conditions of the surety
agreement, the doubt should be resolved in favor of the surety . . . . Ambiguous contracts
are construed against the party who caused the ambiguity." 32 In the absence of an
unequivocal provision that respondent waived his right to be notified of or to give consent to
any alteration of the credit accommodation, we cannot sustain petitioner's view that there
was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that
the bank did not have absolute authority to unilaterally change the terms of the loan
accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this
condition:

"5. The Bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower." 33

We reject petitioner's submission that only Sta Ines as the borrower, not respondent,
was entitled to be notified of any modification in the original loan accommodation. 34
Following the bank's reasoning, such modification would not be valid as to Sta. Ines if no
notice were given; but would still be valid as to respondent to whom no notice need be
given. The latter's liability would thus be more burdensome than that of the former. Such
untenable theory is contrary to the principle that a surety cannot assume an obligation
more onerous than that of the principal. 35

The present controversy must be distinguished from Philamgen v. Mutuc , 36 in which

the Court sustained a stipulation whereby the surety consented to be bound not only for the
specified period, "but to any extension thereafter made, an extension . . . that could be had
without his having to be notified." HCDaAS

In that case, the surety agreement contained this unequivocal stipulation: "It is
hereby further agreed that in case of any extension of renewal of the bond, we equally bind
ourselves to the Company under the same terms and conditions as herein provided without
the necessity of executing another indemnity agreement for the purpose and that we
hereby equally waive our right to be notified of any renewal or extension of the bond
which may be granted under this indemnity agreement ."

In the present case, there is no such express stipulation. At most, the alleged basis
of respondent's waiver is vague and uncertain. It confers no clear authorization on the bank
or Sta. Ines to modify or extend the original obligation without the consent of the surety or
notice thereto.

Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety,
petitioner maintains that there was no need for respondent to execute another surety
contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety

does not authorize the bank to extend the scope of the principal obligation inordinately. 37 In
Dino v. CA, 38 the Court held that "a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination thereof."

To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed P8
million, and (2) that the accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8 million.

Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained
on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980
credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed
the 1989 Loan Agreement, which was executed after November 30, 1981 and which
exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable
for the loan obtained after the payment of the original one, which was covered by a
continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the
surety Agreement specifically provided that "each suretyship is a continuing one which
shall remain in full force and effect until this bank is notified of its revocation. " Since the
bank had not been notified of such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.

No similar provision is found in the present case. On the contrary, respondent's

liability was confined to the 1980 credit accommodation, the amount and the expiry date of
which were set down in the Credit Approval Memorandum. Dc CASI

Special Nature of the JSS

It is a common banking practice to require the JSS ("joint and solidary signature") of
a major stockholder or corporate officer, as an additional security for loans granted to
corporations. There are at least two reasons for this. First , in case of default, the creditor's
recourse, which is normally limited to the corporate properties under the veil of separate
corporate personality, would extend to the personal assets of the surety. Second , such
surety would be compelled to ensure that the loan would be used for the purpose agreed
upon, and that it would be paid by the corporation.

Following this practice, it was therefore logical and reasonable for the bank to have
required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980
when the credit accommodation was granted. There was no reason or logic, however, for
the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan
Agreement, because at that time, he was no longer an officer or a stockholder of the
debtor-corporation. Verily, he was not in a position then to ensure the payment of the
obligation. Neither did he have any reason to bind himself further to a bigger and more
onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the bank and
bad faith on that of the principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit of fair play should have
impelled Sta. Ines to ask somebody else to act as a surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS
of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt
at credit investigation would have revealed that respondent was no longer connected with
the corporation at the time. As it is, the bank is now relying on an unclear Indemnity
Agreement in order to collect an obligation that could have been secured by a fairly
obtained surety. For its defeat in this litigation, the bank has only itself to blame.c aAICE

In sum, we hold that the 1989 Loan Agreement extinguished by novation the
obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity
Agreement, which had been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioner's submission that respondent waived his
right to be notified of, or to give consent to, any modification or extension of the 1980 credit
accommodation. aATHIE

In this light, we find no more need to resolve the issue of whether the loan obtained
before the expiry date of the credit accommodation has been paid.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.

SO ORDERED.

Melo, Vitug, Purisima and Gonzaga-Reyes, JJ ., concur.

Footnotes

1. Written by Justice Jorge S. Imperial (Division chairman), with the concurrence of Justices
Hector L. Hofileña and Omar U. Amin (members).

2. CA Decision, pp. 32-33; rollo, pp. 52-53.

3. Rollo, p. 56. Penned by Justice Amin with the concurrence of Justices Hofileña and
Marina L. Buzon.

4. Written by Judge Eriberto U. Rosario Jr. (now a member of the Court of Appeals).

5. CA Decision, pp. 4-9; rollo, pp. 24-29.

6. According to the RTC, Sta. Ines' Timber License Agreement, which was supposed to
expire on July 15, 1998, was suspended by the Department of Environment and Natural
Resources on December 6, 1989 and eventually cancelled on May 4, 1990. (RTC
Decision, p. 3; rollo, p. 12.)

7. This case was deemed submitted for decision on May 8, 2000, upon receipt by this Court
of respondent's Reply Memorandum signed by Attys. Elvira C. Oquendo and Vissia
Concepcion C. Calderon of Carpio Villaraza & Cruz. Filed earlier on March 3, 2000, was
petitioner's Memorandum, signed by Attys. Menardo I. Guevarra, Adrian Ferdinand S.
Sugay and Ma. Jazmin B. Banal of De Borja Medialdea Bello Guevarra & Gerodias.
8. Petitioner's Memorandum, pp. 9-10; rollo, pp. 320-321. All in upper case in the original.

9. §2, Rule 37 of the Rules of Court, provides that "[a] pro forma motion for new trial or
reconsideration shall not toll the reglementary period of appeal."

10. Respondent's Memorandum, pp. 114-115; rollo, pp. 480-481.

11. See Guerra Enterprises v. CFI, 32 SCRA 314, April 17, 1970.

12. 251 SCRA 87, December 8, 1995, per Feliciano, J.

13. 293 SCRA 661, August 5, 1998, per Davide, Jr., J. (now CJ).

14. Petition for Review, p. 29; rollo, p. 92.

15. Lim Tay v. CA, 293 SCRA 364, August 5, 1998, per Panganiban, J.

16. Cruz v. CA, 293 SCRA 239, July 27, 1998; citing Vitug, Compendium of Civil Law and
Jurisprudence, 1993 ed., p. 528.

17. Petitioner's Memorandum, pp. 25-26; rollo, pp. 336-337.

18. As will be shown later, only one loan was obtained before the expiry date of the 1980
credit accommodation.

19. Rollo, p. 125.

20. Carmen Comia, former manager of the bank's Loans and Discounts Department.

21. Respondent's Memorandum, pp. 67-68; rollo, pp. 433-434; citing TSN, June 17, 1994,
pp. 21, 90, 95-96.

22. Credit Approval Memorandum, p. 1; rollo, p. 109.

23. 1989 Loan Agreement, p. 4; rollo, p. 128.

24. Ibid.

25. Petitioner's Memorandum, p. 28; rollo, p. 339.

26. Cochingyan v. R & B Surety and Insurance Co. , 151 SCRA 339, 352, June 30, 1987,
per Feliciano, J.

27. Complaint, p. 2; rollo, p. 135.

28. Petitioner's Memorandum, p. 19; rollo, p. 330.

29. Petitioner's Memorandum, p. 29; rollo, p. 340.

30. Phil. 253, 257, April 1, 1927, per Villamor, J.

31. Aguenza v. CA, 271 SCRA 1, April 7, 1997, per Hermosisima, J. See also Zenith
Insurance v. CA, 119 SCRA 485, December 29, 1982.

32. Garcia v. CA, 258 SCRA 446, 456, July 5, 1996, per Melo, J.
33. Credit Approval Memorandum, p. 2; rollo, p. 110.

34. Petitioner's Memorandum, pp. 24-25; rollo, pp. 335-336.

35. Article 2054, Civil Code.

36. 61 SCRA 22, 26, November 13, 1974, per Fernando, J.

37. In Atok Finance Corp. v. CA , 222 SCRA 232, 245, May 18, 1993, per Feliciano, J., the
Court explained the nature of a continuing surety 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,
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."

38. 216 SCRA 9, November 26, 1992, per Davide, Jr., J. (now CJ). See also Fortune
Motors v. CA, 267 SCRA 653, February 7, 1997.