Guaranty Full Cases
Guaranty Full Cases
Guaranty Full Cases
SYNOPSIS
The petitioners are the sureties in the loan granted by the Philippine
National Bank (PNB) to the Fil-Eastern Wood Industries, Inc. on July 17,
1967, in the amount of P2,500,000.00 with an interest rate of 21 % per
annum. On August 20, 1976, for failure to pay the said loan, the PNB
filed an action for collection of a sum of money against Fil-Eastern and the
petitioners. In their answer, the petitioners admitted that they signed the
Surety Agreement, but they challenged their liability on the ground that
they were allegedly coerced by their employer, Felipe Ysmael, Jr., to sign
the Surety Agreement; they did not receive a single centavo in
consideration thereof and the cause of the complainant was barred by
laches and estoppel considering that the PNB with full knowledge of the
deteriorating financial condition of the Fil-Eastern, did not take steps to
collect from the said corporation while it was still solvent. After trial, the
Regional Trial Court (RTC) ruled against herein petitioners. On appeal,
the Court of Appeals modified the RTC ruling by deleting the award of
attorney's fees.
Hence, this petition.
The Court ruled that it is true that prescription is different from laches,
but petitioners' reliance on Nielson Co., Inc., vs. Lepanto Consolidated
Mining Co., 18 SCRA 1040, is misplaced. As held in the aforecited case,
laches is principally a question of equity. Necessarily, there is no absolute
rule as to what constitutes laches or staleness of demand; each case is to be
determined accordingly to its particular circumstances. The question of
laches is an equitable doctrine, its application is controlled by equitable
considerations. Petitioners, however, failed to show that the collection suit
against herein sureties was inequitable. Remedies in equity address only
situations tainted with inequity, not those expressly governed by statutes.
Indeed, the petitioners failed to prove the presence of all the established
requisites of laches. The other equitable circumstances above enumerated
failed to support petitioners' cause. Petitioners were already barred from
questioning the voluntariness of their consent. Furthermore, the Court has
categorically ruled that a surety is liable for the debt of another, although
he or she received no benefit therefrom.
The petition was DENIED.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; VOIDABLE CONTRACTS;
VITIATED CONSENT; ACTION TO ANNUL SHALL BE FILED WITHIN FOUR
YEARS FROM CESSATION OF SUCH DEFECTS. - As pointed out by the Court of
Appeals, petitioners failed to challenge their consent to the Agreement within the
prescriptive period. Article 1391 of the Civil Code provides that the action to annul a
contract vitiated by intimidation, violence or undue influence shall be filed within four
yrears from the cessation of such defects. In this case, Petitioners Agra, Gamo and Novales
resigned from Fil-Eastern in 1967, 1968 and 1969, respectively. It was only in 1976, when
PNB sought to enforce the contract, that they alleged a defect in their consent. By their
inaction, their alleged cause of action based on vitiated consent had prescribed. There was
no question that petitioners, in their capacity as sureties, were answerable for the obligations
of Fil-Eastern to PNB.
2. REMEDIAL LAW; ACTIONS; LACHES; APPLICATION THEREOF IS
CONTROLLED BY EQUITABLE CONSIDERATIONS.- True, prescription is different
from laches, but petitioners' reliance on Nielson is misplaced. As held in the aforecited
case, laches is principally a question of equity. Necessarily, there is no absolute rule as to
what constitutes laches or staleness of demand; each case is to be determined according to
its particular circumstances. The question of laches is addressed to the sound discretion of
the court and since laches is an equitable doctrine, its application is controlled by equitable
considerations. Petitioners, howevr, failed to know that the collection suit against herein
sureties was inequitable. Remedies in equity address only situations tainted with inequity,
not those expressly governened by statutes.
3. ID.; ID.; ID.; REQUISITES. - (1) conduct on the part of the defendant, or one under
whom he claims, giving rise to the situation of which complaint is made and for which the
complainant seeks a remedy; (2) delay in asserting the complainant's rights, the complainant
having had knowledge or notice of the defendant's conduct and having been afforded an
opportunity to institute a suit; (3) lack of knowledge or notice on the part of the defendant
that the complainant would assert the right on which he bases his claim; and (4) injury or
prejudice to the defendant in the event relief is accorded to the complainant, or the suit is
not held barred.
4. ID.; ID.; ID.; NOT APPLICABLE IN DELAYS WITHIN THE PRESCRIPTIVE
PERIOD. - Although the collection suit was filed more than seven years after the obligation
of the sureties became due, the lapse was within the prescriptive period for filing an action.
In this light, we find immaterial petitioners' insistence that the cause of action accrued on
December 31, 1968, when the obligation became due, and not on August 30, 1976, when the
judicial demand was made. In either case, both submissions fell within the ten-year
prescriptive period. In any event, the fact of delay, standing alone, is insufficient to
constitute laches. x x x Again we point that, unless reasons of inequitable proportions are
adduced, a delay within the prescriptive period is sanctioned by law and is not considered to
be a delay that would bar relief.
5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; SURETY; HAS DIRECT,
PRIMARY AND ABSOLUTE OBLIGATION. - The Court stresses that the obligation of
a surety is direct, primary and absolute. Thus, the Court has held: [A]lthough 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. 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.
6. ID.; ID.; ID.; ID.; CASE AT BAR. - When petitioners signed as sureties, they expressly
and unequivocally agreed to the stipulation that the liability on this guaranty shall be
solidary, direct and immediate and not contingent upon the pursuit by the creditor, its
successors, indorsees or assigns, of whatever remedies it or they have against the principal
or the securities or liens it or they may possess. If they had mistaken the import of the
Surety Agreement, they could have easily asked for its revocation. The Agreement
stipulates that it may be revoked by the Surety at any time, but only after forty-eight hours
notice in writing to the Creditor, and such revocation shall not operate to relieve the Surety
from responsibility for obligations incurred by the Principal prior to the termination of such
period. This they did not do.
7. ID.; ID.; ID.; LIABLE FOR THE DEBT OF ANOTHER ALTHOUGH HE
RECEIVED NO BENEFIT THEREFROM. - This Court has categorically ruled that a
surety is liable for the debt of another, although he or she received no benefit therefrom.
8. REMEDIAL LAW; ACTIONS; PRINCIPLE OF EQUITY; NOT APPLICABLE IN
CASE AT BAR. - In the present case, there is no showing of any mistake or any inequity.
The fact alone that seven years had lapsed before PNB filed the collection suit does not
mean that it discovered the obligation of the sureties only then. There was a Surety
Arrangement, and the law says that the said contract can be enforced by action within ten
years. The bank and the sureties all knew that the action to enforce the contract did not
have to be filed immediately. In other words, the bank committed no mistake or inequitable
conduct that needed correction, and the sureties had no misconception about their liabilities
under the contract. Clearly, petitioners have no recourse in equity, because they failed to
show any inequity on the part of PNB.
9. ID.; APPEAL; ASSIGNMENT OF ERROR; ISSUES; CANNOT BE RAISED FOR
FIRST TIME ON APPEAL. - In their Memorandum, petitioners belatedly ask the Court to
rule that, in case of a court ruling adverse to them, the conjugal properties would not be
liable for the husbands' debts that did not redound to the benefit of the conjugal partnership.
This issue cannot be allowed, for it is being raised for the first time only in petitioners'
Memorandum. Issues, arguments, theories and causes of action not raised below may no
longer be posed on appeal. Furthermore, petitioners are asking the Court to issue a ruling
on a hypothetical situation. In effect, they are asking the Court to render an advisory
opinion, a task which is beyond its constitutional mandate.
ANTONIO R. AGRA, CAYETANO FERRERIA,
NAPOLEON M. GAMO and VICENTE O. NOVALES,
petitioners, vs. PHILIPPINE NATIONAL BANK,
respondent.
DECISION
PANGANIBAN, J.:
Laches is a recourse in equity. Equity, however, is applied only in the
absence, never in contravention, of statutory law. Thus, laches cannot, as a
rule, abate a collection suit filed within the prescriptive period mandated
by the Civil Code.
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court, assailing the November 26, 1997 Decision of the Court of
Appeals,[if !supportFootnotes][1][endif] which disposed as follows:
IN VIEW OF THE FOREGOING, the decision of the lower
court is hereby AFFIRMED, with the modification that the
award of attorneys fees is hereby DELETED and the twelve
percent (12%) interest on the P2,500,000.00 the
defendant-appellants are to pay PNB should start from
August 30, 1976, the date when the complaint was filed. [if !
supportFootnotes][2][endif]
The Facts
The facts are summarized by the Court of Appeals (CA) in this wise: [if !
supportFootnotes][4][endif]
On August 30, 1976, an action for collection of a sum of
money was filed by the Philippine National Bank (PNB, for
brevity) against Fil-Eastern Wood Industries, Inc. (Fil-
Eastern, for short) in its capacity as principal debtor and
against Cayetano Ferreria, Pedro Atienza, Vicente O.
Novales, Antonio R. Agra, and Napoleon M. Gamo in their
capacity as sureties.
In its complaint, plaintiff PNB alleged that on July 17, 1967
Fil-Eastern was granted a loan in the amount of [t]wo
[m]illion [f]ive [h]undred [t]housand [p]esos
(P2,500,000.00) with interest at twelve percent (12%) per
annum. Drawings from said demand loan were made on
different dates as evidenced by several promissory notes
and were credited to the account of Fil-Eastern. To secure
the payment of the said loan Fil-Eastern as principal and
sureties Ferreria, Atienza, Novales, Agra, and Gamo
executed a Surety Agreement whereby the sureties, jointly
and severally with the principal, guaranteed and warranted
to PNB, its successors or assigns, prompt payment of
subject obligation including notes, drafts, bills of exchange,
overdrafts and other obligations of every kind, on which Fil-
Eastern was indebted or may thereafter become indebted
to PNB. It was further alleged that as of May 31, 1976 the
total indebtedness of Fil-Eastern and its sureties on subject
loan amounted to [f]ive [m]illion [t]wo [h]undred [n]inety-
[s]even [t]housand, [n]ine [h]undred [s]eventy-[s]ix [p]esos
and [s]eventeen [c]entavos (P5,297,976.17), excluding
attorneys fees. Notwithstanding repeated demands, the
defendants refused and failed to pay their loans.
The defendants (herein sureties) filed separate answers
(pp. 49, 68, 205, 208 and 231). Collating these, We drew
the following: All of them claimed that they only signed the
Surety Agreement with the understanding that the same
was a mere formality required of the officers of the
corporation. They did not in any way or manner receive a
single cent from the proceeds of said loan and/or derive
any profit therefrom. Neither did they receive any
consideration valuable or otherwise, from defendant Fil-
Eastern. They further claim that the loan in question was
negotiated and approved under highly irregular, anomalous
and suspicious circumstances to the point that the Surety
Agreement executed thereafter is invalid, null and void and
without force and effect. The extension of time of payment
of the loan in question released and discharged the
answering defendants from any liability under the Surety
Agreement. The Surety Agreement is null and void from the
beginning due to a defect in the consent of the defendants
and that their liabilities under the Surety Agreement, if any,
has been extinguished by novation. The cause of action of
the complainant is barred by laches and estoppel in that
the plaintiff with full knowledge of the deteriorating
financial condition of Fil-Eastern did not take steps to
collect from said defendant corporation while still solvent.
They also maintained that if anyone is liable for the
payment of said loan, it is Felipe Ysmael, Jr. and not them
or it is only Fil-Eastern and the controlling officers who
profited and made use of the proceeds of the loan.
Defendant Agra likewise said that he was made to sign the
Surety Agreement and he did it because of the moral
influence and pressure exerted upon him by Felipe Ysmael,
Jr. (their employer at the time of signing), thereby arousing
strong fears of losing a much needed employment to
support his family should he refuse to sign as Surety.
In the order of the trial court dated October 30, 1978,
defendant Fil-Eastern was declared in default for its failure
to answer the complaint within the reglementary period
and the case was scheduled for pre-trial conference. The
individual defendants with the courts approval thereafter
filed an amended third-party complaint against Felipe
Ysmael, Jr.
The amended third-party complaint alleged that at the time
of execution of the alleged Surety Agreement subject
matter of the principal complaint, third-party plaintiffs were
but employees of Ysmael Steel Manufacturing Co., owned
by third-party-defendant. Third-party-plaintiffs were in no
financial position to act as sureties to a P2.5 million loan.
They became incorporators of original defendant Fil-Eastern
because of fear of losing their employment brought about
by the tremendous pressure and moral influence exerted
upon them by their employer-third-party-defendant. They
signed the Surety Agreement upon the order of the third-
party-defendant. In signing the said document, the third-
party-plaintiffs were assured by the third-party-defendant
that they had nothing to fear and worry about because the
latter will assume all liabilities as well as profits therefrom
and that the loan subject of the Surety Agreement was with
the prior approval and blessing of a high government
official. They were likewise assured that the surety
agreement was but a formality and that because of such
pressure, influence as well as assurances, third-party-
plaintiffs signed the Surety Agreement.
Third-party-defendant Felipe Ysmael, Jr. in his answer
alleged that the Surety Agreement was freely and
voluntarily signed and executed by third-party-plaintiffs
without any intimidation, undue, improper or fraudulent
representations. Further, granting arguendo that the
consent of third-party plaintiffs in signing said Surety
Agreement was vitiated with intimidation, undue influence
or fraudulent representation on the part of third-party-
defendant, said Surety Agreement is only voidable and
therefore binding unless annulled by a proper action in
court. The third-party-plaintiffs did not file the proper court
action for the annulment of said agreement. They are now
barred from filing an action for annulment of said
agreement, the prescriptive period therefor being only four
(4) years from the time the defect of the consent had
ceased, and from the discovery of the all[e]ged fraud. In
addition, third-party plaintiffs had ratified said agreement
which they signed in July 1967 by signing their names on
and execution of several promissory thereafter.
At the pre-trial conference held on March 21, 1980, the
parties failed to agree on a possible amicable settlement
hence the case was set for trial on the merits. On July 5,
1984, during the pendency of the trial, third-party
defendant Felipe Ysmael, Jr. died. He was substituted by his
legal heirs Patrick Ysmael and Jeanne Ysmael as third-party
defendants. Defendant Pedro Atienza died on January 4,
1987. It appearing that he has no legal heirs, the case
against him was dismissed.
After trial, the regional trial court (RTC) ruled against herein
petitioners. On appeal, the CA modified the RTC ruling by deleting the
award of attorneys fees. Hence, this recourse to this Court.
Ruling of the Court of Appeals
In ruling that petitioners were liable under the surety agreement, the
Court of Appeals rejected their defense of laches. It held that the lapse of
seven years and eight months from December 31, 1968 until the judicial
demand on August 30, 1976 cannot be considered as unreasonable delay
which would necessitate the application of laches. The action filed by the
plaintiff has not yet prescribed. It is well within the ten-year prescriptive
period provided for by law wherein actions based on written contracts can
be instituted.[if !supportFootnotes][5][endif]
The Court of Appeals also noted that the prescriptive period did not
begin to run from December 31, 1968 as [herein petitioners] presupposed.
It was only from the time of the judicial demand on August 30, 1976 that
the cause of action accrued. Thus, [private respondent] was well within the
prescriptive period of ten years when it instituted the case in court. The
Court of Appeals further ruled that placing the blame on [PNB] for its
failure to immediately pounce upon its debtors the moment the loan
matured is grossly unfair for xxx demand upon the sureties to pay is not
necessary.
The appellate court also held that petitioners proved only the first of
the following four essential elements of laches: (1) conduct on the part of
the defendant, or one under whom he claims, giving rise to the situation of
which complaint is made and for which the complainant seeks a remedy;
(2) delay in asserting the complainants rights, the complainant having had
knowledge or notice of the defendants conduct and having been afforded
an opportunity to institute a suit; (3) lack of knowledge or notice on the
part of the defendant that the complainant would assert the right on which
he bases his suit; and (4) injury or prejudice to the defendant in the event
relief is accorded to the complainant, or the suit is not held barred.
Issues
In their Memorandum, petitioners raise the following issues: [if !
supportFootnotes][6][endif]
That the first element exists is undisputed. Neither Fil-Eastern nor the
sureties, herein petitioners, paid the obligation under the Surety
Agreement.
The second element cannot be deemed to exist. Although the
collection suit was filed more than seven years after the obligation of the
sureties became due, the lapse was within the prescriptive period for filing
an action. In this light, we find immaterial petitioners insistence that the
cause of action accrued on December 31, 1968, when the obligation
became due, and not on August 30, 1976, when the judicial demand was
made. In either case, both submissions fell within the ten-year prescriptive
period. In any event, the fact of delay, standing alone, is insufficient to
constitute laches.[if !supportFootnotes][11][endif]
Petitioners insist that the delay of seven years was unreasonable and
unexplained, because demand was not necessary. Again we point that,
unless reasons of inequitable proportions are adduced, a delay within the
prescriptive period is sanctioned by law and is not considered to be a delay
that would bar relief. In Chavez v. Bonto-Perez,[if !supportFootnotes][12][endif] the Court
reiterated an earlier holding, viz:
Laches is a doctrine in equity while prescription is based on
law. Our courts are basically courts of law and not courts of
equity. Thus, laches cannot be invoked to resist the
enforcement of an existing legal right. We have ruled in
Arsenal v. Intermediate Appellate Court x x x that it is a
long standing principle that equity follows the law. Courts
exercising equity jurisdiction are bound by rules of law and
have no arbitrary discretion to disregard them. In Zabat, Jr.
v. Court of Appeals x x x, this Court was more emphatic in
upholding the rules of procedure. We said therein:
As for equity, which has been aptly described as justice
outside legality, this is applied only in the absence of, and
never against, statutory law or, as in this case, judicial
rules of procedure. Aequetas nunquam contravenit legis.
This pertinent positive rules being present here, they
should preempt and prevail over all abstract arguments
based only on equity.
Thus, where the claim was filed within the three-year
statutory period, recovery therefore cannot be barred by
laches.
Petitioners also failed to prove the third element of laches. It is absurd
to maintain that petitioners did not know that PNB would assert its right
under the Surety Agreement. It is unnatural, if not unheard of, for banks to
condone debts without adequate recompense in some other form.
Petitioners have not given us reason why they assumed that PNB would
not enforce the Agreement against them.
Finally, petitioners maintain that the fourth element is present because
they would suffer damage or injury as a result of PNBs claim. This is the
crux of the controversy. In addition to the payment of the amount
stipulated in the Agreement, other equitable grounds were enumerated by
petitioners, viz:
1. Petitioners acted as sureties under pressure from Felipe
Baby Ysmael, Jr., the headman of the Ysmael Group of
Companies where the petitioners were all employed in
various executive positions.
2. Petitioners did not receive a single centavo in
consideration of their acting as sureties.
3. The surety agreement was not really a requisite for the
grant of the loan to FIL-EASTERN because the first release
on the loan was made on July 17, 1967, or even before the
Surety Agreement was executed by petitioners on July 21,
1967.
4. Petitioners were assured that the Surety Agreement was
merely a formality, and they had reason to believe that
assurance because the loan was principally secured by an
assignment of 15% of the proceeds of the sale of logs of
FIL-EASTERN to Iwai & Co., Ltd., and such assignment was
clearly stated in PNB Board Resolution No. 407. In fact,
while it was expressly stated in all of the eight (8)
promissory notes covering the releases of the loan that the
said loan was secured by 15% of the contract of sale with
Iwai & Co., Ltd., only three (3) promissory notes stated that
the loan was also secured by the joint and several
signatures of the officers of the corporation. It is to be
noted that no mention was even made of the joint and
several signatures of petitioners as sureties. In other
words, the principal security was the assignment of 15% of
the contract for the sale of logs to Iwai & Co., Ltd.
5. For reasons not explained by PNB, PNB did not collect
the 15% of the proceeds of the sale of the logs to Iwai &
Co., Ltd., and such failure resulted in the non-collection of
the P2,500,000.00 demand loan, or at least a portion of it.
6. For reasons likewise unexplained by PNB, PNB did not
make any demand upon petitioners to pay the unpaid loan
of FIL-EASTERN until after FIL-EASTERN had become
bankrupt, and PNB was aware of this fact because it
foreclosed the chattel mortgages on the other loans of FIL-
EASTERN which were secured by said chattel mortgages. [if !
supportFootnotes][13][endif]
(Emphasis found in the original.)
These circumstances do not justify the application of laches. Rather,
they disclose petitioners failure to understand the language and the nature
of the Surety Arrangement. They cannot now argue that the Surety
Agreement was merely a formality, secondary to the assignment of 15
percent of the proceeds of the sale of Fil-Easterns logs to Iwai and Co.,
Ltd. Neither can they rely on PNBs failure to collect the assigned share in
the sale of the logs or to make a demand on petitioners until after Fil-
Eastern had become bankrupt. The Court stresses that the obligation of a
surety is direct, primary and absolute. Thus, the Court has held:
[A]lthough 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. 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. [if !
supportFootnotes][14][endif]
COMPANY, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari are the Decision dated April
1 2
30, 2008 and Resolution dated March 27, 2009 of the Court of Appeals (CA)
3
in CA-G.R. CV No. 86558 which affirmed the Decision dated April 29, 2005 of
4
the Regional Trial Court of Makati, Branch 132 (RTC) in Civil Case No. 95-
1812. The CA upheld the RTCs finding that the liabilities of Paramount
Insurance Corporation (Paramount), and respondents Philippine Phoenix
Surety and Insurance, Inc. (Phoenix), Mega Pacific Insurance Corporation 5
(Mega Pacific), and Fortune Life and General Insurance Company (Fortune)
on their respective counter-surety bonds have been extinguished due to the
extension of the principal obligations these bonds covered, to which said
respondents did not give their consent.
The Facts
On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and
Paces Industrial Corporation (PICO) entered into a sub-contracting
agreement, denominated as "200 KV Transmission Lines Contract No.
20-/80-II Civil Works & Electrical Erection," with the Electrical Projects
Company of Libya (ELPCO), as main contractor, for the construction and
erection of a double circuit bundle phase conductor transmission line in the
country of Libya. To finance its working capital requirements, ASPAC obtained
loans from foreign banks Banque Indosuez and PCI Capital (Hong Kong)
Limited (PCI Capital) which, upon the latters request, were secured by
several Letters of Guarantee issued by petitioner Trade and Investment
Development Corporation of the Philippines (TIDCORP), then Philippine
6
these letters, including the loan agreements secured by each, are detailed as
follows:
9
LETTER OF GUARANTEE
LOAN AGREEMENT SECURED
CREDITOR
Letter of Guarantee No. 82-446 F
dated March 11, 1982
(LG No. 82-446 F)
Loan Agreement dated March 9, 1982 (with an extension dated March 25,
1983), in the amount of US$250,000.00
Banque
Indosuez
Letter of Guarantee No. 82-498 F
dated June 10, 1982
(LG No. 82-498 F)
Loan Agreement dated June 10, 1982, in the amount of US$250,000.00
PCI
Capital
Letter of Guarantee No. 82-548 F
dated October 5, 1982
(LG No. 82-548 F)
Loan Agreement dated October 5, 1982, in the amount of US$2,000,000.00
PCI
Capital
As a condition precedent to the issuance by TIDCORP of the Letters of
Guarantee, ASPAC, PICO, and ASPACs President, respondent Nicolas C.
Balderrama (Balderrama) had to execute several Deeds of Undertaking, 10
BONDING
COMPANY/
SURETY
FINAL
EXPIRATION
DATE
Surety Bond No. G(16)01943 13
LG No. 82-446 F
P2,752,000.00
Paramount
March 5, 1986 14
LG No. 82-498 F
P1,845,000.00
Paramount
June 4, 1986 16
P1,849,000.00
Fortune
November 21, 1985 18
LG No. 82-548 F
P11,970,000.00
Phoenix
September 28, 1985 20
P5,030,000.00
Mega
Pacific
September 28, 1985 22
Phoenix, Mega Pacific, and Fortune under the Surety Bonds. TIDCORPs
26 27 28
demand letters to the bonding companies were sent on May 28, 1985, or
before the final expiration dates of all the Surety Bonds, but to no avail.
29
from their foreign debts beginning October 17, 1983), TIDCORP and its
various creditor banks, such as Banque Indosuez and PCI Capital, forged a
Restructuring Agreement on April 16, 1986, extending the maturity dates of
32
the Letters of Guarantee. The bonding companies were not privy to the
33
Restructuring Agreement and, hence, did not give their consent to the
payment extensions granted by Banque Indosuez and PCI Capital, among
others, in favor of TIDCORP. Nevertheless, following new payment
schedules, TIDCORP fully settled its obligations under the Letters of
34
damages and liabilities it had incurred under the Letters of Guarantee and
with its previous demands therefor left unheeded, TIIDCORP filed a collection
case against: (a) ASPAC, PICO, and Balderrama on account of their
36
obligations under the deeds of undertaking; and (b) the bonding companies
on account of their obligations under the Surety Bonds.
The RTC Ruling
In a Decision dated April 29, 2005, the RTC partially granted TIDCORPs
37
complaint and thereby found ASPAC, PICO, and Balderrama jointly and
severally liable to TIDCORP in the sum of P277,891,359.66 pursuant to the
terms of the Deeds of Undertaking, but absolved the bonding companies from
liability on the ground that the moratorium request and the consequent
payment extensions granted by Banque Indosuez and PCI Capital in
TIDCORPs favor without their consent extinguished their obligations under
the Surety Bonds. As basis, the RTC cited Article 2079 of the Civil Code
which provides that an extension granted to the debtor by the creditor without
the consent of the guarantor/surety extinguishes the guaranty/suretyship,
and, in this relation, added that the bonding companies "should not be held
liable as sureties for the extended period."
38
Civil Code is only limited to contracts of guaranty, and, hence, should not
apply to contracts of suretyship. Meanwhile, Balderrama theorized that the
main contractors (i.e., ELPCO) failure to pay ASPAC due to the war/political
upheaval in Libya which further resulted in the latters inability to pay Banque
Indosuez and PCI Capital had the effect of releasing him from his obligations
under the Deeds of Undertaking.
The CA Ruling
In a Decision dated April 30, 2008, the CA upheld the RTCs ruling that the
40
"the maturity of the foreign loans was extended to December 31, 1989 or up
to December 31, 1994 as provided under Section 4.01 of the Restructuring
Agreement," and that "said extension is beyond the expiry date[s] of the
surety bonds x x x and the maturity date of the principal obligations it
purportedly secured, which extension was without [the bonding companies]
consent," It further discredited TIDCORPs contention that Article 2079 of the
42
27, 2009. Only TIDCORP elevated the matter to the Court on appeal.
Pending resolution thereof, or on October 6, 2010, TIDCORP filed a Motion
for Partial Withdrawal of its claim against Paramount in view of their
48
Compromise Agreement dated June 24, 2010 which was approved by the
49 50
Article 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected.
Comparing a suretys obligations with that of a guarantor, the Court, in the
case of Palmares v. CA, illumined that a surety is responsible for the debts
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paid; a guaranty, an undertaking that the debtor shall pay. 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. A guarantor, on the other hand, does not contract that the principal will
pay, but simply that he is able to do so. In other words, a surety undertakes
directly for the payment and is so responsible at once if the principal debtor
makes default, while a guarantor contracts to pay if, by the use of due
diligence, the debt cannot be made out of the principal debtor.
(Emphases and underscoring supplied; citations omitted)
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety &
Insurance Co., Inc., and later in the case of Security Bank, held that Article
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2079 of the Civil Code, which pertinently provides that "[a]n extension granted
to the debtor by the creditor without the consent of the guarantor extinguishes
the guaranty," equally applies to both contracts of guaranty and suretyship.
The rationale therefor was explained by the Court as follows: 57
The theory behind Article 2079 is that an extension of time given to the
principal debtor by the creditor without the suretys consent would deprive the
surety of his right to pay the creditor and to be immediately subrogated to the
creditors 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. (Emphasis and underscoring supplied; citations omitted)
Applying these principles, the Court finds that the payment extensions
granted by Banque Indosuez and PCI Capital to TIDCORP under the
Restructuring Agreement did not have the effect of extinguishing the bonding
companies obligations to TIDCORP under the Surety Bonds, notwithstanding
the fact that said extensions were made without their consent. This is
because Article 2079 of the Civil Code refers to a payment extension granted
by the creditor to the principal debtor without the consent of the guarantor or
surety. In this case, the Surety Bonds are suretyship contracts which secure
the debt of ASPAC, the principal debtor, under the Deeds of Undertaking to
pay TIDCORP, the creditor, the damages and liabilities it may incur under the
Letters of Guarantee, within the bounds of the bonds respective coverage
periods and amounts. No payment extension was, however, granted by
TIDCORP in favor of ASPAC in this regard; hence, Article 2079 of the Civil
Code should not be applied with respect to the bonding companies liabilities
to TIDCORP under the Surety Bonds.
The payment extensions granted by Banque Indosuez and PCI Capital
pertain to TIDCORPs own debt under the Letters of Guarantee wherein it
(TIDCORP) irrevocably and unconditionally guaranteed full payment of
ASPACs loan obligations to the banks in the event of its (ASPAC) default. In
other words, the Letters of Guarantee secured ASPACs loan agreements to
the banks. Under this arrangement, TIDCORP therefore acted as a 58
guarantor, with ASPAC as the principal debtor, and the banks as creditors.
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Proceeding from the foregoing discussion, it is quite clear that there are two
sets of transactions that should be treated separately and distinctly from one
another following the civil law principle of relativity of contracts "which
provides that contracts can only bind the parties who entered into it, and it
cannot favor or prejudice a third person, even if he is aware of such contract
and has acted with knowledge thereof." Verily, as the Surety Bonds concern
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ASPACs debt to TIDCORP and not TIDCORPs debt to the banks, the
payments extensions (which conversely concern TIDCORPs debt to the
banks and not ASPACs debt to TIDCORP) would not deprive the bonding
companies of their right to pay their creditor (TIDCORP) and to be
immediately subrogated to the latters remedies against the principal debtor
(ASPAC) upon the maturity date. It must be stressed that these payment
extensions did not modify the terms of the Letters of Guarantee but only
provided for a new payment scheme covering TIDCORPs liability to the
banks. In fine, considering the inoperability of Article 2079 of the Civil Code in
this case, the bonding companies liabilities to TIDCORP under the Surety
Bonds except those issued by Paramount and covered by its Compromise
Agreement with TIDCORP have not been extinguished. Since these
obligations arose and have been duly demanded within the coverage periods
of all the Surety Bonds, TIDCORPs claim is hereby granted and the CAs
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