Garcia v.

CA principal is said to be direct, primary and absolute; in other words, he is

Suretyships | Nov 20, 1990 | Cruz, J. directly and equally bound with the principal.
c. The surety therefore becomes liable for the debt or duty of another
Nature of Case: Petition for certiorari although he possesses no direct or personal interest over the obligations
SUMMARY: WMC obtained 2 loans from PISO. The loans were secured by Antonio Garcia nor does he receive any benefit therefrom.
and Ernest Kahn as sureties. WMC and Garcia failed to pay. Lasal ( to which the credit had d. The peculiar nature of a surety agreement is that it is regarded as valid
been assigned by PISO) sued Garcia for recovery of the debt. Garcia moved to dismiss on despite the absence of any direct consideration received by the surety
the grounds that the suit would result in unjust enrichment of the plaintiff because he had either from the principal obligor or from the creditor.
not received any consideration from PISO. TC granted the motion on the ground that the e. A contract of surety, like any other contract, must generally be supported
surety agreement was invalid for absence of consideration. CA Reversed. SC affirmed the by a sufficient consideration. However, the consideration necessary to
CA and ruled that the surety becomes liable for the debt or duty of another although he support a surety obligation need not pass directly to the surety; a
possesses no direct or personal interest over the obligations nor does he receive any benefit consideration moving to the principal alone will suffice.
therefrom. f. It has been held that if the delivery of the original contract is
contemporaneous with the delivery of the surety’s obligation, each contract
DOCTRINE: The peculiar nature of a surety agreement is that it is regarded as valid becomes completed at the same time, and the consideration which
despite the absence of any direct consideration received by the surety either from the supports the principal contract likewise supports the subsidiary one.
principal obligor or from the creditor. g. It follows from the above principles that Lasal would not be unjustly
A contract of surety, like any other contract, must generally be supported by a sufficient enriched if the petitioner were to be held liable for the obligation contracted
consideration. However, the consideration necessary to support a surety obligation need by WMC. The creditor would only be recovering the amount of its loan plus
not pass directly to the surety; a consideration moving to the principal alone will suffice. 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
2. WON Garcia is liable only as a corporate officer of WMC - NO
FACTS: a. the surety agreement shows that he signed the same not in representation
 Western Minolco Corporation (WMC) obtained from the Philippine Investments of WMC or as its president but in his personal capacity. He is therefore
Systems Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for which personally bound.
it issued corresponding promissory notes payable 3. WON there was novation – No
 On the same date, Antonio Garcia and Ernest Kahn executed a surety agreement a. Petitioner: argued that he is released from liability because there was a
binding themselves jointly and severally for the payment of the loan of P2,500,000.00 novation by virtue of a memorandum agreement supposedly entered into
on due date. by WMC and its creditors.
 Upon failure of WMC to pay after repeated demands, demand was made on Garcia SC: signed only by Don M. Ferry as chairman of the board of directors of
WMC and does not carry the signature of any of the creditors. Hence, it
pursuant to the surety agreement. Garcia also failed to pay
has no binding force whatsoever on such creditors.
 Hence, on April 5, 1983, Lasal Development Corporation (to which the credit had
b. Petitioner: There was still a novation because of the extension of the
been assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional
original period of payment and the compounding of the interest on the
Trial Court of Makati.
principal obligations.
 On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint
Art. 2079. An extension granted to the debtor by the creditor without the
stated no cause of action; (b) the suit would result in unjust enrichment of the
consent of the guarantor extinguishes the guaranty. The mere failure on the
plaintiff because he had not received any consideration from PISO; (c) the surety
part of the creditor to demand payment
agreement violated the doctrine of the limited liability of corporations; and (d) the after the debt has become due does not of itself constitute any
principal obligation had been novated. extension of time referred to herein.
 TC: granted the motion and dismissed the complaint on the ground that the surety SC: In the surety contract, the petitioner not only consented to an
agreement was invalid for absence of consideration. extension in the payment of the obligation but even waived his right to be
 CA: Reversed notified of such extension. He cannot now claim that he has been released
from his undertaking because of the extension granted to the principal.
ISSUE/S & RATIO: As for the compounded interest, the court has held in previous cases that
1. WON surety agreement was invalid because no consideration had been paid to him - the change in the rate of interest was merely a collateral agreement between
NO the creditor bank and the principal debtor that did not affect the surety.
a. Suretyship is a contractual relation resulting from an agreement whereby When the debtor promised to pay the extra rate of interest on demand of
one person, the surety, engages to be answerable for the debt, default or the plaintiff, the liability he assumed was his alone and was separate and
miscarriage of another, known as the principal. The surety’s obligation is apart from the original contract. His agreement to pay the additional rate of
not an original and direct one for the performance of his own act, but interest was an additional burden upon him and him only. That obligation
merely accessory or collateral to the obligation contracted by the principal. in no way affected the original contract of the surety, whose liability
b. Nevertheless, although the contract of a surety is in essence secondary only remained unchanged.
to a valid principal obligation, his liability to the creditor or promisee of the
 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.
c. Petitioner: Cites other supposed agreements in support of his theory of
novation such as the prepayment of the restructured loans of WMC before
the distribution of dividends to the common stockholders, the proposed
sale on installments of its assets to Negros Occidental Copperfield Mines,
and the preference given to other creditors of WMC over PISO.
SC: This was a risk he took when he signed the surety agreement. As it did
not prohibit the alienation of the properties of the principal debtor, the sale
to Negros cannot be considered a novation of the original agreement. In
fact, the proposed sale was intended precisely to enable WMC to meet its
pending obligations.
d. The most important argument against the alleged novation is the failure of
the petitioner to establish the validity of the new contract, an essential
requisite for the novation of a previous valid obligation.
i. Petitioner insists that the various communications made by WMC
with DBP, together with the memorandum of agreement are
sufficient to establish the new undertaking made by WMC with
all its creditors, including DBP.
ii. SC: It is true as a general rule no form of words or writing is
necessary to give effect to a novation.9 Nevertheless, since the
parties involved here are corporations, it must first be proved that
the contracts, assuming they were made, were executed by the
persons possessing the proper authority to bind their respective
principals.
What were submitted are mere exchange of correspondence
between the officers of WMC and DBP.

RULING: Petition denied