G.R. No. 160324, November 15, 2005, Internation Finance Corp. v. Imperial Textile Mills

511 Phil.
591
THIRD DIVISION
[ G.R. NO. 160324, November 15, 2005 ]
INTERNATIONAL FINANCE CORPORATION, PETITIONER,
VS. IMPERIAL TEXTILE MILLS, INC.,** RESPONDENT.
DECISION
PANGANIBAN, J.:
The terms of a contract govern the rights and obligations of the contracting parties.
When the obligor undertakes to be "jointly and severally" liable, it means that the
obligation is solidary. If solidary liability was instituted to "guarantee" a principal
obligation, the law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly that, although
denominated as a "Guarantee Agreement," the Contract was actually a surety.
Notwithstanding the use of the words "guarantee" and "guarantor," the subject
Contract was indeed a surety, because its terms were clear and left no doubt as to
the intention of the parties.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing
the February 28, 2002 Decision[2] and September 30, 2003 Resolution[3] of the
Court of Appeals (CA) in CA-GR CV No. 58471. The challenged Decision
disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The

decision of the trial court is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial Corporation is ORDERED to pay

[Petitioner] International Finance Corporation, the following amounts:
'(a) US$2,833,967.00 with accrued interests as provided in

the Loan Agreement;
'(b) Interest of 12% per annum on accrued interest, which

shall be counted from the date of filing of the instant
action up to the actual payment;
'(c) P73,340.00 as attorney's fees;

'(d) Costs of suit.'
"2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is
HELD secondarily liable to pay the amount herein adjudged to
[Petitioner] International Finance Corporation."[4]
The assailed Resolution denied both parties' respective Motions for

Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
"On December 17, 1974, [Petitioner] International Finance Corporation

(IFC) and [Respondent] Philippine Polyamide Industrial Corporation
(PPIC) entered into a loan agreement wherein IFC extended to PPIC a
loan of US$7,000,000.00, payable in sixteen (16) semi-annual
installments of US$437,500.00 each, beginning June 1, 1977 to
December 1, 1984, with interest at the rate of 10% per annum on the
principal amount of the loan advanced and outstanding from time to
time. The interest shall be paid in US dollars semi-annually on June 1
and December 1 in each year and interest for any period less than a year
shall accrue and be pro-rated on the basis of a 360-day year of twelve
30-day months.
"On December 17, 1974, a 'Guarantee Agreement' was executed with x

x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing
Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex
agreed to guarantee PPIC's obligations under the loan agreement.
"PPIC paid the installments due on June 1, 1977, December 1, 1977 and
June 1, 1978. The payments due on December 1, 1978, June 1, 1979
and December 1, 1979 were rescheduled as requested by PPIC. Despite
the rescheduling of the installment payments, however, PPIC defaulted.
Hence, on April 1, 1985, IFC served a written notice of default to PPIC
demanding the latter to pay the outstanding principal loan and all its
accrued interests. Despite such notice, PPIC failed to pay the loan and
its interests.
"By virtue of PPIC's failure to pay, IFC, together with DBP, applied for
the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC,
located at Calamba, Laguna, with the regional sheriff of Calamba,
Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna
issued a notice of extrajudicial sale. IFC and DBP were the only
bidders during the auction sale. IFC's bid was for P99,269,100.00
which was equivalent to US$5,250,000.00 (at the prevailing exchange
rate of P18.9084 = US$1.00). The outstanding loan, however,
amounted to US$8,083,967.00 thus leaving a balance of
US$2,833,967.00. PPIC failed to pay the remaining balance.
"Consequently, IFC demanded ITM and Grandtex, as guarantors of

PPIC, to pay the outstanding balance. However, despite the demand
made by IFC, the outstanding balance remained unpaid.
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of
Manila against PPIC and ITM for the payment of the outstanding
balance plus interests and attorney's fees.
"The trial court held PPIC liable for the payment of the outstanding
loan plus interests. It also ordered PPIC to pay IFC its claimed
attorney's fees. However, the trial court relieved ITM of its obligation
as guarantor. Hence, the trial court dismissed IFC's complaint against
ITM.
x x x x x x x x x
"Thus, apropos the decision dismissing the complaint against ITM, IFC
appealed [to the CA]."[5]
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as the latter exonerated
ITM from any obligation to IFC. According to the appellate court, ITM bound
itself under the "Guarantee Agreement" to pay PPIC's obligation upon default.[6]
ITM was not discharged from its obligation as guarantor when PPIC mortgaged the
latter's properties to IFC.[7] The CA, however, held that ITM's liability as a
guarantor would arise only if and when PPIC could not pay. Since PPIC's inability
to comply with its obligation was not sufficiently established, ITM could not
immediately be made to assume the liability.[8]
The September 30, 2003 Resolution of the CA denied reconsideration.[9] Hence,

this Petition.[10]
The Issues
Petitioner states the issues in this wise:
"I. Whether or not ITM and Grandtex[11] are sureties and therefore,
jointly and severally liable with PPIC, for the payment of the
loan.
"II. Whether or not the Petition raises a question of law.
"III.
Whether or not the Petition raises a theory not raised in the
lower court."[12]
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for
the payment of the loan.
The Court's Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan
Agreement dated December 17, 1974, between IFC and PPIC;[13] and (2) the
Guarantee Agreement dated December 17, 1974, between ITM and Grandtex, on
the one hand, and IFC on the other.[14]
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to
PPIC's obligations proceeding from the Loan Agreement.[15] For its part, ITM
asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor[16]
and not a surety. Moreover, any ambiguity in the Agreement should be construed
against IFC -- the party that drafted it.[17]
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular clause, which
reads:
"Whereas,
"(A) By an Agreement of even date herewith between IFC and

PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION
(herein called the Company), which agreement is herein called
the Loan Agreement, IFC agrees to extend to the Company a
loan (herein called the Loan) of seven million dollars
($7,000,000) on the terms therein set forth, including a provision
that all or part of the Loan may be disbursed in a currency other
than dollars, but only on condition that the Guarantors agree to
guarantee the obligations of the Company in respect of the Loan
as hereinafter provided.
"(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into said
Agreement, have agreed so to guarantee such obligations of the
Company."[18]
The obligations of the guarantors are meticulously expressed in the following

provision:
"Section 2.01. The Guarantors jointly and severally, irrevocably,

absolutely and unconditionally guarantee, as

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G.R. No. 160324, November 15, 2005, Internation Finance Corp. v. Imperial Textile Mills

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511 Phil.

"WHEREFORE, the appeal is PARTIALLY GRANTED. The

"1. Philippine Polyamide Industrial Corporation is ORDERED to pay

'(a) US$2,833,967.00 with accrued interests as provided in

'(b) Interest of 12% per annum on accrued interest, which

'(c) P73,340.00 as attorney's fees;

The assailed Resolution denied both parties' respective Motions for

The facts are narrated by the appellate court as follows:

"On December 17, 1974, [Petitioner] International Finance Corporation

"On December 17, 1974, a 'Guarantee Agreement' was executed with x

"Consequently, IFC demanded ITM and Grandtex, as guarantors of

Ruling of the Court of Appeals

The September 30, 2003 Resolution of the CA denied reconsideration.[9] Hence,

Petitioner states the issues in this wise:

"II. Whether or not the Petition raises a question of law.

The Court's Ruling

The Petition is meritorious.

"(A) By an Agreement of even date herewith between IFC and

The obligations of the guarantors are meticulously expressed in the following

"Section 2.01. The Guarantors jointly and severally, irrevocably,

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