9/12/21, 3:15 PM G.R. No.

166058

Republic of the Philippines

THIRD DIVISION

G.R. No. 166058             April 4, 2007

EMERITA GARON, Petitioner, 
vs.
PROJECT MOVERS REALTY AND DEVELOPMENT CORPORATION and STONGHOLD INSURANCE
COMPANY, INC., Respondents.

DECISION

CALLEJO, SR., J.:

This is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals (CA) dated May 7, 2004 in CA-
G.R. CV No. 69962, and its Resolution2 dated November 16, 2004. The assailed Decision affirmed with modification
the Order3 dated September 19, 2000 issued by the Regional Trial Court (RTC), Makati City, Branch 56, in Civil Case
No. 99-1051.

Antecedents

On December 19, 1997, Project Movers Realty and Development Corporation (PMRDC) obtained a loan from
Emerita Garon in the amount of ₱6,088,783.68. The loan was covered by Promissory Note No. PMRDC-97-12-
3324to mature on December 19, 1998. The stipulated interest rate, in accordance with the schedule5  of payment
attached to the note, was 36% per annum. To secure the payment of the loan, PMRDC undertook to assign to Garon
its leasehold rights over a space at the Monumento Plaza Commercial Complex, covered by Original Certificate of
Leasehold Title (OCLT) No. 1108. The parties stipulated that failure to pay the note or any portion thereof, or any
interest thereon, shall constitute default, and the entire obligation shall become due and payable without need of
demand.

On December 31, 1997, PMRDC obtained another loan from Garon in the amount of US$189,418.75, at 17% per
annum, to mature on December 31, 1998. The transaction was covered by Promissory Note No. PMRDC-D97-12-
333.6  This loan was secured by an assignment of leasehold rights over another space of the Monumento Plaza
Commercial Complex covered by OCLT No. 0161.

To secure its obligation to assign the leasehold rights to Garon, PMRDC procured a surety bond7 from Stronghold
Insurance Company, Inc. (SICI). The surety bond was subject to the following conditions:

WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the Principal at Monumento
Plaza Building in favor of the Obligee over the Certain Original Certificate of Leasehold Title No. 0161 and 0108 (sic).

WHEREAS, the liability of the surety company upon determination under this bond shall in no case exceed the penal
sum of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY-FIVE THOUSAND ONE HUNDRED THIRTY-NINE &
85/100 (₱12,755,139.85) Only, Philippine Currency.

xxx

Liability of surety on this bond will expire on November 7, 1998 and said bond will be cancelled five days after its
expiration, unless surety is notified of any existing obligations thereunder.8

When PMRDC defaulted in the payment of its obligations, Garon sent a demand letter9 dated November 3, 1998,
requiring PMRDC to execute and deliver a unilateral Deed of Assignment of its leasehold rights over the commercial
spaces covered by OCLT Nos. 1108 and 0161. Garon also sent a formal demand letter10 dated November 6, 1998
for SICI to comply with its obligation under the surety bond.

In view of PMRDC’s and SICI’s failure to comply with their respective obligations, Garon filed a Complaint11  for
collection before the RTC of Makati City. The case was raffled to Branch 56, and was docketed as Civil Case No. 99-

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1051. The complaint contained the following prayer:

WHEREFORE, plaintiff respectfully prays that after hearing on the merits, this Court render[s] judgment in favor of
plaintiff and against defendants as follows:

1. Ordering defendant PMRDC to pay plaintiff the sums of:

1.1. PESOS: Six Million Eighty-Eight Thousand Seven Hundred Eighty-Three and 68/100
(₱6,088,783.68) under PMRDC-97-12-332; and

1.2. DOLLARS: One Hundred Eighty-Nine Thousand Four Hundred Eighteen and 75/100
(US$189,418.75) under PMRDC-97-12-333.

2. Declaring defendant Stronghold solidarily liable, and ordering it to pay plaintiff the sum of PESOS: Twelve
Million Seven Hundred Fifty-Five Thousand One Hundred Thirty-Nine and 85/100 (₱12,755,139.85) under
SICI Bond No. 67831.

3. Ordering defendant PMRDC to pay:

3.1. Interest at 36% per annum and a penalty of 3% per month until full payment on the unpaid amount
due under PMRDC-97-12-332;

3.2. Interest at 17% per annum and a penalty of 3% per month until full payment on the unpaid amount
due under PMRDC-97-12-333;

3.3. Legal interest on the interest accruing at the time of the filing of the complaint conformably with
Article 2212 of the New Civil Code.

4. On the third cause of action, ordering:

4.1. defendant PMRDC to pay PESOS: Ten Thousand (₱10,000.00) as attorney’s fees stipulated in
PMRDC-97-12-332;

4.2. defendant PMRDC to pay PESOS: Ten Thousand (₱10,000.00) as attorney’s fees stipulated in
PMRDC-97-12-333; and

4.3. defendant Stronghold to pay Attorney’s fees in the amount of ₱200,000.00.

4.4. defendants PMRDC and Stronghold to pay plaintiff such amounts of litigation expenses and costs
of suit as may be proven during trial.

Other reliefs just and equitable under the premises are likewise prayed for.12

In its Answer,13 SICI averred, as special and affirmative defenses, that the complaint stated no cause of action and
was prematurely filed; its obligation had been extinguished; the liability on the bond had been discharged by the act
of plaintiff and by the act of law; and its liability on the bond had prescribed.14 It likewise contended that at the time
plaintiff sent the demand letter, the obligation guaranteed by the bond had not yet matured.15 It further claimed that it
was misled by plaintiff and PMRDC that the bond guaranteed its investment with the project of PMRDC at
Monumento Plaza. SICI also asserted that Garon did not exercise the diligence of a good father of a family to avoid
or minimize losses since she did not even require the surrender of the OCLTs before the promissory notes were
signed and the loans released. SICI also set up a cross-claim against PMRDC for the payment of any amount it may
be ordered to pay to Garon, pursuant to the Indemnity Agreement16 executed by the latter.17

For its part, PMRDC denied that it executed the above-stated promissory notes and alleged instead that they were
merely roll-overs of PN No. 97-07-228 and 97-08-260.18  It also alleged that it had already complied with its
undertaking under the promissory notes when it put up a surety bond;19 and when Garon chose to demand from
SICI, she effectively waived the right to claim from it.20 PMRDC further denied liability on the stipulated interest on
the ground that the same is exorbitant and unconscionable.21  As a counterclaim, PMRDC asked for moral and
exemplary damages, as well as for attorney’s fees.22  As and by way of cross-claim against SICI, it likewise
demanded the payment of moral damages and attorney’s fees.23

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Garon filed her Reply24 and a motion25 to render summary judgment. The RTC granted the motion and ruled as
follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of plaintiff Mrs. Emerita I. Garon as
follows:

1. Defendant Project Movers Realty and Development Corporation is hereby directed to pay plaintiff as
follows:

On Promissory Note No. PMRDC 97-12-332:

(A) The sum of PESOS: Six Million Eighty-Eight Thousand Seven Hundred Eighty-Three and 68/100
(₱6,088,783.68) under PMRDC-97-12-332;

(B) Interest thereon at 36% per annum computed from 19 December 1997 until fully paid.

(C) A penalty of 3% per month computed from 03 November 1998 until full payment on all unpaid
amounts consisting of the principal and interest.

On Promissory Note PMRDC No. 97-12-333:

(A) The peso equivalent of the sum of DOLLARS: One Hundred Eighty-Nine Thousand Four Hundred
Eighteen and 75/100 (US$189,418.75) under PMRDC-97-12-333.

(B) Interest thereon at the stipulated rate of 17% per annum computed from 31 December 1997;

(C) A penalty of 3% per month computed from 03 November 1998 until full payment on all unpaid
amounts consisting of the principal and interest.

2. Defendant Stronghold Insurance Company, Inc. is hereby held jointly and solidarily liable to plaintiff Mrs.
Garon in the amount of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY FIVE THOUSAND ONE
HUNDRED THIRTY NINE AND EIGHTY FIVE CENTAVOS (₱12,755,139.85).

3. Defendants Project Movers Realty and Development Corporation and Stronghold Insurance Company, Inc.
are also ordered to pay plaintiff Mrs. Garon jointly and severally the sum of PESOS: TWO HUNDRED
THOUSAND as attorney’s fees plus costs of suit.

All other claims and counter-claims of the parties are hereby ordered dismissed.

SO ORDERED.26

The RTC found that the assignment of PMRDC’s leasehold rights was merely an accessory obligation and not an
alternative one; hence, Garon’s demand on SICI’s obligation on the surety bond could not be considered a waiver of
her right to collect from PMRDC. On SICI’s contention that her claim was premature, the RTC ruled that the former’s
liability arose upon PMRDC’s failure to assign the leasehold rights, not on the maturity date of the loan. The court
further held that SICI’s claim of prescription is without merit because plaintiff made a demand on November 6, 1998,
while the surety bond expired on November 7, 1998.

Garon filed a Motion for Execution Pending Appeal,27  while SICI filed a Motion for Reconsideration.28  The court
denied29 the motion for reconsideration and granted30 the motion for execution pending appeal. SICI then filed a
special civil action for Certiorari with Temporary Restraining Order (TRO) and/or Writ of Preliminary
Injunction31before the CA, docketed as CA-G.R. SP No. 63334 assailing the order of the court granting execution
pending appeal. On February 23, 2001, the CA issued a TRO32  enjoining petitioner from enforcing the writ of
execution pending appeal.

Meanwhile, on October 11, 2000 and February 16, 2001, PMRDC and SICI filed their respective Notices of
Appeal33which the RTC approved. However, in view of PMRDC’s failure to file its appellant’s brief, the CA issued a
Resolution34 dismissing its appeal for having been abandoned. The Resolution became final and executory. 1awphi1.nét

On the other hand, in its brief, SICI raised the following errors:

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I. THE LOWER COURT PALPABLY COMMITTED GRAVE ERROR IN GRANTING APPELLEE’S MOTION
FOR SUMMARY JUDGMENT, DESPITE LACK OF VALID BASIS THEREFOR.

II. THE LOWER COURT LIKEWISE PALPABLY COMMITTED GRAVE ERROR IN RENDERING THE
SUMMARY JUDGMENT HOLDING APPELLANT STRONGHOLD LIABLE UNDER ITS SURETY BOND TO
APPELLEE DESPITE LACK OF FACTUAL AND LEGAL BASIS FOR ITS JUDGMENT.35

According to SICI, the RTC erroneously rendered summary judgment notwithstanding the genuine issues raised by
the parties.36  It claimed that its obligations under the surety bond never became effective because of PMRDC’s
failure to assign its leasehold rights. It likewise insisted that when the promissory notes matured, Garon could no
longer run after it as its liability under the surety bond had already expired.

On May 7, 2004, the CA affirmed with modification the decision of the RTC. 37 The fallo reads:

WHEREFORE, foregoing considered, the appealed decision is affirmed with the modification that defendant-
appellant SICI is not liable to plaintiff-appellee.

No pronouncement as to cost.

SO ORDERED.38

In upholding the propriety of the summary judgment rendered by the RTC, the CA declared that no genuine issue
was raised since the parties admitted executing the promissory notes and surety bond, and the non-performance of
the correlative obligations; the liabilities of the parties were likewise clearly set forth in the contracts. The CA further
affirmed the RTC’s finding that PMRDC was not relieved of its liability despite the enforcement of Garon’s right
against SICI; so long as the debt has not been fully paid, SICI is still liable.

The CA found, however, that appellant cannot be held liable because its liability had long expired (on November 7,
1998) prior to the maturity dates of the loans on December 17 and 31, 1998. Thus, at the time PMRDC defaulted, the
surety bond had long expired.

Garon, now petitioner, comes before this Court on the sole ground that:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN MODIFYING THE TRIAL COURT’S DECISION
AND FINDING THAT PROMISSORY NOTES NO. PMRDC 97-12-332 AND PMRDC NO. 97-12-333 MATURED
ONLY ON 17 DECEMBER 1998 AND 31 DECEMBER 1998, RESPECTIVELY.39

Petitioner avers that it was specifically stated in the promissory notes that failure to pay any of the note or interest
thereon shall constitute default, and the entire obligation shall immediately become due and payable. In view of
PMRDC’s default, the entire obligation became due and demandable. Moreover, the liability of respondent SICI
attached the moment PMRDC failed to assign its leasehold rights. Thus, the CA’s ruling that respondent cannot be
held liable because the notes have not yet matured is utterly incorrect.

For its part, respondent SICI avers that petitioner invoked the alleged acceleration clauses of the promissory notes
only before this Court. It likewise argues that the maturity date of the loan is immaterial because the promissory
notes were not guaranteed by the surety bond. As such, respondent SICI cannot be made to answer for the payment
of the loan.40

In her Reply,41  petitioner asserts that the promissory notes, which explicitly provide for the acceleration of the
maturity dates, are all part of the record. Since respondent SICI did not deny the authenticity and due execution of
the notes, the contents may be read in evidence in the resolution of the issues. She further states that in view of the
admission of respondent SICI that the leasehold rights of PMRDC were never assigned to petitioner, the SICI should
be held liable.

Thus, the issue in this case is whether respondent SICI is liable to petitioner under its surety bond.

The present controversy arose from the following contracts: (1) the contracts of loan covered by promissory notes
No. PMRDC-97-12-33242  and PMRDC-D97-12-33343  dated December 19 and 31, 1997, between petitioner and
PMRDC; and (2) the surety bond44 dated November 7, 1997, between PMRDC and respondent SICI. 1a\^/phi1.net

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In the subject promissory notes, PMRDC undertook to pay the amount of the loan covered by the two notes, as well
as to assign its leasehold rights over two spaces in the Monumento Plaza Commercial Complex covered by OCLT
Nos. 0161 and 1108, as a security for the loan.

To secure PMRDC’s obligation to assign its leasehold rights to petitioner, the former procured the surety bond from
respondent SICI subject to the following conditions:

WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the Principal at Monumento
Plaza Building in favor of the Obligee over the Certain Original Certificate of Leasehold Title No. 0161 and 0108 (sic).

WHEREAS, the liability of the surety company upon determination under this bond shall in no case exceed the penal
sum of PESOS: TWELVE MILLION SEVEN HUNDRED FIFTY FIVE THOUSAND ONE HUNDRED THIRTY NINE &
85/100 (₱12,755,139.85) Only, Philippine Currency.

xxx

Liability of surety on this bond will expire on November 7, 1998 and said bond will be cancelled five days after its
expiration, unless surety is notified of any existing obligations thereunder.45

Thus, respondent SICI, in turn, undertook to guarantee the assignment of leasehold rights; and bound itself to be
liable to petitioner in case of PMRDC’s failure to assign the leasehold rights in an amount not exceeding
₱12,755,139.85. This undertaking, however, was to expire on November 7, 1998.

It must be stressed that the principal obligation guaranteed by the surety bond is the assignment of the leasehold
rights of PMRDC to petitioner over the subject spaces. Petitioner made a formal demand on November 3, 1998 for
PMRDC to perform the obligation, but the latter defaulted. As such, PMRDC’s liability as principal arose.
Consequently, respondent’s liability as surety likewise arose. Respondent therefore cannot claim that its obligation
arose only upon the maturity of the subject loans. To sustain this contention would mean that respondent cannot be
held liable under the surety bond, because if demand is made after the maturity dates of the loans – December 19
and 31, 1998 – it could again assert that its liability had expired on November 7, 1998.

Suretyship arises upon the solidary binding of a person (deemed the surety) with the principal debtor, for the purpose
of fulfilling an obligation.46 A surety is considered in law as being the same party as the debtor in relation to whatever
is adjudged as touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable.47 Although a surety contract is secondary to the principal obligation, the liability of the surety is direct,
primary and absolute, or equivalent to that of a regular party to the undertaking.48

Notwithstanding the timeliness of the demand on respondent, the latter cannot be held liable in the instant case.
Indeed, the liability of respondent arose the moment PMRDC failed to assign its leasehold rights; and the demand on
respondent was made prior to the expiration of the surety bond. However, an examination of the terms of the surety
bond clearly shows that respondent guaranteed the  assignment of the leasehold rights,  not  the  payment of a
particular sum of money owed by PMRDC to petitioner. The principal obligation therefore is the assignment of the
leasehold right, and the accessory obligation is the surety agreement.

The Court notes, however, that respondent is a stranger to the contract of loan between petitioner and PMRDC; it
cannot thus be held liable for an obligation which it did not undertake to perform or at least to guarantee. It is basic
that the parties are bound by the terms of their contract which is the law between them. The extent of a surety’s
liability is determined by the language of the suretyship contract or bond itself. It cannot be extended by implication,
beyond the terms of the contract.49 Contracts have the force of law between the parties who are free to stipulate any
matter not contrary to law, morals, good customs, public order or public policy.50 If the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.51

Since respondent’s undertaking under the surety bond was to guarantee the assignment of leasehold rights, the
security of the principal debt, its obligation cannot extend to the payment of the principal obligation; to do so would
mean going beyond the terms of the contract.

The records show that in her demand letters dated November 3 and 6, 1998, petitioner made formal demands on
both PMRDC and respondent for the assignment of PMRDC’s leasehold right. However, in her complaint in Civil
Case No. 99-1051 where the present case arose, petitioner prayed for the  payment of the principal debt,  not
the assignment of PMRDC’s leasehold rights. The pertinent portion of the complaint reads:

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WHEREFORE, plaintiff respectfully prays that after hearing on the merits, this court render[s] judgment in favor of
plaintiff and against defendants as follows:

1. Ordering defendant PMRDC to pay plaintiff the sums of:

xxx

2. Declaring defendant Stronghold solidarily liable and ordering it to pay plaintiff the sum of x x x. (Emphasis
supplied)52

It thus shows that petitioner was enforcing her right to collect the debt, rather than her right to secure it through the
assignment of the leasehold right. Respondent is being made solidarily liable for the payment of such debt which
obviously is beyond its undertaking under the surety bond.

In sum, respondent’s liability on the bond arose from the time PMRDC failed to comply with its obligation to assign its
leasehold rights over the subject properties as security for the payment of her debt covered by the promissory notes,
not on the maturity of the loan. However, respondent cannot be held liable to make such payment for the following
reasons: (1) its undertaking under the surety bond was merely to guarantee the assignment of PMRDC’s leasehold
rights and not the payment of the principal obligation; and (2) petitioner, in instituting the instant case, is seeking to
enforce her right to collect the principal debt rather than enforce the security.

IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED. The Decision of the Court of Appeals
dated May 7, 2004, and its Resolution dated November 16, 2004, are AFFIRMED.

SO ORDERED.

ROMEO J. CALLEJO, SR.

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

ANTONIO EDUARDO B. NACHURA

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

Footnotes

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1 Penned by Associate Justice Eugenio S. Labitoria, with Associate Justices Jose L. Sabio, Jr. and Hakim S.
Abdulwahid, concurring; rollo, pp. 23-35.
2 Rollo, pp. 36-37.

3 Penned by Judge Nemesio S. Felix, id. at 57-68.

4 Records, pp. 12-13.

5 Id. at 13.

6 Id. at 14-15.

7 Id. at 16-17.

8 Id. at 16.

9 Id. at 18-19.

10 Id. at 20-21.

11 Id. at 1-11.

12 Id. at 8-10.

13 Id. at 40-47.

14 Id. at 42.

15 Id.

16 Id. at 48.

17 Id. at 53-54.

18 Id. at 87.

19 Id. at 88.

20 Id.

21 Id. at 89.

22 Id. at 89-90.

23 Id. at 90.

24 Id. at 96-105.

25 Id. at 144-162.

26 Id. at 211-212.

27 Id. at 213-225.

28 Id. at 232-237.

29 Order dated January 23, 2001 (records, p. 273).

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30 Order dated February 8, 2001 (records, pp. 274-277).

31 Records, pp. 303-317.

32 Id. at 420-421.

33 Id. at 238 and 280.

34 CA rollo, pp. 138-139.

35 Id. at 67.

36 Id. at 71.

37 Supra note 1.

38 Rollo, p. 35.

39 Id. at 15.

40 Id. at 89-95.

41 Id. at 122-126.

42 Records, pp. 12-13.

43 Id. at 14-15.

44 Id. at 16-17.

45 Id. at 16.

46 Tiu Hiong Guan v. Metropolitan Bank & Trust Company, G.R. No. 144339, August 9, 2006, citing Philippine
Bank of Communication v. Lim, G.R. No. 158138, April 12, 2005, 455 SCRA 714, 721.
47 Trade & Investment Development Corporation of the Philippines v. Roblett Industrial Construction Corp.,
G.R. No. 139290, November 11, 2005, 474 SCRA 510, 531, citing Molino v. SDIC, 415 Phil 587,597 (2001).

48 Tiu Hiong Guan v. Metropolitan Bank & Trust Company, supra.; Suico Rattan & Buri Interiors, Inc. v. Court
of Appeals, G.R. No. 138145, June 15, 2006, 490 SCRA 560, 580;  Trade & Investment Development
Corporation of the Philippines v. Roblett Industrial Construction Corp., supra.

49 Tiu Hiong Guan v. Metropolitan Bank & Trust Company, supra; Molino v. SDIC, supra note 47, at 595; Rizal
Commercial Banking Corporation v. Court of Appeals, G.R. No. 85396, October 27, 1989, 178 SCRA 739,
744.
50 International Finance Corporation v. Imperial Textile Mills, Inc. G.R. No. 160324, November 15, 2005, 475
SCRA 149, 159.

51 Civil Code, Art. 1370.

52 Records, pp. 8-9.

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