(1) JOSE C. TUPAZ IV and G.R. No. 145578

PETRONILA C. TUPAZ, Petitioners,

Present:

Davide, Jr., C.J.,

Chairman,

- versus - Quisumbing,

Ynares-Santiago,

Carpio, and

Azcuna, JJ.

THE COURT OF APPEALS and BANK OF THE PHILIPPINE Promulgated:

ISLANDS, Respondents. November 18, 2005

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO, J.:

The Case

This is a petition for review[1] of the Decision[2] of the Court of Appeals dated 7 September

2000 and its Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed the

ruling of the Regional Trial Court, Makati, Branch 144 in a case for estafa under Section 13,

Presidential Decree No. 115. The Court of Appeals Resolution of 18 October 2000 denied petitioners motion for reconsideration.

The Facts

Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were Vice-President for Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (El Oro Corporation). El Oro Corporation had a contract with the Philippine Army to supply the latter with survival bolos.

To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of

El Oro Corporation, applied with respondent Bank of the Philippine Islands (respondent bank) for two commercial letters of credit. The letters of credit were in favor of El Oro Corporations suppliers, Tanchaoco Manufacturing Incorporated[3](Tanchaoco Incorporated) and Maresco Rubber and Retreading Corporation[4] (Maresco Corporation). Respondent bank granted petitioners application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco Corporation.

Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in

favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV (petitioner Jose Tupaz) signed, in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods covered by the

letter of credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if not

sold, on or before 29 December 1981.

On 9 October 1981, petitioners signed, in their capacities as officers of El Oro

Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5

(for P294,000). Petitioners bound themselves to sell the goods covered by that letter of credit and

to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before 8

December 1981.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El

Oro Corporation, respondent bank paid the former P564,871.05 and P294,000, respectively.

Petitioners did not comply with their undertaking under the trust receipts. Respondent bank

made several demands for payments but El Oro Corporation made partial payments only. On 27

June 1983 and 28 June 1983, respondent banks counsel[5] and its representative[6] respectively sent final demand letters to El Oro Corporation. El Oro Corporation replied that it could not fully

pay its debt because the Armed Forces of the Philippines had delayed paying for the survival

bolos.

Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No.

115 (Section 13)[7] or Trust Receipts Law (PD 115). After preliminary investigation, the then Makati Fiscals Office found probable cause to indict petitioners. The Makati Fiscals Office filed the corresponding Informations (docketed as Criminal Case Nos. 8848 and 8849) with the

Regional Trial Court, Makati, on 17 January 1984 and the cases were raffled to Branch 144 (trial court) on 20 January 1984. Petitioners pleaded not guilty to the charges and trial ensued. During the trial, respondent bank presented evidence on the civil aspect of the cases.

The Ruling of the Trial Court

On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on

reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro

Corporation for the balance of El Oro Corporations principal debt under the trust receipts. The dispositive portion of the trial courts Decision provides:

WHEREFORE, judgment is hereby rendered ACQUITTING both

accused Jose C. Tupaz, IV and Petronila Tupaz based upon reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila

Tupaz, are hereby ordered, jointly and solidarily, to pay the Bank of the

Philippine Islands the outstanding principal obligation of P624,129.19 (as of

January 23, 1992) with the stipulated interest at the rate of 18% per annum; plus

10% of the total amount due as attorneys fees; P5,000.00 as expenses of litigation; and costs of the suit.[8]

In holding petitioners civilly liable with El Oro Corporation, the trial court held:

[S]ince the civil action for the recovery of the civil liability is deemed

impliedly instituted with the criminal action, as in fact the prosecution thereof

was actively handled by the private prosecutor, the Court believes that the El

Oro Engraver Corporation and both accused Jose C. Tupaz and Petronila Tupaz,

jointly and solidarily should be held civilly liable to the Bank of the Philippine

Islands. The mere fact that they were unable to collect in full from the AFP

and/or the Department of National Defense the proceeds of the sale of the

delivered survival bolos manufactured from the raw materials covered by the

trust receipt agreements is no valid defense to the civil claim of the said

complainant and surely could not wipe out their civil obligation. After all, they

are free to institute an action to collect the same.[9]

Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their

acquittal operates to extinguish [their] civil liability and (2) at any rate, they are not personally liable for El Oro Corporations debts.

The Ruling of the Court of Appeals

In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling. The appellate court held:

It is clear from [Section 13, PD 115] that civil liability arising from the

violation of the trust receipt agreement is distinct from the criminal liability

imposed therein. In the case of Vintola vs. Insular Bank of Asia and

America, our Supreme Court held that acquittal in the estafa case (P.D. 115) is

no bar to the institution of a civil action for collection. This is because in such

cases, the civil liability of the accused does not arise ex delicto but rather

based ex contractu and as such is distinct and independent from any criminal

proceedings and may proceed regardless of the result of the latter. Thus, an

independent civil action to enforce the civil liability may be filed against the

corporation aside from the criminal action against the responsible officers or

employees.

xxx

[W]e hereby hold that the acquittal of the accused-appellants from the

criminal charge of estafa did not operate to extinguish their civil liability under

the letter of credit-trust receipt arrangement with plaintiff-appellee, with which

they dealt both in their personal capacity and as officers of El Oro Engraver

Corporation, the letter of credit applicant and principal debtor.

Appellants argued that they cannot be held solidarily liable with their

corporation, El Oro Engraver Corporation, alleging that they executed the

subject documents including the trust receipt agreements only in their capacity

as such corporate officers. They said that these instruments are mere pro-

forma and that they executed these instruments on the strength of a board

resolution of said corporation authorizing them to apply for the opening of a

letter of credit in favor of their suppliers as well as to execute the other

documents necessary to accomplish the same.

Such contention, however, is contradicted by the evidence on

record. The trust receipt agreement indicated in clear and unmistakable terms

that the accused signed the same as suretyfor the corporation and that they

bound themselves directly and immediately liable in the event of default with

respect to the obligation under the letters of credit which were made part of the

said agreement, without need of demand. Even in the application for the letter

of credit, it is likewise clear that the undertaking of the accused is that of a

surety as indicated [in] the following words: In consideration of your establishing the commercial letter of credit herein applied for substantially in

accordance with the foregoing, the undersigned Applicant and Surety hereby

agree, jointly and severally, to each and all stipulations, provisions and

conditions on the reverse side hereof.

xxx

Having contractually agreed to hold themselves solidarily liable with El

Oro Engraver Corporation under the subject trust receipt agreements with

appellee Bank of the Philippine Islands, herein accused-appellants may not,

therefore, invoke the separate legal personality of the said corporation to evade

their civil liability under the letter of credit-trust receipt arrangement with said

appellee, notwithstanding their acquittal in the criminal cases filed against

them. The trial court thus did not err in holding the appellants solidarily liable

with El Oro Engraver Corporation for the outstanding principal obligation

of P624,129.19 (as of January 23, 1992) with the stipulated interest at the rate of

18% per annum, plus 10% of the total amount due as attorneys fees, P5,000.00 as expenses of litigation and costs of suit.[10]

Hence, this petition. Petitioners contend that:

1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH

THE CIVIL LIABILITY OF PETITIONERS[;]

2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED

OBLIGATION WAS INCURRED BY THE CORPORATION, THE

SAME IS NOT YET DUE AND PAYABLE;

3. GRANTING THAT THE QUESTIONED OBLIGATION WAS

ALREADY DUE AND PAYABLE, xxx PETITIONERS ARE NOT

PERSONALLY LIABLE TO xxx RESPONDENT BANK, SINCE

THEY SIGNED THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS OF EL ORO, AND THEREFORE, AN EXCLUSIVE

LIABILITY OF EL ORO; [AND]

4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS

ARE SIMULATED AND VOID.[11]

The Issues

The petition raises these issues:

(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts under the trust receipts;

(2) If so (a) whether petitioners liability is solidary with El Oro Corporation; and (b) whether petitioners acquittal of estafa under Section 13, PD 115

extinguished their civil liability.

The Ruling of the Court

The petition is partly meritorious. We affirm the Court of Appeals ruling with the modification that petitioner Jose Tupaz is liable as guarantor of El Oro Corporations debt under the trust receipt dated 30 September 1981.

On Petitioners Undertaking Under the Trust Receipts

A corporation, being a juridical entity, may act only through its directors, officers, and

employees. Debts incurred by these individuals, acting as such corporate agents, are not theirs but

the direct liability of the corporation they represent.[12] As an exception, directors or officers are

personally liable for the corporations debts only if they so contractually agree or stipulate. [13]

Here, the dorsal side of the trust receipts contains the following stipulation:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods described herein, I/We, jointly

and severally, agree and promise to pay to you, on demand, whatever sum or

sums of money which you may call upon me/us to pay to you, arising out of,

pertaining to, and/or in any way connected with, this Trust Receipt, in the event

of default and/or non-fulfillment in any respect of this undertaking on the part of

the said . I/we further agree that my/our liability in this guarantee shall be DIRECT AND IMMEDIATE, without any

need whatsoever on your part to take any steps or exhaust any legal remedies

that you may have against the said . before making demand upon me/us.[14] (Capitalization in the original)

In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of

El Oro Corporation. Thus, under petitioner Petronila Tupazs signature are the words Vice-PresTreasurer and under petitioner Jose Tupazs signature are the words Vice-PresOperations. By so signing that trust receipt, petitioners did not bind themselves personally liable for El Oro

Corporations obligation. In Ong v. Court of Appeals,[15] a corporate representative signed a solidary guarantee clause in two trust receipts in his capacity as corporate representative. There,

the Court held that the corporate representative did not undertake to guarantee personally the

payment of the corporations debts, thus:

[P]etitioner did not sign in his personal capacity the solidary guarantee

clause found on the dorsal portion of the trust receipts. Petitioner placed his

signature after the typewritten words ARMCO INDUSTRIAL CORPORATION found at the end of the solidary guarantee clause. Evidently, petitioner did not undertake to guaranty personally the payment of the principal

and interest of ARMAGRIs debt under the two trust receipts.

Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are not personally liable for El Oro Corporations obligation.

For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose

Tupaz signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz did not

indicate that he was signing as El Oro Corporations Vice-President for Operations. Hence, petitioner Jose Tupaz bound himself personally liable for El Oro Corporations debts. Not being a party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable under

such trust receipt.

The Nature of Petitioner Jose Tupazs Liability Under the Trust Receipt Dated 30 September 1981

As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods described herein, I/We, jointly

and severally, agree and promise to pay to you, on demand, whatever sum or

sums of money which you may call upon me/us to pay to you, arising out of,

pertaining to, and/or in any way connected with, this Trust Receipt, in the event

of default and/or non-fulfillment in any respect of this undertaking on the part of

the said . I/we further agree that my/our liability in this guarantee shall be DIRECT AND IMMEDIATE, without any

need whatsoever on your part to take any steps or exhaust any legal

remedies that you may have against the said

. Before making demand upon me/us. (Underlining supplied; capitalization in the original)

The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily liable

with El Oro Corporation for the latters debt under that trust receipt.

This is error.

In Prudential Bank v. Intermediate Appellate Court,[16] the Court interpreted a

substantially identical clause[17] in a trust receipt signed by a corporate officer who bound himself

personally liable for the corporations obligation. The petitioner in that case contended that the stipulation we jointly and severally agree and undertake rendered the corporate officer solidarily liable with the corporation. We dismissed this claim and held the corporate officer liable as

guarantor only. The Court further ruled that had there been more than one signatories to the trust

receipt, the solidary liability would exist between the guarantors. We held:

Petitioner [Prudential Bank] insists that by virtue of the clear wording

of the xxx clause x x x we jointly and severally agree and undertake x x x, and the concluding sentence on exhaustion, [respondent] Chis liability therein is solidary.

xxx

Our xxx reading of the questioned solidary guaranty clause yields no

other conclusion than that the obligation of Chi is only that of a guarantor. This

is further bolstered by the last sentence which speaks of waiver of exhaustion,

which, nevertheless, is ineffective in this case because the space therein for the

party whose property may not be exhausted was not filled up. Under Article

2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by

a guarantor before he may be held liable for the obligation. Petitioner likewise

admits that the questioned provision is a solidary guaranty clause, thereby

clearly distinguishing it from a contract of surety. It, however, described the

guaranty as solidary between the guarantors; this would have been correct if two

(2) guarantors had signed it. The clause we jointly and severally agree and undertake refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking

between either one or both of them on the one hand and the petitioner on the

other with respect to the liability described under the trust receipt. xxx

Furthermore, any doubt as to the import or true intent of the solidary

guaranty clause should be resolved against the petitioner. The trust receipt,

together with the questioned solidary guaranty clause, is on a form drafted and

prepared solely by the petitioner; Chis participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such,

it must be strictly construed against the party responsible for its

preparation.[18] (Underlining supplied; italicization in the original)

However, respondent banks suit against petitioner Jose Tupaz stands despite the Courts finding that he is liable as guarantor only. First, excussion is not a pre-requisite to secure judgment

against a guarantor. The guarantor can still demand deferment of the execution of the judgment

against him until after the assets of the principal debtor shall have been exhausted.[19] Second, the

benefit of excussion may be waived.[20] Under the trust receipt dated 30 September 1981,

petitioner Jose Tupaz waived excussion when he agreed that his liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent

bank] to take any steps or exhaust any legal remedies xxx. The clear import of this stipulation is that petitioner Jose Tupaz waived the benefit of excussion under his guarantee.

As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and other accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust

receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981)

provided for payment of attorneys fees equivalent to 10% of the total amount due and an interest at the rate of 7% per annum, or at such other rate as the bank may fix, from the date due until paid

xxx.[21] In the applications for the letters of credit, the parties stipulated that drafts drawn under the letters of credit are subject to interest at the rate of 18% per annum.[22]

The lower courts correctly applied the 18% interest rate per annum considering that the

face value of each of the trust receipts is based on the drafts drawn under the letters of credit.

Based on the guidelines laid down in

Eastern Shipping Lines, Inc. v. Court of Appeals,[23] the accrued stipulated interest earns 12%

interest per annum from the time of the filing of the Informations in the Makati Regional Trial

Court on 17 January 1984. Further, the total amount due as of the date of the finality of this

Decision will earn interest at 18% per annum until fully paid since this was the stipulated rate in

the applications for the letters of credit.[24]

The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court used, is no longer useful as it does not specify the amounts owing under each of the trust

receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro

Corporations total liability under each of the trust receipts dated 30 September 1981 and 9 October 1981 based on the following formula:[25]

TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments made[26]

Interest = principal x 18 % per annum x no. of years from due

date[27] until finality of judgment

Interest on interest = interest computed as of the filing of the complaint

(17 January 1984) x 12% x no. of years until finality of judgment

Attorneys fees is 10% of the total amount computed as of finality of judgment

Total amount due as of the date of finality of judgment will earn an

interest of 18% per annum until fully paid.

In so delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation v.

Alfa RTW Manufacturing Corporation[28] where we also ordered the trial court to compute the

amount of obligation due based on a formula substantially similar to that indicated above:

The total amount due xxx [under] the xxx contract[] xxx may be easily

determined by the trial court through a simple mathematical computation based

on the formula specified above. Mathematics is an exact science, the application

of which needs no further proof from the parties.

Petitioner Jose Tupazs Acquittal did not Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action, the

civil liability is not extinguished by acquittal

[w]here the acquittal is based on reasonable doubt xxx as only preponderance of

evidence is required in civil cases; where the court expressly declares that the

liability of the accused is not criminal but only civil in nature xxx as, for

instance, in the felonies of estafa, theft, and malicious mischief committed by

certain relatives who thereby incur only civil liability (See Art. 332, Revised

Penal Code); and, where the civil liability does not arise from or is not based

upon the criminal act of which the accused was acquitted xxx.[29] (Emphasis

supplied)

Here, respondent bank chose not to file a separate civil action[30] to recover payment

under the trust receipts. Instead, respondent bank sought to recover payment in Criminal Case

Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not

extinguish his civil liability. As the Court of Appeals correctly held, his liability arose not from

the criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex

contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September

1981 in his personal capacity.

On the other Matters Petitioners Raise

Petitioners raise for the first time in this appeal the contention that El Oro Corporations debts under the trust receipts are not yet due and demandable. Alternatively, petitioners assail the

trust receipts as simulated. These assertions have no merit. Under the terms of the trust receipts

dated 30 September 1981 and 9 October 1981, El Oro Corporations debts fell due on 29 December 1981 and 8 December 1981, respectively.

Neither is there merit to petitioners claim that the trust receipts were simulated. During the trial, petitioners did not deny applying for the letters of credit and subsequently executing the trust

receipts to secure payment of the drafts drawn under the letters of credit.

WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court

of Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the

following MODIFICATIONS:

1) El Oro Engraver Corporation is principally liable for the total amount due under the

trust receipts dated 30 September 1981 and 9 October 1981, as computed by the

Regional Trial Court, Makati, Branch 144, upon finality of this Decision, based on

the formula provided above;

2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt under the trust receipt dated 30 September 1981 as thus computed by the Regional

Trial Court, Makati, Branch 144; and

3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust

receipt dated 9 October 1981.

SO ORDERED.

(2) SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M.

CUENCA, respondent.

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

D E C I S I O N

PANGANIBAN, J.:

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. Cuencas 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 petitioners 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 ofP100,000.00 as attorneys 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]llion [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 companys 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. (Emphasis 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:

x x x x x x x x x

Rodolfo M. Cuenca x x x hereby binds himself x x x 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 x x x the client may be indebted to the bank x x x by virtue of aforesaid credit

accommodation(s) including the substitutions, renewals, extensions, increases, amendments,

conversions and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis 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/74/78/85, 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 SIMCs 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, et 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 loans, 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.

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) andP3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers 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. (Underscoring 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, x x x 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.

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.

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 Cuencas liability under the Indemnity Agreement covered only availments on SIMCs 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 SIMCs indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC

without Respondent Cuencas 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 SIMCs indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus

extinguishing Respondent Cuencas liability under the indemnity agreement;

B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC;

C. Whether or not petitioners 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 Cuencas 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.

The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners 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.

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.

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 accomodation 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

accomodation. This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows:

1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers 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:

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 originalP8 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. x x x. 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 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.

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 forP8 million, and that it was for

a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts 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] Respondents 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 x x x.[29]

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 latters 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, petitioners 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., x x x ---- 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 theP8 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 banks 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.

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 x x x. 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 petitioners 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 petitioners 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

banks 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 latters 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 x x x that could be had without his having to be notified.

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

respondents 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, respondents liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set

down in the Credit Approval Memorandum.

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 creditors 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.

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 petitioners submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.

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.

(3) ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING

CORPORATION, respondents.

[G.R. No. 126490. March 31, 1998]

D E C I S I O N

REGALADO, J.:

Where a party signs a promissory note as a co-maker and binds herself to be jointly and

severally liable with the principal debtor in case the latter defaults in the payment of the loan, is

such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a

guarantor who warrants the solvency of the debtor?

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending

Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner

Estrella Palmares, in the amount of P30,000.00 payable on or before May 12, 1990, with

compounded interest at the rate of 6% per annum to be computed every 30 days from the date

thereof.[1] On four occasions after the execution of the promissory note and even after the loan

matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby

leaving a balance of P13,700.00. No payments were made after the last payment on September

26, 1991.[2]

Consequently, on the basis of petitioners solidary liability under the promissory note, respondent corporation filed a complaint[3] against petitioner Palmares as the lone party-defendant,

to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.

In her Amended Answer with Counterclaim,[4] petitioner alleged that sometime in August

1990, immediately after the loan matured, she offered to settle the obligation with respondent

corporation but the latter informed her that they would try to collect from the spouses Azarraga

and that she need not worry about it; that there has already been a partial payment in the amount

of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well

as the penalty charges of 3% per month, are usurious and unconscionable; and that while she

agrees to be liable on the note but only upon default of the principal debtor, respondent

corporation acted in bad faith in suing her alone without including the Azarragas when they were

the only ones who benefited from the proceeds of the loan.

During the pre-trial conference, the parties submitted the following issues for the resolution

of the trial court: (1) what the rate of interest, penalty and damages should be; (2) whether the

liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the

defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with

primary liability.[5]

Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and

the memoranda to be submitted by them. On November 26, 1992, the Regional Trial Court of

Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing

of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are

primarily liable on the instrument.[6] This was based on the findings of the courta quo that the

filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga

spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the

obligation is considered a valid tender of payment sufficient to discharge a persons secondary liability on the instrument; that petitioner, as co-maker, is only secondarily liable on the

instrument; and that the promissory note is a contract of adhesion.

Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered

judgment declaring herein petitioner Palmares liable to pay respondent corporation:

1. The sum of P13,700.00 representing the outstanding balance still due and owing with

interest at six percent (6%) per month computed from the date the loan was contracted

until fully paid;

2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of the

outstanding balance;

3. Attorneys fees at 25% of the total amount due per stipulations;

4. Plus costs of suit.[7]

Contrary to the findings of the trial court, respondent appellate court declared that petitioner

Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the

principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is

primarily liable on the note and hence may be sued by the creditor corporation for the entire

obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although

she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the

imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law

is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it rationalized that

even if the promissory note were to be considered as a contract of adhesion, the same is not

entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he

adheres, he gives his consent.

Hence this petition for review on certiorari wherein it is asserted that:

A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore

solidarily liable to pay the promissory note.

1. The terms of the promissory note are vague. Its conflicting provisions do not

establish Palmares solidary liability.

2. The promissory note contains provisions which establish the co-makers liability as that of a guarantor.

3. There is no sufficient basis for concluding that Palmares liability is solidary.

4. The promissory note is a contract of adhesion and should be construed against M.B.

Lending Corporation.

5. Palmares cannot be compelled to pay the loan at this point.

B. Assuming that Palmares liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory

note.

The foregoing contentions of petitioner are denied and contradicted in their material points

by respondent corporation. They are further refuted by accepted doctrines in the American

jurisdiction after which we patterned our statutory law on suretyship and guaranty. This case then

affords us the opportunity to make an extended exposition on the ramifications of these two

specialized contracts, for such guidance as may be taken therefrom in similar local controversies

in the future.

The basis of petitioner Palmares liability under the promissory note is expressed in this wise:

ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully

understood the contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily

liable with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand

payment of the above loan from me in case the principal maker, Mrs. Merlyn

Azarraga defaults in the payment of the note subject to the same conditions above-

contained.[8]

Petitioner contends that the provisions of the second and third paragraph are conflicting in

that while the second paragraph seems to define her liability as that of a surety which is joint and

solidary with the principal maker, on the other hand, under the third paragraph her liability is

actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the

principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply

stated, although the second paragraph says that she is liable as a surety, the third paragraph defines

the nature of her liability as that of a guarantor. According to petitioner, these are two conflicting

provisions in the promissory note and the rule is that clauses in the contract should be interpreted

in relation to one another and not by parts. In other words, the second paragraph should not be

taken in isolation, but should be read in relation to the third paragraph.

In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers

that she could be held liable only as a guarantor for several reasons. First, the words jointly and severally or solidarily liable used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is

likely to enter into such transactions without fully realizing the nature and extent of her

liability. On the contrary, the wordings used in the third paragraph are easier to

comprehend. Second, the law looks upon the contract of suretyship with a jealous eye and the rule

is that the obligation of the surety cannot be extended by implication beyond specified limits,

taking into consideration the peculiar nature of a surety agreement which holds the surety liable

despite the absence of any direct consideration received from either the principal obligor or the

creditor. Third, the promissory note is a contract of adhesion since it was prepared by respondent

M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents

thereof were never explained to her, and her only participation was to sign thereon. Thus, any

apparent ambiguity in the contract should be strictly construed against private respondent pursuant

to Art. 1377 of the Civil Code.[9]

Petitioner accordingly concludes that her liability should be deemed restricted by the clause

in the third paragraph of the promissory note to be that of a guarantor.

Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the

principal debtors cannot be considered in default in the absence of a judicial or extrajudicial

demand. It is true that the complaint alleges the fact of demand, but the purported demand letters

were never attached to the pleadings filed by private respondent before the trial court. And, while

petitioner may have admitted in her Amended Answer that she received a demand letter from

respondent corporation sometime in 1990, the same did not effectively put her or the principal

debtors in default for the simple reason that the latter subsequently made a partial payment on the

loan in September, 1991, a fact which was never controverted by herein private respondent.

Finally, it is argued that the Court of Appeals gravely erred in awarding the amount

of P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance

of the loan is only P13,700.00. Where the interest charged on the loan is exorbitant, iniquitous or

unconscionable, and the obligation has been partially complied with, the court may equitably

reduce the penalty[10] on grounds of substantial justice. More importantly, respondent corporation

never refuted petitioners allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation. The court should, therefore, mitigate the damages

to be paid since petitioner has shown a sincere desire for a compromise.[11]

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the

petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary

award adjudged to herein respondent corporation.

At the outset, let it here be stressed that even assuming arguendo that the promissory note

executed between the parties is a contract of adhesion, it has been the consistent holding of the

Court that contracts of adhesion are not invalid per se and that on numerous occasions the binding

effects thereof have been upheld. The peculiar nature of such contracts necessitate a close scrutiny

of the factual milieu to which the provisions are intended to apply. Hence, just as consistently and

unhesitatingly, but without categorically invalidating such contracts, the Court has construed

obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not

unreasonably against the drafter thereof when justified in light of the operative facts and

surrounding circumstances.[12] The factual scenario obtaining in the case before us warrants a

liberal application of the rule in favor of respondent corporation.

The Civil Code pertinently provides:

Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to

fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section

4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a

suretyship.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear

and leave no doubt upon the intention of the contracting parties, the literal meaning of its

stipulation shall control.[13] In the case at bar, petitioner expressly bound herself to be jointly and

severally or solidarily liable with the principal maker of the note. The terms of the contract are

clear, explicit and unequivocal that petitioners liability is that of a surety.

Her pretension that the terms jointly and severally or solidarily liable contained in the second paragraph of her contract are technical and legal terms which could not be easily

understood by an ordinary layman like her is diametrically opposed to her manifestation in the

contract that she fully understood the contents of the promissory note and that she is fully aware of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to

the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence,

mere preponderance of evidence not even being adequate. Petitioners attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-

serving allegations.[14]

Having entered into the contract with full knowledge of its terms and conditions, petitioner is

estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or

as to the legal effect of the undertaking.[15] The rule that ignorance of the contents of an instrument

does not ordinarily affect the liability of one who signs it also applies to contracts of

suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no

reason for relieving her of liability.[16]

Petitioner would like to make capital of the fact that although she obligated herself to be

jointly and severally liable with the principal maker, her liability is deemed restricted by the

provisions of the third paragraph of her contract wherein she agreed that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs.

Merlyn Azarraga defaults in the payment of the note, which makes her contract one of guaranty and not suretyship. The purported discordance is more apparent than real.

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the

debtor.[17] A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking

that the debtor shall pay.[18] 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.[19] 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.[20] 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.[21]

Quintessentially, the undertaking to pay upon default of the principal debtor does not

automatically remove it from the ambit of a contract of suretyship. The second and third

paragraphs of the aforequoted portion of the promissory note do not contain any other condition

for the enforcement of respondent corporations right against petitioner. It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein

petitioner only if and when the defaulting principal has become insolvent. A contract of

suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtors obligation, so as to render himself directly and primarily responsible with him, and without

reference to the solvency of the principal.[22]

In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the

rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or

guaranty has once been judicially determined under the rule of reasonable construction applicable

to all written contracts, then the liability of the surety, under his contract, as thus interpreted and

construed, is not to be extended beyond its strict meaning.[23] The rule, however, will apply only

after it has been definitely ascertained that the contract is one of suretyship and not a contract of

guaranty. It cannot be used as an aid in determiningwhether a partys undertaking is that of a surety or a guarantor.

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation

contained in the third paragraph of the controverted suretyship contract merely elucidated on and

made more specific the obligation of petitioner as generally defined in the second paragraph

thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her

liability attaches only upon default of the principal debtor, must necessarily fail for being

incongruent with the judicial pronouncements adverted to above.

It is a well-entrenched rule that in order to judge the intention of the contracting parties, their

contemporaneous and subsequent acts shall also be principally considered.[24] Several attendant

factors in that genre lend support to our finding that petitioner is a surety. For one, when

petitioner was informed about the failure of the principal debtor to pay the loan, she immediately

offered to settle the account with respondent corporation. Obviously, in her mind, she knew that

she was directly and primarily liable upon default of her principal. For another, and this is most

revealing, petitioner presented the receipts of the payments already made, from the time of initial

payment up to the last, which were all issued in her name and of the Azarraga spouses.[25]This can

only be construed to mean that the payments made by the principal debtors were considered by

respondent corporation as creditable directly upon the account and inuring to the benefit of

petitioner. The concomitant and simultaneous compliance of petitioners obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally

bound by the contract of the principal makers.

In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely

with the principal,[26] and as such is deemed an original promisor and debtor from the

beginning.[27] This is because in suretyship there is but one contract, and the surety is bound by the

same agreement which binds the principal.[28] In essence, the contract of a surety starts with the

agreement,[29] which is precisely the situation obtaining in this case before the Court.

It will further be observed that petitioners undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal

obligors. A surety is usually bound with his principal by the same instrument, executed at the

same time and upon the same consideration; he is an original debtor, and his liability is immediate

and direct.[30] Thus, it has been held that where a written agreement on the same sheet of paper

with and immediately following the principal contract between the buyer and seller is executed

simultaneously therewith, providing that the signers of the agreement agreed to the terms of the

principal contract, the signers were sureties jointly liable with the buyer.[31] A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear

upon the same instrument, and the same consideration usually supports the obligation for both the

principal and the surety.[32]

There is no merit in petitioners contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or

extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent

corporation may demand payment of the loan from her in case the principal maker defaults,

subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of

the note states that should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand. Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so

declares.[33] As a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit

against them, since the commencement of the suit is a sufficient demand.[34] On this point, it may

be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the

principals default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of

the principal cannot have the effect of discharging the surety. The surety is bound to take notice

of the principals default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of

suretyship.[35]

The alleged failure of respondent corporation to prove the fact of demand on the