MARLOU L. VELASQUEZ,                     G.R. No. 157309                             Petitioner,                                                                   Present:                                                                                                    AUSTRIA-MARTINEZ,* J.,       Acting Chairperson,                                                               TINGA,**

              -   versus   -                                        CHICO-NAZARIO,     NACHURA, and     REYES, JJ.                                                                            Promulgated:SOLIDBANK CORPORATION,Respondent.                                  March 28, 2008 x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x D E C I S I O N  REYES, R.T., J.:              PARTIES may not impugn the effectivity of a contract, after much benefit has been gained to the prejudice of another.  They are bound by the obligations they expressly set out to do. Before Us is a petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC) in Cebu City,[2] holding petitioner Marlou Velasquez liable under his letter of undertaking to respondent Solidbank Corporation. The Facts           Petitioner is engaged in the export business operating under the name Wilderness Trading.  Respondent is a domestic banking corporation organized under Philippine laws.           The case arose out of a business transaction for the sale of dried sea cucumber for export to South Korea between Wilderness Trading, as seller, and Goldwell Trading of Pusan, South Korea, as buyer. To facilitate payment of the products, Goldwell Trading opened a letter of credit in favor of Wilderness Trading in the amount of US$87,500.00[3] with the Bank of Seoul, Pusan, Korea.           On November 12, 1992, petitioner applied for credit accommodation with respondent bank for pre-shipment financing.  The credit accommodation was granted.  Petitioner was successful in his first two export transactions both drawn on the letter of credit.  The third export shipment, however, yielded a different result. On February 22, 1993, petitioner submitted to respondent the necessary documents for his third shipment.  Wanting to be paid the value of the shipment in advance, petitioner negotiated for a documentary sight draft to be drawn on the letter of credit, chargeable to the account of Bank of Seoul.  The sight draft represented the value of the shipment in the amount of US$59,640.00.[4]

 As a condition for the issuance of the sight draft, petitioner executed a letter of undertaking in favor of respondent.  Under the terms of the letter of undertaking, petitioner promised that the draft will be accepted and paid by Bank of Seoul according to its tenor.  Petitioner also held himself liable if the sight draft was not accepted.  The letter of undertaking provided: SOLIDBANK CORPORATION                                Feb. 22, 199332 Borromeo StreetCebu City Gentlemen:       Re: PURCHASE OF ONE DOC. SIGHT DRAFT DRAWN UNDER LC#M2073210NS00040 FOR US$59,640.00 UNDER OUR CEBP93/102.             In consideration of your negotiating the above described draft(s), we hereby warrant that the above referred to draft(s) and accompanying documents are genuine and accurately represent the facts stated therein

and that the draft(s) will be accepted and paid in accordance with its/their tenor.  We further undertake and agree, jointly and severally, to hold you free and harmless from and to defend all actions, claims and demands whatsoever, and to pay on demand all damages, actual or compensatory, including attorney’s fees, in case of suit, at least equal to __% of the amount due, which you may suffer arising by reason of or on account of your negotiating the above draft(s) because of the following discrepancies or reasons or any other discrepancy or reason whatever: 1)    B/L MARKED “SAID TO CONTAIN” & “SHIPPER’S LOAD, STOWAGE & COUNT.”2)    LATE SHIPMENT.3)    QUANTITY SHIPPED @ US$14.00 OVERDRAWN BY 0.06 TON.4)    NO INSPECTION CERTIFICATE PRESENTED.             We hereby undertake to pay on demand the full amount of the draft(s) or any unpaid balance of the draft(s), with interest at the prevailing rate of today from the date of negotiation, plus all charges and expenses whatsoever incurred in connection therewith.  You shall neither be obligated to contest or dispute any refusal to accept or to pay the whole or any part of the above draft(s) nor to proceed in anyway against the drawee thereof, the issuing bank, or against any indorser thereof before making a demand on us for the payment of the whole or any unpaid balance of the draft(s).[5]  (Emphasis added) By virtue of the letter of undertaking, respondent advanced the value of the shipment which, at the current rate of exchange at that time was P1,495,115.16, less bank charges, to petitioner.  Respondent then sent all the documents pertinent to the export transaction to the Bank of Seoul.   Respondent failed to collect on the sight draft as it was dishonored by non-acceptance by the Bank of Seoul.  The reasons given for the dishonor were late shipment, forged inspection certificate, and absence of countersignature of the negotiating bank on the inspection certificate.[6]  Goldwell Trading likewise issued a stop payment order on the sight draft because most of the bags of dried sea cucumber exported by petitioner contained soil. Due to the dishonor of the sight draft and the stop payment order, respondent demanded restitution of the sum advanced.[7]  Petitioner failed to heed the demand. On June 3, 1993, respondent filed a complaint for recovery of sum of money[8] with the RTC in Cebu City.  In his answer, petitioner alleged that his liability under the sight draft was extinguished when respondent failed to protest its non-acceptance, as required under the Negotiable Instruments Law (NIL).  He also alleged that the letter of undertaking is not binding because it is a superfluous document, and that he did not violate any of the provisions of the letter of credit.[9]

 RTC and CA Dispositions           On September 25, 1996, the RTC rendered judgment[10] in favor of respondent with the following fallo:           IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the defendant:

 (1)      to pay the plaintiff the principal sum of P1,495, 115.16 plus interest at 20% per annum counted from February 22, 1993 up to the time the entire amount shall have been fully paid; (2)      to pay attorney’s fees equivalent to 10% of the total amount due the plaintiff; and (3)      to pay the costs. SO ORDERED.[11]

           The RTC ratiocinated: This court is not convinced with the defendant’s argument that because of plaintiff’s failure to protest the dishonor of the sight draft, his liability is extinguished because his liability remains under the letter of undertaking

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which he signed and without which plaintiff would not have advanced or credited to him the amount. Section 152 of the Negotiable Instruments Law under which defendant claims extinguishment of his liability to plaintiff is not a bar to the filing of other appropriate remedies which the aggrieved party may pursue to vindicate his rights and in this instant case, plaintiff wants his right vindicated by virtue of the letter of undertaking which defendant signed. By the letter of undertaking, defendant bound himself to pay on demand all damages including attorney’s fees which plaintiff may suffer arising by reason of or on account of negotiating the above draft because of the following discrepancies or any other discrepancy or reasons whatsoever and further to pay on demand full amount of any unpaid balance with interest at the prevailing rate.  He should be bound to the fulfillment of what he expressly obligated himself to do and perform in the letter of undertaking without which, plaintiff would not have advance (sic) and credited to him the amount in the draft.  He should not enrich himself at the expense of plaintiff.[12]  (Emphasis added) Disagreeing, petitioner elevated the matter to the CA. On June 27, 2002, the CA affirmed with modification the RTC decision, disposing as follows: WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED with MODIFICATION.  Defendant-appellant Marlou L. Velasquez is hereby ordered to pay plaintiff-appellee Solidbank Corporation, the following: (1) the principal amount of One Million Four Hundred Ninety-Five Thousand One Hundred Fifteen and Sixteen Centavos (P1,495,115.16) plus interest at twelve percent (12%) per annum from February 22, 1993 until fully paid, (2) attorney’s fees equivalent to five percent (5%) of the total amount due, and (3) costs of the suit. SO ORDERED.[13]

           In ruling against petitioner, the CA opined:           The fact that said draft was dishonored and not paid by the Bank of Seoul-Korea, (sic) it is incumbent upon defendant-appellant Velasquez to comply with his obligation under the Letter of Undertaking.  He cannot be allowed to impugn the contract of undertaking he entered into by saying that it was a superfluous document, and therefore, not binding on him.  The contract of undertaking is the law between them, and must be enforced accordingly.  This is in accord with Article 1159 of the New Civil Code, which provides that “obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” And parties to a contract are bound to the fulfillment of what has expressly been stipulated therein, regardless of the fact that it turn (sic) out to be financially disadvantageous.[14]

 x x x x             The fact that Defendant-appellant benefited from the advance payment made by Plaintiff appellee, (sic) it is incumbent upon him to return what he received because the purpose of the advance payment was not attained and/or realized, as the sight draft was not paid accordingly, otherwise, it will result to unjust enrichment on the part of Defendant-appellant at the expense of Plaintiff-appellee, in violation of Articles 19 and 22 of the New Civil Code.  The doctrine of unjust enrichment and restitution simply means that “the exercise of a right ends when the right disappears, and it disappears when it is abused, especially to the prejudice of others.”[15]  (Emphasis added)           Petitioner moved for reconsideration[16] but his motion was denied.[17]  Hence, the present recourse. Issues           Petitioner raises twin issues for Our consideration, to wit: THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE, NOT HERETOFORE DETERMINED BY THIS HONORABLE COURT, OR HAS DECIDED IT IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS HONORABLE COURT, IN THAT: I.

THE COURT OF APPEALS RULED THAT PETITIONER IS LIABLE ON THE ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE FACT THAT PETITIONER WAS ALREADY RELEASED FROM LIABILITY UNDER THE SIGHT DRAFT, THE PRINCIPAL CONTRACT, UNDER THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW AND THE CIVIL CODE. II.THE COURT OF APPEALS HELD PETITIONER LIABLE UNDER THE ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE FACT THAT THERE WAS NO PROOF WHATSOEVER THAT PETITIONER VIOLATED EITHER THE PRINCIPAL CONTRACT, THE SIGHT DRAFT, OR EVEN THE LETTER OF UNDERTAKING.[18]  (Underscoring supplied)           The main issue is whether or not petitioner should be held liable to respondent under the sight draft or the letter of undertaking. There is no dispute that petitioner duly signed and executed these documents. It is likewise admitted that the sight draft was dishonored by non acceptance by the Bank of Seoul. Our Ruling           The petition is without merit. Petitioner is not liable under the sight draft but he is liable under his letter of undertaking; liability under the letter of undertaking was not extinguished by non-protest of the dishonor of the sight draft. Petitioner argues that he cannot be held liable under either the sight draft or the letter of undertaking.  He claims that the failure of respondent to protest the dishonor of the sight draft under Section 152 of the NIL discharged him from liability under the negotiable instrument.  It is also contended that his liability under the letter of undertaking is that of a mere guarantor; that the letter of undertaking is only an accessory contract to the sight draft.  Since he was discharged from liability under the sight draft, he cannot be held liable under the letter of undertaking. For its part, respondent counters that petitioner’s liability springs from the letter of undertaking, independently of the sight draft.  It would not have advanced the amount without the letter of undertaking. According to respondent, the letter of undertaking is an independent agreement and not merely an accessory contract.  To permit petitioner to escape liability under the letter of undertaking would result in unjust enrichment. Petitioner’s liability under the letter of undertaking is independent from his liability under the sight draft.  He may be held liable under either the sight draft or the letter of undertaking or both. Admittedly, petitioner was discharged from liability under the sight draft when respondent failed to protest it for non-acceptance by the Bank of Seoul.  A sight draft made payable outside the Philippinesis a foreign bill of exchange.[19]  When a foreign bill is dishonored by non-acceptance or non-payment, protest is necessary to hold the drawer and indorsers liable.  Verily, respondent’s failure to protest the non-acceptance of the sight draft resulted in the discharge of petitioner from liability under the instrument. Section 152 of the NIL is explicit: Section 152.  In what cases protest necessary. – Where a foreign bill appearing on its face to be such is dishonored by non-acceptance, it must be duly protested for non-acceptance, and where such a bill which has not been previously dishonored by non-acceptance, is dishonored by non-payment, it must be duly protested for non-payment. If it is not so protested, the drawer and indorsers are discharged.  Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary.  (Emphasis added) Petitioner, however, can still be made liable under the letter of undertaking.  It bears stressing that it is a separate contract from the sight draft.  The liability of petitioner under the letter of undertaking is direct and primary.  It is independent from his liability under the sight draft.  Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment. Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that he will reimburse the amount in case the sight

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draft is dishonored.  The bank would certainly not have agreed to grant petitioner an advance export payment were it not for the letter of undertaking.  The consideration for the letter of undertaking was petitioner’s promise to pay respondent the value of the sight draft if it was dishonored for any reason by the Bank of Seoul. We cannot accept petitioner’s thesis that he is only a mere guarantor under the letter of credit.  Petitioner cannot be both the primary debtor and the guarantor of his own debt.  This is inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a third person if the debtor defaults in his obligation.  Certainly, to accept such an argument would make a mockery of commercial transactions. Petitioner bound himself liable to respondent under the letter of undertaking if the sight draft is not accepted. He also warranted that the sight draft is genuine; will be paid by the issuing bank in accordance with its tenor; and that he will be held liable for the full amount of the draft upon demand, without necessity of proceeding against the drawee bank.[20]  Petitioner breached his undertaking when the Bank of Seoul dishonored the sight draft and Goldwell Trading ordered a stop payment order on it for discrepancies in the export documents. Petitioner is liable without need for respondent to establish collateral facts such as violations of the letter of credit. It is also argued that petitioner cannot be held liable under the letter of undertaking because respondent failed to prove that he violated any of the provisions in the letter of credit or that sixty (60) of the seventy-one (71) bags shipped to Goldwell Trading contained soil instead of dried sea cucumber. We cannot agree.  Respondent need not prove that petitioner violated the provisions of the letter of credit in order to be held liable under the letter of undertaking.  Parties are bound to fulfill what has been expressly stipulated in the contract.[21]  Petitioner’s liability under the letter of undertaking is clear.  He is liable to respondent if the sight draft is not accepted by the Bank of Seoul.  Mere non-acceptance of the sight draft is sufficient for liability to attach.  Here, the sight draft was dishonored for non-acceptance.  The non-acceptance of the sight draft triggered petitioner’s liability under the letter of undertaking. Records also show that the Bank of Seoul found discrepancies in the documents submitted by petitioner.  Goldwell Trading issued a stop payment order because the products shipped were defective.  It found that most of the bags shipped contained soil instead of dried sea cucumber.  If petitioner disputes the finding of Goldwell Trading, he can file a case against said company but he cannot dispute his liability under either the sight draft or the letter of undertaking.  As We see it, this is a straightforward case of collection of sum of money on the basis of a letter of undertaking.  Respondent advanced the export payment to petitioner on the understanding that the draft will be honored and paid.  The draft was dishonored.  Justice and equity dictate that petitioner be held liable to respondent bank. WHEREFORE, the petition is DENIED for lack of merit.  The Decision of the Court of Appeals dated June 27, 2002 is hereby AFFIRMED. SO ORDERED.

[G. R. No. 127261.  September 7, 2001]VISAYAN SURETY & INSURANCE CORPORATION, petitioner, vs. THE  HONORABLE  COURT  OF  APPEALS,   SPOUSES  JUN BARTOLOME+ and  SUSAN  BARTOLOME   and  DOMINADOR V. IBAJAN,+ respondents.D E C I S I O NPARDO, J.:The CaseThe case is a petition to review and set aside a decision [1] of  the Court  of  Appeals  affirming  that of the Regional Trial Court, Biñan, Laguna, Branch 24, holding the surety liable to the intervenor in lieu of the principal on a replevin bond.The FactsThe facts, as found by the Court of Appeals,[2] are as follows:On February 2, 1993, the spouses Danilo Ibajan and Mila Ambe Ibajan filed with the Regional Trial Court, Laguna, Biñan a complaint against spouses Jun and Susan Bartolome, for replevin to recover from them the

possession of an Isuzu jeepney, with damages.  Plaintiffs Ibajan alleged that they were the owners of an Isuzu jeepney which was forcibly and unlawfully taken by defendants Jun and Susan Bartolome on December 8, 1992, while parked at their residence.On February 8, 1993, plaintiffs filed a replevin bond through petitioner Visayan Surety & Insurance Corporation.  The contract of surety provided thus:“WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN SURETY & INSURANCE CORP., of Cebu, Cebu, with branch office at Manila, jointly and severally bind ourselves in the sum of Three Hundred Thousand Pesos (P300,000.00) for the return of the property to the defendant, if the return thereof be adjudged, and for the payment to the defendant of such sum as he/she may recover from the plaintiff in the action.”[3]

On February 8, 1993, the trial court granted issuance of a writ of replevin directing the sheriff to take the Isuzu jeepney into his custody. Consequently, on February 22, 1993, Sheriff Arnel Magat seized the subject vehicle and turned over the same to plaintiff spouses Ibajan.[4]

On February 15, 1993, the spouses Bartolome filed with the trial court a motion to quash the writ of replevin and to order the return of the jeepney to them.On May 3, 1993, Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court a motion for leave of court to intervene, stating that he has a right superior to the plaintiffs over the ownership and possession of the subject vehicle.On June 1, 1993, the trial court granted the motion to intervene.On August 8, 1993, the trial court issued an order granting the motion to quash the writ of replevin and ordering plaintiff Mila Ibajan to return the subject jeepney to the intervenor Dominador Ibajan.[5]

 On August 31, 1993, the trial court ordered the issuance of a writ of replevin directing the sheriff to take into his custody the subject motor vehicle and to deliver the same to the intervenor who was the registered owner.[6]

On September 1, 1993, the trial court issued a writ of replevin in favor of intervenor Dominador Ibajan but it was returned unsatisfied.On March 7, 1994, intervenor Dominador Ibajan filed with the trial court a motion/application for judgment against plaintiffs’ bond.On June 6, 1994, the trial court rendered judgement the dispositive portion of which reads:“WHEREFORE, in the light of the foregoing premises, judgment is hereby rendered in favor of Dominador Ibajan and against Mila Ibajan and the Visayan Surety and Insurance Corporation ordering them to pay the former jointly and severally the value of the subject jeepney in the amount of P150,000.00 and such other damages as may be proved by Dominador Ibajan plus costs.”[7]

On June 28, 1994, Visayan Surety and Insurance Corporation and Mila Ibajan filed with the trial court their respective motions for reconsideration.On August 16, 1994, the trial court denied both motions.On November 24, 1995, Visayan Surety and Insurance Corporation (hereafter Visayan Surety) appealed the decision to the Court of Appeals.[8]

On August 30, 1996, the Court of Appeals promulgated its decision affirming the judgment of the trial court.[9] On September 19, 1996, petitioner filed a motion for reconsideration.[10] On December 2, 1996, the Court of Appeals denied the motion for reconsideration for lack of merit.[11]

Hence, this petition.[12]

The IssueThe issue in this case is whether the surety is liable to an intervenor on a replevin bond posted by petitioner in favor of respondents.[13]

Respondent Dominador Ibajan asserts that as intervenor, he assumed the personality of the original defendants in relation to the plaintiffs’ bond for the issuance of a writ of replevin.Petitioner Visayan Surety contends that it is not liable to the intervenor, Dominador Ibajan, because the intervention of the intervenor makes him a party to the suit, but not a beneficiary to the plaintiffs’ bond.  The intervenor was not a party to the contract of surety, hence, he was not bound by the contract.The Court’s RulingThe petition is meritorious.An intervenor is a person, not originally impleaded in a proceeding, who has legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof.[14]

May an intervenor be considered a party to a contract of surety which he did not sign and which was executed by plaintiffs and defendants?

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It is a basic principle in law that contracts can bind only the parties who had entered into it; it cannot favor or prejudice a third person.[15] Contracts take effect between the parties, their assigns, and heirs, except in cases where the rights and  obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.[16]

A contract of surety is an agreement where a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third person called the obligee.[17] Specifically, suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal.[18]

The obligation of a surety cannot be extended by implication beyond its specified limits.[19] “When a surety executes a bond, it does not guarantee that the plaintiff’s cause of action is meritorious, and that it will be responsible for all the costs that may be adjudicated against its principal in case the action fails. The extent of a surety’s liability is determined only by the clause of the contract of suretyship.” [20] A contract of surety is not presumed; it cannot extend to more than what is stipulated.[21]

Since the obligation of the surety cannot be extended by implication, it follows that the surety cannot be held liable to the intervenor when the relationship and obligation of the surety is limited to the defendants specified in the contract of surety.WHEREFORE, the Court REVERSES and sets aside the decision of the Court of Appeals in CA-G. R. CV No. 49094.  The Court rules that petitioner Visayan Surety & Insurance Corporation is not liable under the replevin bond to the intervenor, respondent Dominador V. Ibajan.No costs.SO ORDERED.

G.R. No. 179628               January 16, 2013THE MANILA INSURANCE COMPANY, INC., Petitioner, vs.SPOUSES ROBERTO and AIDA AMURAO, Respondents.D E C I S I O NDEL CASTILLO, J.:The jurisdiction of the Construction Industry Arbitration Commission (CIAC) is conferred by law. Section 41 of Executive Order (E.O.) No. I 008, otherwise known as the Construction Industry Arbitration Law, "is broad enough to cover any dispute arising from, or connected with construction contracts, whether these involve mere contractual money claims or execution of the works."2

This Petition for Review on Certiorari3 under Rule 45 of the Rules of Court assails the Decision4 dated June 7, 2007 and the Resolution5 dated September 7, 2007 of the Court of Appeals (CA) in CA-G.R. SP No. 96815.Factual AntecedentsOn March 7, 2000, respondent-spouses Roberto and Aida Amurao entered into a Construction Contract Agreement (CCA)6 with Aegean Construction and Development Corporation (Aegean) for the construction of a six-storey commercial building in Tomas Morato corner E. Rodriguez Avenue, Quezon City.7 To guarantee its full and faithful compliance with the terms and conditions of the CCA, Aegean posted performance bonds secured by petitioner The Manila Insurance Company, Inc.8 (petitioner) and Intra Strata Assurance Corporation (Intra Strata).9

On November 15, 2001, due to the failure of Aegean to complete the project, respondent spouses filed with the Regional Trial Court (RTC) of Quezon City, Branch 217, a Complaint,10 docketed as Civil Case No. Q-01-45573, against petitioner and Intra Strata to collect on the performance bonds they issued in the amounts ofP2,760,000.00 and P4,440,000.00, respectively.11

Intra Strata, for its part, filed an Answer12 and later, a Motion to Admit Third Party Complaint,13 with attached Third Party Complaint14 against Aegean, Ronald D. Nicdao, and Arnel A. Mariano.Petitioner, on the other hand, filed a Motion to Dismiss15 on the grounds that the Complaint states no cause of action16 and that the filing of the Complaint is premature due to the failure of respondent-spouses to implead the principal contractor, Aegean.17 The RTC, however, denied the motion in an Order18 dated May 8, 2002. Thus, petitioner filed an Answer with Counterclaim and Cross-claim,19 followed by a Third Party Complaint20 against Aegean and spouses Ronald and Susana Nicdao.During the pre-trial, petitioner and Intra Strata discovered that the CCA entered into by respondent-spouses and Aegean contained an arbitration clause.21

Hence, they filed separate Motions to Dismiss22 on the grounds of lack of cause of action and lack of jurisdiction.Ruling of the Regional Trial Court

On May 5, 2006, the RTC denied both motions.23 Petitioner and Intra Strata separately moved for reconsideration but their motions were denied by the RTC in its subsequent Order24 dated September 11, 2006.Aggrieved, petitioner elevated the case to the CA by way of special civil action for certiorari.25

Ruling of the Court of AppealsOn June 7, 2007, the CA rendered a Decision26 dismissing the petition. The CA ruled that the presence of an arbitration clause in the CCA does not merit a dismissal of the case because under the CCA, it is only when there are differences in the interpretation of Article I of the construction agreement that the parties can resort to arbitration.27 The CA also found no grave abuse of discretion on the part of the RTC when it disregarded the fact that the CCA was not yet signed at the time petitioner issued the performance bond on February 29, 2000.28 The CA explained that the performance bond was intended to be coterminous with the construction of the building.29 It pointed out that "if the delivery of the original contract is contemporaneous with the delivery of the surety’s obligation, each contract becomes completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one."30 The CA likewise said that, although the contract of surety is only an accessory to the principal contract, the surety’s liability is direct, primary and absolute.31 Thus:WHEREFORE, we resolve to DISMISS the petition as we find that no grave abuse of discretion attended the issuance of the order of the public respondent denying the petitioner’s motion to dismiss.IT IS SO ORDERED.32

Petitioner moved for reconsideration but the CA denied the same in a Resolution33 dated September 7, 2007.IssuesHence, this petition raising the following issues:A.THE HONORABLE CA ERRED WHEN IT HELD THAT IT IS ONLY WHEN THERE ARE DIFFERENCES IN THE INTERPRETATION OF ARTICLE I OF THE CONSTRUCTION AGREEMENT THAT THE PARTIES MAY RESORT TO ARBITRATION BY THE CIAC.B.THE HONORABLE CA ERRED IN TREATING PETITIONER AS A SOLIDARY DEBTOR INSTEAD OF A SOLIDARY GUARANTOR.C.THE HONORABLE [CA] OVERLOOKED AND FAILED TO CONSIDER THE FACT THAT THERE WAS NO ACTUAL AND EXISTING CONSTRUCTION AGREEMENT AT THE TIME THE MANILA INSURANCE BOND NO. G (13) 2082 WAS ISSUED ON FEBRUARY 29, 2000.34

Petitioner’s ArgumentsPetitioner contends that the CA erred in ruling that the parties may resort to arbitration only when there is difference in the interpretation of the contract documents stated in Article I of the CCA.35 Petitioner insists that under Section 4 of E.O. No. 1008, it is the CIAC that has original and exclusive jurisdiction over construction disputes, such as the instant case.36

Petitioner likewise imputes error on the part of the CA in treating petitioner as a solidary debtor instead of a solidary guarantor.37 Petitioner argues that while a surety is bound solidarily with the obligor, this does not make the surety a solidary co-debtor.38 A surety or guarantor is liable only if the debtor is himself liable.39 In this case, since respondent-spouses and Aegean agreed to submit any dispute for arbitration before the CIAC, it is imperative that the dispute between respondent-spouses and Aegean must first be referred to arbitration in order to establish the liability of Aegean.40 In other words, unless the liability of Aegean is determined, the filing of the instant case is premature.41

Finally, petitioner puts in issue the fact that the performance bond was issued prior to the execution of the CCA.42Petitioner claims that since there was no existing contract at the time the performance bond was executed, respondent-spouses have no cause of action against petitioner.43 Thus, the complaint should be dismissed.44

Respondent spouses’ ArgumentsRespondent-spouses, on the other hand, maintain that the CIAC has no jurisdiction over the case because there is no ambiguity in the provisions of the CCA.45 Besides, petitioner is not a party to the CCA.46 Hence, it cannot invoke Article XVII of the CCA, which provides for arbitration proceedings.47 Respondent-spouses also insist that petitioner as a surety is directly and equally bound with the principal.48 The fact that the performance bond was issued prior to the execution of the CCA also does not affect the latter’s validity because the performance bond is coterminous with the construction of the building.49

Our RulingThe petition has merit.

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Nature of the liability of the suretyA contract of suretyship is defined as "an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206."50 We have consistently held that a surety’s liability is joint and several, limited to the amount of the bond, and determined strictly by the terms of contract of suretyship in relation to the principal contract between the obligor and the obligee.51 It bears stressing, however, that although the contract of suretyship is secondary to the principal contract, the surety’s liability to the obligee is nevertheless direct, primary, and absolute.52

In this case, respondent-spouses (obligee) filed with the RTC a Complaint against petitioner (surety) to collect on the performance bond it issued. Petitioner, however, seeks the dismissal of the Complaint on the grounds of lack of cause of action and lack of jurisdiction.The respondent-spouses have cause of action against the petitioner; the performance bond is coterminous with the CCAPetitioner claims that respondent-spouses have no cause of action against it because at the time it issued the performance bond, the CCA was not yet signed by respondent-spouses and Aegean.We do not agree.A careful reading of the Performance Bond reveals that the "bond is coterminous with the final acceptance of the project."53 Thus, the fact that it was issued prior to the execution of the CCA does not affect its validity or effectivity.But while there is a cause of action against petitioner, the complaint must still be dismissed for lack of jurisdiction.The CIAC has jurisdiction over the caseSection 4 of E.O. No. 1008 provides that:SEC. 4. Jurisdiction. – The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration.The jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship, violation of the terms of agreement, interpretation and/or application of contractual time and delays, maintenance and defects, payment, default of employer or contractor, and changes in contract cost.Excluded from the coverage of the law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines.Based on the foregoing, in order for the CIAC to acquire jurisdiction two requisites must concur: "first, the dispute must be somehow connected to a construction contract; and second, the parties must have agreed to submit the dispute to arbitration proceedings."54

In this case, both requisites are present.The parties agreed to submit to arbitration proceedings "any dispute arising in the course of the execution and performance of the CCA by reason of difference in interpretation of the Contract Documents x x x which the parties are unable to resolve amicably between themselves."55 Article XVII of the CCA reads:ARTICLE XVII – ARBITRATION17.1 Any dispute arising in the course of the execution and performance of this Agreement by reason of difference in interpretation of the Contract Documents set forth in Article I which the OWNER and the CONTRACTOR are unable to resolve amicably between themselves shall be submitted by either party to a board of arbitrators composed of Three (3) members chosen as follows: One (1) member shall be chosen by the CONTRACTOR AND One (1) member shall be chosen by the OWNER. The said Two (2) members, in turn, shall select a third member acceptable to both of them. The decision of the Board of Arbitrators shall be rendered within Ten (10) days from the first meeting of the board, which decision when reached through the affirmative vote of at least Two (2) members of the board shall be final and binding upon the OWNER and CONTRACTOR.1âwphi117.2 Matters not otherwise provided for in this Contract or by Special Agreement of the parties shall be governed by the provisions of the Arbitration Law, Executive Order No. 1008.56

In William Golangco Construction Corporation v. Ray Burton Development Corporation,57 we declared that monetary claims under a construction contract are disputes arising from "differences in interpretation of the contract" because "the matter of ascertaining the

duties and obligations of the parties under their contract all involve interpretation of the provisions of the contract."58 Following our reasoning in that case, we find that the issue of whether respondent-spouses are entitled to collect on the performance bond issued by petitioner is a "dispute arising in the course of the execution and performance of the CCA by reason of difference in the interpretation of the contract documents."The fact that petitioner is not a party to the CCA cannot remove the dispute from the jurisdiction of the CIAC because the issue of whether respondent-spouses are entitled to collect on the performance bond, as we have said, is a dispute arising from or connected to the CCA.In fact, in Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc.,59 we rejected the argument that the jurisdiction of CIAC is limited to the construction industry, and thus, cannot extend to surety contracts. In that case, we declared that "although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal. The Performance Bond is significantly and substantially connected to the construction contract that there can be no doubt it is the CIAC, under Section 4 of E.O. No. 1008, which has jurisdiction over any dispute arising from or connected with it."60

In view of the foregoing, we agree with the petitioner that juriisdiction over the instant case lies with the CIAC, and not with the RTC. Thus, the Complaint filed by respondent-spouses with the RTC must be dismissed.WHEREFORE, the petition is hereby GRANTED. The Decision dated June 7, 2007 and the Resolution dated September 7, 2007 of the Court of Appeals in CA-G.R. SP No. 96815 are hereby ANNULLED and SET ASIDE. The Presiding Judge of the Regional Trial Court of Quezon City, Branch 217 1s DIRECTED to dismiss Civil Case No. Q-01-45573 for lack of jurisdiction.SO ORDERED.Footnotes* Per raffle dated January 14.2013.** Per Special Order No. 1408 dated January 15, 2013.1 SEC. 4. Jurisdiction. -The ClAC shall have original and exclusive jurisdiction over disputes arising from. or connected with. contracts entered into by parties involved in construction in the Philippines. whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction. the parties to a dispute must agree to submit the same to voluntary arbitration.The jurisdiction of the ClAC may include but is not limited to violation of specifications for materials and workmanship. violation of the terms of agreement, interpretation and/or application of contractual time and delays. maintenance and defects. payment. default of employer or contractor, and changes in contract cost.Excluded from the coverage of this law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines.2 LICOMCEN, lncorporated v. Foundation Specialists, Inc., G.R. Nos. 167022 and 169678. April 4, 2011, 647 SCRA 83, 91.3 Rollo, pp. 13-37.4 Id. at 39-47; penned by Associate Justice Apolinario D. Bruselas, Jr. and concurred in by Associate Justices Bienvenido L. Reyes (now a member of this Court) and Aurora Santiago-Lagman.

G.R. No. 126490 March 31, 1998ESTRELLA PALMARES, petitioner, vs.COURT OF APPEALS and M.B. LENDING CORPORATION, respondents. 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 Osmeña 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

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a balance of P13,700.00. No payments were made after the last payment on September 26, 1991. 2

Consequently, on the basis of petitioner's 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 Osmeña and Merlyn Azarraga who are primarily liable on the instrument.  6 This was based on the findings of the court a 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 person's secondary liability on the instrument; 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. Attorney's 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-maker's 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 surety 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 WELLI, 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 petitioner's 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

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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 petitioner's 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. Petitioner's 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 principal's 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 corporation's 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 debtor's 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 determining whether a party's 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 petitioner's 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, 26and 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 petitioner's 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 petitioner's 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

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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 principal's 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 principal's default and to perform the obligation. He cannot complain that the creditor has not notifiedhim 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 principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account.  36 The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default. 37 As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal. 38

Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety. We disagree.A creditor's right to proceed against the surety exists independently of his right to proceed against the principal. 39Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. 40 Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. 41 Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. 42

We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-visthe surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's mere statement that the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The consequences of the delay, such as the subsequent insolvency of the principal, 46 or the fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47

The raison d'être for the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. 49

It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety. 50 In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the

surety or with a reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt. 51

None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve here in petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor, 52 herein respondent corporation, failing in which we cannot grant the relief prayed for.As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate. The statement, likewise traversed by said respondent, is misleading.In an affidavit 53 executed by petitioner, which was attached to her petition, she stated, among others, that:8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been released and that she has not paid the same upon its maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed.9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña Azarraga. At the same time, I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmeña Azarraga. Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmeña Azarraga.10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmeña Azarraga, together with interest and penalties thereon, has not been paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that they are not interested in real estate.11. In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount of P30,000.00.12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory.1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay.2. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due.  54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object of the obligation would constitute novation requiring the express consent of the parties. 55

3. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless the

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thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.  56 In other words, the prestation must be fulfilled completely. A person entering into a contract has a right to insist on its performance in all particulars. 57

Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their contract.This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine.In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization:Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3 %) per month on total amount due but unpaid should be equitably reduced. The purpose for which the penalty interest is intended — that is, to punish the obligor — will have been sufficiently served by the effects of compounded interest. Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether. 59

Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy.  61 The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this case. 62

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.SO ORDERED.

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