Topic: Guaranty and Suretyship (Definition)
Case title: Machetti vs. Hospicio De San Jose, April 10, 1992
G.R. No. L-16666
Summary: In 1916, Romulo Machetti agreed to construct a building in Manila for the Hospicio de
San Jose, backed by a guarantee from the Fidelity and Surety Company. As the construction
progressed, payments were made until issues arose regarding the work quality. Machetti sued
for the unpaid balance; however, he was later declared insolvent, pausing the proceedings. The
Hospicio de San Jose then sought action against the Fidelity and Surety Company, bypassing
Machetti. The court ruled that the case against the guarantor couldn't proceed while the principal
was suspended. The agreement was identified as a guaranty, not a suretyship, meaning the
guarantor was liable only if Machetti couldn't pay. The court reversed the judgment, stating that
until it's proven Machetti can't pay, the guarantor couldn't be compelled to do so, suggesting the
Hospicio de San Jose should first exhaust its remedies against Machetti before pursuing the
guarantor further.
Facts: Romulo Machetti agreed to build for Hospicio de San Jose at P64,000 with a Fidelity and
Surety Company guarantee of P128,800. Payments were made until P4,978.08 remained due to
work issues. Hospicio counterclaimed for damages of P71,350. Machetti's insolvency paused the
case. Hospicio shifted the case against Fidelity and Surety Company, seeking P12,800 based on
the guarantee. Courts ruled for Hospicio, leading to Fidelity and Surety Company appealing,
flipping the initial parties involved, mostly excluding Machetti from the proceedings.
Issue/s: Whether or not Fidelity and Surety Company is obligated to make payment to Hospicio
based on the conditions outlined in the guarantee.
Ruling: No, Hospicio must proceed first against Machetti. While a surety undertakes to pay if the
principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The
one is the insurer of the debt (surety), the other an insurer of the solvency of the debtor
(guarantor). In English the term "guarantor" implies an undertaking of guaranty, as distinguished
from suretyship. Although in the use of the words "guarantee" or "guaranty" circumstances may
be shown which convert the contract into one of suretyship but such circumstances do not exist
in the present case. The undertaking is perhaps not exactly that of a fianza under the Civil Code,
but is a perfectly valid contract and must be given the legal effect if ordinarily carries.
The Surety Company endorsed a written contract for building construction between Machetti and
the Hospicio de San Jose, guaranteeing compliance with its terms. The court affirmed that the
endorsement implied a guaranty, not a suretyship or solidary obligation, and must be interpreted
accordingly in the language it was written. The distinction between a guarantor and a surety lies
in their roles: a guarantor ensures the debtor's solvency, while a surety insures the debt itself. A
guarantor commits to pay if the principal cannot, whereas a surety pledges payment if the principal
defaults.The liability of a guarantor necessitates proof of the principal's inability to pay. Mere
insolvency of the principal, as per the current Insolvency Law, doesn't automatically establish this
inability. The guarantor can't be compelled to pay until it's demonstrated that the principal is truly
incapable, a determination typically made during the final settlement of the principal's estate in
insolvency proceedings.
The Fidelity and Surety Company having bound itself to pay only the event its principal, Machetti,
cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to
pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means,
but is not sufficiently established by the mere fact that he has been declared insolvent in
insolvency proceedings, in which the extent of the insolvent's inability to pay is not determined
until the final liquidation of his estate.
Topic: Guaranty and Suretyship (Definition)
Case title: Castellvi De Higgins vs. Sellner, November 5, 1920
G.R. No. L-158025
Summary:
Facts:
Issue/s:
Ruling:
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: Severino vs. Severino, September 24, 1931
G.R. No. 34642
Summary:
Facts: After Melencio Severion's passing, a dispute arose among his heirs—his son Guillermo,
widow Felicitas, daughter Fabiola, and others—regarding his substantial estate. A settlement was
reached wherein Guillermo assumed control of Melencio's estate, agreeing to pay Fabiola
P100,000. This involved an initial payment of P40,000 upon the compromise's signing, followed
by the remainder in three equal parts. Enrique Echause acted as a guarantor by endorsing the
agreement. When Guillermo defaulted on the remaining payments, Fabiola sued both Guillermo
and Enrique. Enrique argued that he received no benefit from signing as a guarantor, claiming a
lack of consideration regarding his involvement in the contract.
Issue/s: Whether or not Enrique bear responsibility for Guillermo's debt if there's no apparent
consideration for the guarantee.
Ruling: Yes. A guarantor or surety is held to the same terms that validate a contract between the
primary involved parties. In legal terms, the compromise and dismissal of a lawsuit stand as
valuable considerations. The dismissal of the lawsuit filed by Felicitas Villanueva and Fabiola
Severino against Guillermo Severino suffices as valid consideration for Guillermo's commitment
to pay the specified amount outlined in the contract in question. Thus, the promise made by the
appellant Echaus as a guarantor is binding. It's not a requirement for the guarantor or surety to
directly receive any benefits that the principal gains. In this case, the actual consideration for this
contract was the loss suffered by the plaintiffs in dismissing their previous legal action, and it's
irrelevant whether there was a benefit to either the principal or the guarantor.
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: Wise & Co., Inc. vs. Tanglao, August 29, 1936
G.R. No. L-42518
Summary:
Facts: Wise & Co. initiated a lawsuit against its agent, Cornelio C. David, seeking the recovery
of a specific amount. Initially, Wise secured a preliminary attachment on David's property. To
circumvent this attachment, David arranged for his Attorney Tanglao to execute a power of
attorney, where Tanglao acted as a guarantor for David's debt to Wise & Company, and also
pledged his property as security. Following a compromise, David committed to paying the owed
amount in installments, securing it with certain properties. However, David managed to only pay
P343.47 to Wise & Co., leaving an outstanding balance of P296.53, prompting Wise & Co. to
bring a case against Tanglao to recover this remaining sum. The trial court ruled in favor of Wise
& Co., leading to this petition.
Issue/s: Whether or not Wise & Co. possesses the legal basis to pursue a claim against Attorney
Tanglao for the retrieval of the remaining balance owed by David.
Ruling: No. According to the Special Power of Attorney (SPA), Tanglao only authorized David to
engage in a suretyship contract and to mortgage a specified property with Wise & Co. However,
David solely utilized this SPA to mortgage the property and didn’t pursue the suretyship contract.
Moreover, the compromise agreement doesn’t indicate Tanglao's role as David's surety. As per
the law, a suretyship contract must be explicitly stated and cannot be assumed. Even if Tanglao
were to be considered a surety under the compromise agreement, the legal action against him
isn’t yet applicable because all available legal remedies against the debtor haven’t been
exhausted. Wise & Co. holds a judgment in its favor against debtor David for the debt payment,
and there's no evidence of seeking execution of this judgment. The compromise agreement
highlights that David possesses two properties, the combined value of which exceeds the balance
of the debt sought from Tanglao in his alleged capacity as a surety.
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: Manila Surety & Fidelity vs. Almeda, July 31, 1970
G.R. No. L-27249
Summary:
Facts: Noemi Almeda, married to Generoso Esquillo, who owns Almeda Trading, entered a credit
purchase agreement with the National Marketing Corporation (NAMARCO), where payments
were due within 30 days from the delivery dates. To comply with NAMARCO's requirement,
Almeda secured a P5,000 bond from the Manila Surety & Fidelity Co., Inc., ensuring compliance
with the contract terms. Later, an updated agreement included a new P5,000 bond, also
guaranteed by Manila Surety & Fidelity Co., Inc., and contained a provision stating that the surety
would pay any overdue accounts to NAMARCO upon demand if the principal's account was not
settled on time. Subsequently, Generoso Esquillo filed for voluntary insolvency and was declared
insolvent by the court. NAMARCO requested Almeda Trading to settle their outstanding accounts,
while Manila Surety urged Almeda to clear their unsettled accounts with NAMARCO. Manila
Surety then sued Noemi Almeda, Generoso Esquillo, and NAMARCO, seeking release from
liability under the bonds, citing the spouses' insolvency and NAMARCO's rescission of their
agreement, which NAMARCO denied. The trial court upheld NAMARCO's argument that the
principal debtor's insolvency did not absolve the surety's liability under the bond. The complaint
was dismissed, and Manila Surety was instructed to pay the spouses' debt to NAMARCO to the
extent of its commitment, along with legal fees and expenses. Hence, this appeal.
Issue/s: Whether or not the surety remains obligated to the creditor under the bond even if the
debtor-principal becomes insolvent.
Ruling: Yes. Under the bonds provided to NAMARCO, Manila Surety committed to immediately
settle any overdue accounts of the debtor-principal, bypassing the need for a demand or notice
of non-payment. This agreement established Manila Surety as directly liable to the creditor,
without the requirement of exhausting the debtor's assets, and this responsibility persisted until
the debt was completely paid. Essentially, Manila Surety didn't just guarantee the debtor's
payment, but took on the responsibility of paying the debts themselves. While Civil Code
provisions could potentially allow Manila Surety to seek release through legal means due to the
debtor's recognized insolvency, the law specifies that the guarantor's action for release can only
be pursued against the principal debtor, not the creditor. The law doesn't grant a cause of action
against the creditor for release of the guaranty before the debt is settled, as the creditor isn't
obliged to release the guaranty without their consent, which would require a remission or a
novation by subrogation—both necessitating the creditor's agreement for validity. In the event the
debtor cannot fully pay, the release of the guarantor can only happen with the creditor's consent,
either through accepting an equally secure guarantee or by counter-guarantee. Although
NAMARCO's claim was registered in the insolvency proceeding, Manila Surety cannot rely on this
as grounds for release from its commitment. Despite the debtor-principal's potential discharge
from obligations in the insolvency case, it wouldn't relieve the surety of its liability under the
agreement. Even if the current action seeks substitution of the suretyship with alternative security,
the circumstances make it challenging for the debtor-principal, with impounded assets, to acquire
other securities to replace the surety. Ultimately, given these circumstances, the current action
appears likely to be futile.
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: RCBC vs. Arro, July 30, 1982
G.R. No. L-49401
Summary:
Facts: Residoro Chua and Enrique Go, Sr. signed an extensive surety agreement to guarantee
the existing debts of Davao Agricultural Industries Corporation (DAICOR) and any future loans,
with a limit not exceeding an aggregate principal sum of P100,000. A promissory note worth
P100,000 was issued to RCBC, signed by Enrique Go, Sr. personally and on behalf of DAICOR.
Despite repeated demands, the promissory note remained unpaid, leading RCBC to file a
complaint against DAICOR, Enrique Go, Sr., and Residoro Chua. Chua filed a motion to dismiss,
arguing that he couldn't be held accountable since only Enrique Go, Sr. signed the promissory
note on behalf of DAICOR and personally. RCBC contended that, based on the comprehensive
surety agreement, Chua is liable because it extends beyond the specific promissory note in
question, continuing to cover any debts DAICOR might incur with the bank over time. The trial
court granted Chua's motion to dismiss the complaint.
Issue/s: Whether or not Chua is obligated to fulfill the obligation indicated in the unsigned
promissory note, considering the terms of the comprehensive surety agreement previously signed
by Chua and Go, wherein they bound themselves jointly responsible, not only for existing debts
but also for future ones of the corporation.
Ruling: Yes. Residoro Chua and Enrique Go, Sr., respectively the President and General
Manager of DAICOR, jointly signed a comprehensive surety agreement. This agreement aimed
to cover both current and potential future obligations that DAICOR might undertake with RCBC,
with the limitation that their liability wouldn't exceed P100,000 at any given time. The agreement's
purpose was evidently to persuade RCBC to approve any loan applications DAICOR might seek
from the bank. This guarantee was ongoing and would persist until RCBC received notice of its
termination. The earlier signed surety agreement by Enrique Go, Sr. and RCBC was a subsidiary
obligation, contingent on a primary one—specifically, the loan obtained by DAICOR as
represented by a promissory note. RCBC's decision to grant the loan was clearly influenced by
the surety agreement in which Go and Chua solidly committed themselves to ensuring the timely
repayment of the loan. The terms of the surety agreement explicitly show that it was designed to
secure future debts that DAICOR might accrue with RCBC, a practice allowed by the Civil Code.
Therefore, Article 2053 of the Civil Code allows for a guaranty to be provided as security for future
debts whose precise amounts are yet to be determined. No claim can be made against the
guarantor until the debt is settled, and a conditional obligation can also be secured in this manner.
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: South City Homes Inc., vs. BA Finance Corp.
G.R. No. 135462
Summary:
Facts: Joseph L. G. Chua, as President of Fortune Motors Corporation, initially signed a
Continuing Suretyship Agreement with BA Finance Corporation. This agreement involved an
unconditional joint and several guarantee for the complete and timely settlement of all debts owed
by Fortune Motors Corporation to BA Finance Corporation. Subsequently, Palawan Lumber
Manufacturing Corporation, represented by Joseph L. G. Chua among others, and South City
Homes, Inc., represented by different individuals, also entered similar Continuing Suretyship
Agreements with BA Finance Corporation, sharing comparable terms of joint and several
unconditional guarantees for Fortune Motors Corporation's debts to BA Finance Corporation.
Fortune Motors Corporation engaged in trust receipt agreements with Canlubang Automotive
Resources Corporation (CARCO), agreeing to remit proceeds from vehicle sales and surrender
unsold vehicles. When Fortune Motors Corporation failed to fulfill these obligations, BA Finance
Corporation demanded payment from the individuals and corporations involved. CARCO then
filed a lawsuit seeking payment for the delivered vehicles. The trial court ruled in favor of CARCO,
demanding payment from Palawan Lumber Manufacturing Corporation and Joseph L. G. Chua.
However, it dismissed the complaint against South City Homes, Aurelio Tablante, Joselito
Baltazar, George Tan, and Edgar Rodrigueza. On appeal, the Court of Appeals modified the trial
court's decision, directing South City Homes, together with Fortune Motors Corporation, Palawan
Lumber Manufacturing Corporation, and Joseph L. G. Chua, to jointly and severally settle the
outstanding amounts from the six drafts and trust receipts, along with accruing interest at the legal
rate until the full payment of these amounts.
Issue/s: (1) Whether or not the suretyship agreement is legally binding even if there was no
primary obligation in place at the time of its signing; and (2) Whether or not the BA Finance
Corporation has a legitimate claim for a sum of money based on the transactions involving drafts
and trust receipts, considering there was no request from BA Finance Corporation to Fortune
Motors Corporation for the return of the unsold vehicles.
Ruling:
1. Yes, according to the Civil Code, a suretyship agreement is permitted to secure future debts,
even if the specific amount is not yet determined. Article 2053 of the Civil Code explicitly states:
"Art. 2053. A guaranty may also be given as security for future debts, the amount of which is not
yet known."
2. No, in cases of default by the entrustee in a trust receipt agreement, it's not mandatory for the
entruster to cancel the trust and take possession of the goods to enforce their rights under the
agreement. The law provides discretion to the entruster, using the word "may," granting them the
right to cancel the trust and seize the goods. Consequently, the entruster has the choice to
exercise this right or pursue alternative actions such as a third-party claim or a separate civil
action, whenever the entrustee defaults or fails to comply with the terms of the trust agreement.
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: National Marketing Corporation vs. Marquez, January 31, 1969
G.R. No. 25553
Summary:
Facts: Defendant Marquez obtained a tractor and rice thresher from the Philippine Relief and
Trade Rehabilitation Administration (PRATRA) valued at P20,000. He paid only P8,000 as a down
payment, leaving a balance of P12,000. Simultaneously, Marquez signed a promissory note
committing to pay this balance in installments, with a clause stipulating that failure to meet these
payments would result in an extra 10% of the total amount due as attorney's fees. To ensure
fulfillment of this commitment, Marquez and Plaridel Surety & Insurance Company executed a
guaranty bond in favor of PRATRA, jointly and severally binding themselves to pay the P12,000.
The surety agreed to immediate, direct liability without needing payment demand or notice of nonpayment, explicitly waiving any right to such notifications. Despite initial partial payments,
Marquez defaulted, resulting in a total amount due to PRATRA of P19,990.91, encompassing
principal and accrued interest. Despite multiple demands, both Marquez and Plaridel Surety &
Insurance Company failed to settle their outstanding obligation. Consequently, NAMARCO filed
a claim that was upheld by the trial court. Plaridel Surety contested this decision, arguing they
never received a payment demand from the plaintiff and that the demand made on the principal
debtor did not extend to the surety.
Issue/s: (1) Whether or not the surety is entitled to prior demand to be liable; and (2)
Whether the surety's liability can exceed the debt of the principal.
Ruling:
1. No, the argument doesn't hold. The appellant's liability was clearly outlined as joint and several
in the guaranty bond, and the document explicitly states the waiver of rights to demand payment
and notice of non-payment.
2. Yes, the judgment aligns with the surety's obligations. The court's decision only amounted to
P10,000 for the principal, while the remaining P9,990.91 accounted for moratory interest due to
the default in payment after the obligation matured. Plaridel Surety was aware of this interest as
it was tied to the original agreement. The guaranty contract doesn't exclude this interest, and
Article 2055, paragraph 2, of the Civil Code of the Philippines is applicable, including all
accessories to the principal obligation, such as judicial costs, for which the guarantor is only liable
post a judicial requirement for payment.
Topic: Guaranty and Suretyship (Nature, Characteristics, and Extent)
Case title: Estate of Hemady vs. Luzon Surety and Ins., November 18, 1956
G.R. No. L-8437
Summary:
Facts: The Luzon Surety Co. brought a claim against K. H. Hemady's Estate based on twenty
separate indemnity agreements, where Hemady had acted as a solidary guarantor alongside
distinct principals. These agreements were in consideration of Luzon Surety Co.'s guarantee for
various principals with different creditors. The claim sought allowance for the value of the twenty
bonds, unpaid premiums, and documentary stamps affixed to the bonds, plus 12 percent interest.
However, the trial court dismissed the claim against Hemady's Estate, stating that any losses
occurring after Hemady's death couldn't be attributed to his estate as he ceased to be a guarantor
upon his death.
Issue/s: Whether or not the death of the guarantor extinguishes the contract of the guaranty.
Ruling: No. In our legal system, contractual rights and obligations typically pass on to successors,
except when they're inherently non-transmissible, stipulated otherwise, or prohibited by law. The
liability from K. H. Hemady's surety contracts with Luzon Surety Co. doesn't lose transmissibility
due to the nature of the commitment, contractual terms, or legal provisions. Consequently, this
liability transfers to his heirs after his death. Hence, the contracts establish potential claims
against his estate. The Court determined that the guarantor's liability doesn't end with his death,
allowing Luzon Surety Co. to file a contingent claim for reimbursement against the estate.
Topic: Guaranty and Suretyship (Effects of Guaranty between Co-Guarantors)
Case title: Southern Motors, Inc. vs. Barbosa, May 25, 1956
G.R. No. -9036
Summary:
Facts: Southern Motors, Inc. sued Eliseo Barbosa to foreclose a real estate mortgage he made
in favor of Southern Motors, securing a debt owed by Alfredo Brillantes. The mortgage allowed
Southern Motors to foreclose the property if Brillantes failed to settle his debt. Barbosa claimed
to have acted as a guarantor for Brillantes and argued that Southern Motors didn't pursue all legal
avenues against the debtor as required by Article 2058 of the Civil Code. The Court of First
Instance and the Court of Appeals ruled in favor of Southern Motors. The Supreme Court also
upheld this decision, stating that Article 2058 was not applicable to this case.
Issue/s: Whether or not the mortgage in question could be foreclosed although Southern Motors
had not exhausted, and did not intend to exhaust, the properties of his principal debtor.
Ruling: Yes, creditor Southern Motors can foreclose guarantor Barbosa’s mortgage even though
the former had not yet exhausted or even intended to exhaust the properties of his principal
debtor, Alfredo Brillantes. The rights of guarantors under Article 2058 of the Civil Code, which
demands exhaustion of the property of the principal debtor, exists only when a pledge/mortgage
has not been given as special security for the payment of the principal obligation. Guarantees,
without any such pledge or mortgage are governed by Title XV [Guaranty] of the said Code, while
pledges & mortgages fall under Title XVI [Pledge, Mortgage and Antichresis] of the same Code.
Under Articles 2087 & 2126 of Title XVI [Pledge, Mortgage and Antichresis] which governs the
case at bar, when the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor; the mortgage directly &
immediately subjects the property upon which it is imposed whoever the possessor may be, to
the
fulfillment
of
the
obligation
for
whose
security
it
was
constituted.
Moreover, it has been held already in Saavedra v. Price that a mortgagor is not entitled to the
exhaustion of the property of the principal debtor. Although an ordinary personal guarantor—not
a mortgagor/pledgor—may demand the exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor who shall be entitled to a deferment of the execution of said
judgment against him until after the properties of the principal debtor shall have been exhausted
to satisfy the obligation involved in the case.
Topic: Guaranty and Suretyship (Effects of Guaranty between Co-Guarantors)
Case title: Central Surety and Insurance vs. Ubay, February 28, 1985
G.R. No. L-40334
Summary:
Facts:
Issue/s:
Ruling:
Topic: Guaranty and Suretyship (Effects of Guaranty between Co-Guarantors)
Case title: Manila Surety & Fidelity vs. Almeda, July 31, 1970
G.R. No. L-27249
Summary:
Facts:
Issue/s:
Ruling:
Topic: Guaranty and Suretyship (Effects of Guaranty between Co-Guarantors)
Case title: Associated Insurance & Surety Co., Inc. vs. Bacolod, February 28, 1959
G.R. No. I-12333
Summary:
Facts:
Issue/s:
Ruling: