Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 177240               September 8, 2010

PRUDENTIAL GUARANTEE AND ASSURANCE INC., Petitioner, vs.ANSCOR LAND, INC., Respondent.

D E C I S I O N

VILLARAMA, JR., J.:

This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assails the Decision1 dated April 28, 2006 of the Court of Appeals (CA) in CA-G.R. SP No. 72854 which modified the Decision2 promulgated on September 2, 2002 by the Construction Industry Arbitration Commission (CIAC) to the effect that herein petitioner Prudential Guarantee and Assurance Inc. (PGAI) was declared solidarily liable with its principal Kraft Realty and Development Corporation (KRDC) under the performance bond.

The facts follow.

On August 2, 2000, Anscor Land, Inc. (ALI) and KRDC entered into a Construction Contract3 for the construction of an 8-unit townhouse (project) located in Capitol Hills, Quezon City.

Under the contract, KRDC was to build and complete the project within 275 continuous calendar days from the date of receipt of a notice to proceed for the consideration of P18,800,000.00.

As part of its undertaking, KRDC submitted a surety bond amounting to P4,500,000.00 to secure the reimbursement of the down payment paid by ALI in case of failure to finish the project and a performance bond amounting to P4,700,000.00 to guarantee the supply of labor, materials, tools, equipment, and necessary supervision to complete the project. The said bonds were issued in favor of ALI by herein petitioner PGAI.

Under the Performance Bond,4 the parties agreed on a time-bar provision which states:

…Furthermore, it is hereby agreed and understood that PRUDENTIAL GUARANTEE AND ASSURANCE INC., shall not be liable for any claim not discovered and presented to the company within ten days from the expiration of this bond or from the occurrence of the default or failure of the principal, whichever is the earliest, and that the obligee hereby waives his right to file any claim against the Surety after the termination of the period of ten days above mentioned after which time this bond shall definitely terminate and be deemed absolutely cancelled.

KRDC then received a notice to proceed on November 24, 1999. On October 16, 2000 or 325 days after KRDC received the notice to proceed, and 50 days beyond the contract date of completion, ALI sent PGAI a letter5notifying the latter that the contract with KRDC was terminated due to "very serious delays". The letter also informed PGAI that ALI "may be making claims against the said bonds".

KRDC, through a letter on October 20, 2000, asked ALI to reconsider its decision to terminate the contract and requested that it be allowed to continue with the project. On October 27, 2000, ALI replied6 with regrets that it stands by its earlier decision to terminate the construction contract.

Through a letter7 dated November 29, 2001, or exactly one (1) year after the expiration date in the performance bond, ALI reiterated its claim against the performance bond issued by PGAI amounting to P3,852,800.84. PGAI however did not respond to the letter.

On February 7, 2002, ALI commenced arbitration proceedings against KRDC and PGAI in the CIAC. PGAI answered with cross-claim contending that it was not a party to the construction contract and that the claim of ALI against the bonds was filed beyond the expiration period.

On September 2, 2002, the CIAC rendered judgment8 awarding a total of P7,552,632.74 to ALI and a total ofP1,292,487.81 to KRDC. CIAC also allowed the offsetting of the awards to both parties which resulted to a net amount due to ALI of P6,260,144.93 to be paid by KRDC. Meanwhile, the CIAC found PGAI liable for the reimbursement of the unliquidated portion of the down payment as a solidary liability under the surety bond in the amount of P1,771,264.06.9

In the same judgment, the CIAC absolved PGAI from a claim against the performance bond. It reasoned that ALI belatedly filed its claim on the performance bond. The CIAC accepted the view that the November 29, 2001 letter of ALI to PGAI was the first and only claim on the performance bond, which was filed unquestionably beyond the allowed period for filing claims under the contract.

The CIAC ruled that the October 16, 2000 letter of ALI to PGAI did not constitute a proper "claim" under the performance bond. In so ruling, the CIAC relied on the tenor of the letter which used the phrase "may be making claims against the said bonds". The CIAC interpreted this phrase as tentative at best and far from a positive claim against PGAI. According to the CIAC, the letter merely informed PGAI of the termination of the construction contract between ALI and KRDC and in no sense did such letter present a valid claim against the performance bond issued by PGAI.

ALI then filed a petition for review on October 3, 200210 with the CA questioning the decision of the CIAC to release PGAI from its solidary liability on the performance bond.

The CA found the petition meritorious in its questioned Decision11 dated April 28, 2006, to wit:

WHEREFORE, the petition is GRANTED. The decretal portion of the decision is MODIFIED to the effect that PGAI is hereby pronounced solidarily liable with KRDC under the performance bond.

SO ORDERED.12

Petitioner PGAI now comes to this Court to seek relief.

Petitioner argues that the CIAC had no jurisdiction over the dispute as regards the claim of ALI against the performance bond because petitioner was not a party to the construction contract. It maintains that Executive Order (EO) No. 100813 did not vest jurisdiction on the CIAC to settle disputes between a party to a construction contract on one hand and a non-party on the other.

The petitioner contends that CIAC’s jurisdiction was limited to the construction industry and cannot extend to surety or guarantee contracts. By reason of the lack of jurisdiction of the CIAC over the dispute, the September 2, 2002 judgment14 of the CIAC was void with regard to the liability of PGAI.

As to the award made by the CIAC on ALI’s claims, petitioner maintains that it cannot be held liable under the performance bond because clearly, under the time-bar provision in the said bond, the claim made by ALI in its letter to PGAI dated November 29, 2001 was submitted one (1) year late. Petitioner points out that such letter was the first and only definite claim that ALI made against the performance bond and unfortunately, it was filed beyond the allowed period. Hence, the Decision of the CA declaring PGAI solidarily liable with KRDC under the performance bond is erroneous and should be struck down.

On the other hand, respondent avers that the construction contract itself provided that the performance and surety bond shall be deemed part of the construction contract, to wit:

Article 1CONTRACT DOCUMENTS

1.1 The following shall form part of this Contract and together with this Contract, are known as the "Contract Documents":

a. Bid Proposal

x x x x

d. Notice to proceed

x x x x

j. Appendices A & B (respectively, Surety Bond for Performance and, Supply of Materials by the Developer)15

By reason of this express provision in the construction contract, respondent maintains that petitioner PGAI became a party to such contract when it submitted its Surety and Performance bonds. Consequently, petitioner’s argument that CIAC has not acquired jurisdiction over PGAI because the latter was not a party to the construction contract, is untenable.

As to the alleged lack of jurisdiction of CIAC over the dispute arising from the surety contract, respondent cites EO No. 1008, which provides that any dispute connected with a construction contract comes within the original and exclusive jurisdiction of the CIAC. The surety bond being an integral part of the construction contract, it is necessarily connected thereto which brings it under the jurisdiction of the CIAC.

On the issue of timeliness of the "claim", respondent insists that its letter dated October 16, 2000 was for all intents and purposes a notification of termination of the construction contract and at the same time a notice to petitioner that respondent is in fact making a claim on the performance bond. Contrary to PGAI’s view that the November 29, 2001 letter was the first and only claim made, respondent asserts that the said letter was merely a reiteration of its earlier October 16, 2000 claim.

In fine, there are two (2) main issues for this Court to resolve, to wit:

I.

Whether or not the CIAC had jurisdiction over the dispute.

II.

Whether or not the respondent made its claim on the performance bond within the period allowed by the time-bar provision.

First Issue – Jurisdiction of the CIAC

Section 4 of EO No. 1008 defines the jurisdiction of the CIAC:

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 this law are disputes arising from employer-employee relationships which shall continue to be covered by the Labor Code of the Philippines. (Italics supplied.)

EO No. 1008 expressly vests in the CIAC original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties that have agreed to submit their dispute to voluntary arbitration. Under the aforequoted provision, it is apparent that a dispute must meet two (2) requirements in order to fall under the jurisdiction of the CIAC: 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.

As regards the first requirement, the Performance Bond issued by the petitioner was meant to guarantee the supply of labor, materials, tools, equipment, and necessary supervision to complete the project. A guarantee or a surety contract under Article 204716 of the Civil Code of the Philippines is an accessory contract because it is dependent for its existence upon the principal obligation guaranteed by it.17

In fact, the primary and only reason behind the acquisition of the performance bond by KRDC was to guarantee to ALI that the construction project would proceed in accordance with the contract terms and conditions. In effect, the performance bond becomes liable for the completion of the construction project in the event KRDC fails in its contractual undertaking.

Because of the performance bond, the construction contract between ALI and KRDC is guaranteed to be performed even if KRDC fails in its obligation. In practice, a performance bond is usually a condition or a necessary component of construction contracts. In the case at bar, the performance bond was so connected with the construction contract that the former was agreed by the parties to be a condition for the latter to push through and at the same time, the former is reliant on the latter for its existence as an accessory contract.

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 EO No. 1008, which has jurisdiction over any dispute arising from or connected with it.

On the second requirement that the parties to a dispute must have previously agreed to submit to arbitration, it is clear from Article 24 of the Construction Contract itself that the parties have indeed agreed to submit their disputes to arbitration, to wit:

Article 24DISPUTES AND ARBITRATION

All disputes, controversies, or differences between the parties arising out of or in connection with this Contract, or arising out of or in connection with the execution of the WORK shall be settled in accordance with the procedures laid down by the Construction Industry Arbitration Commission. The cost of arbitration shall be borne jointly by both CONTRACTOR and DEVELOPER on a fifty-fifty (50-50) basis.18

Petitioner however argues that such provision in the construction contract does not bind it because it is not a party to such contract and in effect did not give its consent to submit to arbitration in case of any dispute on the performance bond. Such argument is untenable. The Performance Bond issued by petitioner states that PGAI agreed --

To guarantee the supply of labor, materials, tools, equipment and necessary supervision to complete the construction of Proposed Sigma Townhouses of the Obligee as per Notice to Proceed dated November 23, 1999, copy of which is hereto attached and made an integral part of this bond.19

When it executed the performance bond, PGAI’s undertaking thereunder was that of a surety to the obligation of KRDC, the principal under the construction contract. PGAI should not be allowed now to insist that it had nothing to do with the construction contract and should be viewed as a non-party. Since the liability of petitioner as surety is solidary with that of KRDC, it was properly impleaded as it would be the party ultimately answerable under the bond should KRDC be adjudged liable for breach of contract. Furthermore, it is well settled that accessory contracts should not be read independently of the main contract. They should be construed together in order to arrive at their true meaning.20 In Velasquez v. Court of Appeals,21 the Court labeled such rule as the "complementary contracts construed together" doctrine. It states:

That the "complementary contracts construed together" doctrine applies in this case finds support in the principle that the surety contract is merely an accessory contract and must be interpreted with its principal contract, which in this case was the loan agreement. This doctrine closely adheres to the spirit of Art. 1374 of the Civil Code which states that–

Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.

In the case at bar, the performance bond was silent with regard to arbitration. On the other hand, the construction contract was clear as to arbitration in the event of disputes. Applying the said doctrine, we rule that the silence of the accessory contract in this case could only be construed as acquiescence to the main contract. The construction contract breathes life into the performance bond. We are not ready to assume that the performance bond contains reservations with regard to some of the terms and conditions in the construction contract where in fact it is silent. On the other hand, it is more reasonable to assume that the party who issued the performance bond carefully and meticulously studied the construction contract that it guaranteed, and if it had reservations, it would have and should have mentioned them in the surety contract.

Second Issue – Petitioner’s Liability Under the Performance Bond

On the second issue, the crux of the controversy revolves upon a letter dated October 16, 2000 sent by ALI to PGAI. It reads:

x x x x

This pertains to the contract between Kraft Realty Development Corp. and Anscor Land, Inc., which is covered by surety and performance bonds by your good company.

Please be advised that we are now terminating the contract of Kraft due to the breach by Kraft of the terms and conditions of the construction contract. More specifically, the project has accumulated very serious delays, in spite of the full cooperation that this company has extended to Kraft.

Kindly refer to the attached letter of termination dated 16 October 2000.

Anscor Land [Inc.] may be making claims against the said bonds and in this regard, kindly coordinate with the following for any matter with which we can assist you with.

Engr. Teodelito de Vera

Anscor Land, Inc.

Tel. 812-7941 to 48 Fax 813-5301

Thank you for your kind attention.22 (Italics supplied.)

The question really is whether or not the foregoing letter constituted a valid claim and effectively complied with thetime-bar provision in the performance bond.

It is clear that ALI communicated two (2) important points to PGAI in the letter. First, that ALI is terminating the construction contract with KRDC and second, that ALI may be making a claim on the bonds issued by PGAI.

The time-bar provision in the Performance Bond provides that any claim against the bond should be "discovered and presented to the company within ten days from the expiration of this bond or from the occurrence of the default or failure of the principal, whichever is the earliest". The purpose of this provision in the performance bond is to give the issuer, in this case PGAI, notice of the claim at the earliest possible time and to afford the issuer sufficient time to evaluate, and examine the validity of the claim while the evidence or indicators of breach are fresh. In the construction industry, time is precious, delay costs money and postponement in making a claim could cause additional expenses.

In line with the rationale behind the time-bar provision, we rule that the letter dated October 16, 2000 was a sufficient claim. The tenor of the letter adequately put PGAI on notice that ALI has terminated the contract because of serious delays tantamount to breach by KRDC of its obligations. The letter timely informed PGAI that ALI was in fact terminating the construction contract and thereby giving rise to the obligation of PGAI under the performance bond. PGAI was informed within the time-bar provision and had all the opportunity to conduct its evaluation and examination as to the validity of the termination.

The CA thus correctly ruled that:

The fact of contract termination had been made known to PGAI as early as October 16, 2000. This termination consequently meant that the principal KRDC would no longer be able to supply "labor, materials, tools, equipment and necessary supervision" to complete the project. It was at this time, therefore, that PGAI’s obligation guaranteeing the project completion arose, although the amount of payment was still undetermined.

That ALI merely used the word "may" in expressing its intent to proceed against the bond does not make its claim any less categorical as argued by PGAI. The point is the very condition giving rise to the obligation to pay, i.e. KRDC’s default and the resulting contract termination, was clearly mentioned in the 16 October 2000 letter. The citation of this fact is more than sufficient to place PGAI in notice that ALI shall be making claims on the bonds.

x x x x

But the important consideration is that ALI, by its 16 October 2000 letter, was informing PGAI of the contract termination, the very condition for its liabilities under the performance bond to accrue. ALI had no other purpose in sending the letter than to notify PGAI that it was intending to proceed against the performance bond. PGAI makes much out of ALI’s failure to identify the particular bond against which it would be claiming. But the contract termination necessarily implies that there would be hiatus in the supply of labor and materials.

Surely, no bond would answer for the non-implementation of contractual provisions other than the performance bond. Further, the surety bond only guarantees reimbursement of the portion of the downpayment and not the supply of labor, materials and equipment.23 (Emphasis supplied, italics in the original.)

In interpreting the time-bar provision, the absence of any ambiguity in the words used would lead to the conclusion that the generally accepted meaning of the words shall control. In the time-bar provision, the word "claim" does not give rise to any ambiguity in interpretation and does not call for a stretched understanding.

In Finasia Investments and Finance Corporation v. Court of Appeals,24 the Court had the occasion to rule that:

The word "claim" is also defined as:

Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.

In conflicts of law, a receiver may be appointed in any state which has jurisdiction over the defendant who owes a claim.25 (Italics supplied.)

In the case at bar, the claim of ALI against PGAI arose from the failure of KRDC to perform its obligation under the construction contract. ALI therefore already had the "claim" or "right to payment" against PGAI in the maximum amount of P4,700,000.00 from the moment KRDC failed to comply with its obligation. According to the time-bar provision, in order to enforce such claim or recover the said amount, ALI shall present its claim within ten (10) days from the occurrence of the default or failure of KRDC.

The October 16, 2000 letter was the presentation of the claim. ALI’s intent to recover its claim was communicated clearly to PGAI. By informing PGAI of the termination of the contract with KRDC, ALI in effect presented a situation where PGAI is put on notice that ALI in fact has a right to payment by virtue of the performance bond and it intends to recover it. Undeniably, ALI has substantially complied with the time-bar provision of the performance bond.

WHEREFORE, the petition is DENIED and the Decision dated April 28, 2006 of the Court of Appeals in CA-G.R. SP No. 72854 is hereby AFFIRMED.

With costs against the petitioner.

SO ORDERED.

2

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. Nos. 152505-06             September 13, 2007

PRUDENTIAL GUARANTEE and ASSURANCE, INC., petitioner, vs.EQUINOX LAND CORPORATION, respondent.

D E C I S I O N

SANDOVAL-GUTIERREZ, J.:

Before us for resolution is the instant Petition for Review on Certiorari assailing the Decision1 of the Court of Appeals (Third Division) dated November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No. 57335.

The undisputed facts of the case, as established by the Construction Industry Arbitration Commission (CIAC) and affirmed by the Court of Appeals, are:

Sometime in 1996, Equinox Land Corporation (Equinox), respondent, decided to construct five (5) additional floors to its existing building, the Eastgate Centre, located at 169 EDSA, Mandaluyong City. It then sent invitations to bid to various building contractors. Four (4) building contractors, including J’Marc Construction & Development Corporation (J’Marc), responded.

Finding the bid of J’Marc to be the most advantageous, Equinox offered the construction project to it. On February 22, 1997, J’Marc accepted the offer. Two days later, Equinox formally awarded to J’Marc the contract to build the extension for a consideration of P37,000,000.00.

On February 24, 1997, J’Marc submitted to Equinox two (2) bonds, namely: (1) a surety bond issued by Prudential Guarantee and Assurance, Inc. (Prudential), herein petitioner, in the amount of P9,250,000.00 to guarantee the unliquidated portion of the advance payment payable to J’Marc; and (2) a performance bond likewise issued by Prudential in the amount of P7,400,000.00 to guarantee J’Marc’s faithful performance of its obligations under the construction agreement.

On March 17, 1997, Equinox and J’Marc signed the contract and related documents. Under the terms of the contract, J’Marc would supply all the labor, materials, tools, equipment, and supervision required to complete the project.

In accordance with the terms of the contract, Equinox paid J’Marc a downpayment of P9,250,000.00 equivalent to 25% of the contract price.

J’Marc did not adhere to the terms of the contract. It failed to submit the required monthly progress billings for the months of March and April 1997. Its workers neglected to cover the drainpipes, hence, they were clogged by wet cement. This delayed the work on the project.

On May 23, 1997, J’Marc requested an unscheduled cash advance of P300,000.00 from Equinox, explaining it had encountered cash problems. Equinox granted J’Marc’s request to prevent delay.

On May 31, 1997, J’Marc submitted its first progress billing showing that it had accomplished only 7.3825% of the construction work estimated at P2,731,535.00. After deducting the advanced payments, the net amount payable to J’Marc was only P1,285,959.12. Of this amount, Equinox paid J’Marc only P697,005.12 because the former paid EXAN P588,954.00 for concrete mix.

Shortly after Equinox paid J’Marc based on its first progress billing, the latter again requested an advanced payment of P150,000.00. Again Equinox paid J’Marc this amount. Eventually, Equinox found that the amount owing to J’Marc’s laborers was only P121,000.00, not P150,000.00.

In June 1997, EXAN refused to deliver concrete mix to the project site due to J’Marc’s recurring failure to pay on time. Faced with a looming delay in the project schedule, Equinox acceded to EXAN’s request that payments for the concrete mix should be remitted to it directly.

On June 30, 1997, J’Marc submitted its second progress billing showing that it accomplished only 16.0435% of the project after 4 months of construction work. Based on the contract and its own schedule, J’Marc should have accomplished at least 37.70%.

Faced with the problem of delay, Equinox formally gave J’Marc one final chance to take remedial steps in order to finish the project on time. However, J’Marc failed to undertake any corrective measure. Consequently, on July 10, 1997, Equinox terminated its contract with J’Marc and took over the project. On the same date, Equinox sent Prudential a letter claiming relief from J’Marc’s violations of the contract.

On July 11, 1997, the work on the project stopped. The personnel of both Equinox and J’Marc jointly conducted an inventory of all materials, tools, equipment, and supplies at the construction site. They also measured and recorded the amount of work actually accomplished. As of July 11, 1997, J’Marc accomplished only 19.0573% of the work or a shortage of 21.565% in violation of the contract.

The cost of J’Marc’s accomplishment was only P7,051,201.00. In other words, Equinox overpaid J’Marc in the sum of P3,974,300.25 inclusive of the 10% retention on the first progress billing amounting to P273,152.50. In addition, Equinox also paid the wages of J’Marc’s laborers, the billings for unpaid supplies, and the amounts owing to subcontractors of J’Marc in the total sum of P664,998.09.

On August 25, 1997, Equinox filed with the Regional Trial Court (RTC), Branch 214, Mandaluyong City a complaint for sum of money and damages against J’Marc and Prudential. Equinox prayed that J’Marc be ordered to reimburse the amounts corresponding to its (Equinox) advanced payments and unliquidated portion of its downpayment; and to pay damages. Equinox also prayed that Prudential be ordered to pay its liability under the bonds.

In its answer, J’Marc alleged that Equinox has no valid ground for terminating their contract. For its part, Prudential denied Equinox’s claims and instituted a cross-claim against J’Marc for any judgment that might be rendered against its bonds.

During the hearing, Prudential filed a motion to dismiss the complaint on the ground that pursuant to Executive Order No. 1008, it is the CIAC which has jurisdiction over it.

On February 12, 1999, the trial court granted Prudential’s motion and dismissed the case.

On May 19, 1999, Equinox filed with the CIAC a request for arbitration, docketed as CIAC Case No. 17-99. Prudential submitted a position paper contending that the CIAC has no jurisdiction over it since it is not a privy to the construction contract between Equinox and J’Marc; and that its surety and performance bonds are not construction agreements, thus, any action thereon lies exclusively with the proper court.

On December 21, 1999, the CIAC rendered its Decision in favor of Equinox and against J’Marc and Prudential, thus:

AWARD

After considering the evidence and the arguments of the parties, we find that:

1. J’Marc has been duly notified of the filing and pendency of the arbitration proceeding commenced by Equinox against J’Marc and that CIAC has acquired jurisdiction over J’Marc;

2. The construction Contract was validly terminated by Equinox due to J’Marc’s failure to provide a timely supply of adequate labor, materials, tools, equipment, and technical services and to remedy its inability to comply with the construction schedule;

3. Equinox is not entitled to claim liquidated damages, although under the circumstances, in the absence of adequate proof of actual and compensatory damages, we award to Equinox nominal or temperate damages in the amount of P500,000.00;

4. The percentage of accomplishment of J’Marc at the time of the termination of the Contract was 19.0573% of the work valued at P7,051,201.00. This amount should be credited to J’Marc. On the other hand, Equinox [i] had paid J’Marc 25% of the contract price as down or advance payment, [ii] had paid J’Marc its first progress billing, [iii] had made advances for payroll of the workers, and for unpaid supplies and the works of J’Marc’s subcontractors, all in the total sum of P11,690,483.34. Deducting the value of J’Marc’s accomplishment from these advances and payment, there is due from J’Marc to Equinox the amount ofP4,639,285.34. We hold J’Marc liable to pay Equinox this amount of P4,639,285.34.

5. If J’Marc had billed Equinox for its accomplishment as of July 11, 1997, 25% of the P7,051,201.00 would have been recouped as partial payment of the advanced or down payment. This would have resulted in reducing Prudential’s liability on the Surety Bond from P8,250,000.00 to P7,487,199.80. We, therefore, find that Prudential is liable to Equinox on its Surety Bond the amount of P7,487,199.80;

6. Prudential is furthermore liable on its Performance Bond for the following amounts: the advances made by Equinox on behalf of J’Marc to the workers, suppliers, and subcontractors amounting to P664,985.09, the nominal damages of P500,000.00 and attorney’s fees of P100,000.00 or a total amount of P1,264,985.00;

7. All other claims and counterclaims are denied;

8. J’Marc shall pay the cost of arbitration and shall indemnify Equinox the total amount paid by Equinox as expenses of arbitration;

9. The total liability of J’Marc to Equinox is determined to be P5,139,285.34 plus attorney’s fees ofP100,000.00. The surety’s liability cannot exceed that of the principal debtor [Art. 2054, Civil Code}. We hold that, notwithstanding our finding in Nos. 5 and 6 of this Award, Prudential is liable to Equinox on the Surety Bond and Performance Bond an amount not to exceed P5,239,285.34. The cost of arbitration shall be paid by J’Marc alone.

The amount of P5,239,285.34 shall be paid by respondent J’Marc and respondent Prudential, jointly and severally, with interest at six percent [6%] per annum from promulgation of this award. This amount, including accrued interest, shall earn interest at the rate of 12% per annum from the time this decision becomes final and executory until the entire amount is fully paid or judgment fully satisfied. The expenses of arbitration, which shall be paid by J’Marc alone, shall likewise earn interest at 6% per annum from the date of promulgation of the award, and 12% from the date the award becomes final until this amount including accrued interest is fully paid.

SO ORDERED.

Thereupon, Prudential filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 56491. Prudential alleged that the CIAC erred in ruling that it is bound by the terms of the construction contract between Equinox and J’Marc and that it is solidarily liable with J’Marc under its bonds.

Equinox filed a motion for reconsideration on the ground that there is an error in the computation of its claim for unliquidated damages; and that it is entitled to an award of liquidated damages.

On February 2, 2000, the CIAC amended its Award by reducing the total liability of J’Marc to Equinox toP4,060,780.21, plus attorney’s fees of P100,000 or P4,160,780.21, and holding that Prudential’s liability to Equinox on the surety and performance bonds should not exceed the said amount of P4,160,780.21, payable by J’Marc and Prudential jointly and severally.

Dissatisfied, Equinox filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 57335. This case was consolidated with CA-G.R. SP No. 56491 filed by Prudential.

On November 23, 2001, the Court of Appeals rendered its Decision in CA-G.R. SP No. 57335 and CA-G.R. SP No. 56491, the dispositive portion of which reads:

WHEREFORE, the Amended Decision dated February 2, 2000 is AFFIRMED with MODIFICATION in paragraph 4 in the Award by holding J’Marc liable for unliquidated damages to Equinox in the amount ofP5,358,167.09 and in paragraph 9 thereof by increasing the total liability of J’Marc to Equinox toP5,958,167.09 (in view of the additional award of P500,000.00 as nominal and temperate damages andP100,000.00 in attorney’s fees), and AFFIRMED in all other respects.

SO ORDERED.

Prudential seasonably filed a motion for reconsideration but it was denied by the Court of Appeals.

The issue raised before us is whether the Court of Appeals erred in (1) upholding the jurisdiction of the CIAC over the case; and (2) finding Prudential solidarily liable with J’Marc for damages.

On the first issue, basic is the rule that administrative agencies are tribunals of limited jurisdiction and as such, can only wield such powers as are specifically granted to them by their enabling statutes.2

Section 4 of Executive Order No. 1008,3 provides:

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 continue to be covered by the Labor Code of the Philippines.

In David v. Construction Industry and Arbitration Commission,4 we ruled that Section 4 vests upon the CIAC original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties who have agreed to submit their case for voluntary arbitration.

As earlier mentioned, when Equinox lodged with the RTC its complaint for a sum of money against J’Marc and Prudential, the latter filed a motion to dismiss on the ground of lack of jurisdiction, contending that since the case involves a construction dispute, jurisdiction lies with CIAC. Prudential’s motion was granted. However, after the CIAC assumed jurisdiction over the case, Prudential again moved for its dismissal, alleging that it is not a party to the construction contract between Equinox and J’Marc; and that the surety and performance bonds it issued are not construction agreements.

After having voluntarily invoked before the RTC the jurisdiction of CIAC, Prudential is estopped to question its jurisdiction. As we held in Lapanday Agricultural & Development Corporation v. Estita,5 the active participation of a party in a case pending against him before a court or a quasi-judicial body is tantamount to a recognition of that

court’s or quasi-judicial body’s jurisdiction and a willingness to abide by the resolution of the case and will bar said party from later on impugning the court’s or quasi-judicial body’s jurisdiction.

Moreover, in its Reply to Equinox’s Opposition to the Motion to Dismiss before the RTC, Prudential, citingPhilippine National Bank v. Pineda6 and Finman General Assurance Corporation v. Salik,7 argued that as a surety, it is considered under the law to be the same party as the obligor in relation to whatever is adjudged regarding the latter’s obligation. Therefore, it is the CIAC which has jurisdiction over the case involving a construction contract between Equinox and J’Marc. Such an admission by Prudential binds it and it cannot now claim otherwise.

Anent the second issue, it is not disputed that Prudential entered into a suretyship contract with J’Marc. Section 175 of the Insurance Code defines a suretyship as "a contract or agreement whereby a party, called the suretyship, 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 under Act 5368, as amended." Corollarily, Article 2047 of the Civil Code provides that suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor for the purpose of fulfilling an obligation.

In Castellvi de Higgins and Higgins v. Seliner,9 we held that while a surety and a guarantor are alike in that each promises to answer for the debt or default of another, the surety assumes liability as a regular party to the undertaking and hence its obligation is primary.

In Security Pacific Assurance Corporation v. Tria-Infante,10 we reiterated the rule that while a contract of surety is secondary only to a valid principal obligation, the surety’s liability to the creditor is said to be direct, primary, and absolute. In other words, the surety is directly and equally bound with the principal. Thus, Prudential is barred from disclaiming that its liability with J’Marc is solidary.

WHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals (Third Division) dated November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No. 57355 is AFFIRMED in toto. Costs against petitioner.

3

Palmares vs. CA

(288 SCRA 422)Facts:

Private respondent M.B. Lending Corporation extended a loan to the spouses Osmeña andMerlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on orbefore May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30days from the date thereof. 1 On four occasions after the execution of the promissory note and evenafter the

loan matured, petitioner and the Azarraga spouses were able to pay a total of P16,300.00,thereby leaving a balance of P13,700.00. No payments were made after the last payment onSeptember 26, 1991. 2Consequently, on the basis of petitioner's solidary liability under the promissory note, respondentcorporation filed a complaint 3 against petitioner Palmares as the lone party-defendant, to theexclusion of the principal debtors, allegedly by reason of the insolvency of the latter.

Issue: WON Palmares is liable

Held:

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter3, Title I of this Book shall be observed. In such case the contract is called a suretyship. It is a cardinalrule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt uponthe intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In thecase at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with theprincipal maker of the note. The terms of the contract are clear, explicit and unequivocal thatpetitioner's liability is that of a surety.

SECOND DIVISION

[G.R. No. 151060.  August 31, 2005]

JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA, petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent.

[G.R. No. 151311.  August 31, 2005]

NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and FOREIGN LOAN GUARANTEE CORPORATION, respondent.

D E C I S I O NTINGA, J.:

Before us are consolidated petitions questioning the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan Guarantee Corporation v. JN Development Corporation, et al., which reversed the Decision of the Regional Trial Court (RTC) of Makati, Branch 60.

On 13 December 1979, petitioner JN Development Corporation (“JN”) and Traders Royal Bank (TRB) entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by several securities, including a real estate mortgage[2] and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee Corporation (“PhilGuarantee”), now Trade and Investment Development Corporation of the Philippines, covering seventy percent (70%) of the credit line.[3] With PhilGuarantee issuing a guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee.

It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980 TRB requested PhilGuarantee to make good its guarantee.[8] PhilGuarantee informed JN about the call made by TRB, and inquired about the action of JN to settle the loan.[9] Having received no response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay.  On 30 May 1983, JN, through Rodrigo Sta. Ana, proposed to settle the obligation “by way of development and sale” of the mortgaged property.[11] PhilGuarantee, however, rejected the proposal.

PhilGuarantee thus filed a Complaint[12] for collection of money and damages against herein petitioners.

In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantee’s Complaint as well as the counterclaim of petitioners. It ruled that petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB.  Crucial to this holding was the court’s finding that TRB was able to foreclose the real estate mortgage executed by JN, thus extinguishing petitioners’ obligation.[13] Moreover, there was no showing that after the said foreclosure, TRB had demanded from JN any deficiency or the payment of the difference between the proceeds of the foreclosure sale and the actual loan.[14] In addition, the RTC held that since PhilGuarantee’s guarantee was good for only one year from 17 December 1979, or until 17 December 1980, and since it was not renewed after the expiry of said period, PhilGuarantee had no

more legal duty to pay TRB on 10 March 1981.[15] The RTC likewise ruled that Cruz cannot be held liable under the Undertaking since he was not the one who signed the document, in line with its finding that his signature found in the records is totally different from the signature on the Undertaking.[16]

According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it paid to TRB.  Thus, PhilGuarantee’s payment to TRB amounts to a waiver of its right under Art. 2058 of the Civil Code.[17]

Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos (P934,624.34), plus service charge and interest.[18]

In reaching its denouement, the CA held that the RTC’s finding that the loan was extinguished by virtue of the foreclosure sale of the mortgaged property had no factual support,[19] and that such finding is negated by Rodrigo Sta. Ana’s testimony that JN did not receive any notice of foreclosure from PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even offered the same mortgaged property to PhilGuarantee to settle its obligations with the latter.[21]

The CA also ruled that JN’s obligation had become due and demandable within the one-year period of effectivity of the guarantee; thus, PhilGuarantee’s payment to TRB conformed with its guarantee, although the payment itself was effected one year after the maturity date of the loan.[22] Contrary to the trial court’s finding, the CA ruled that the contract of guarantee was not extinguished by the alleged lack of evidence on PhilGuarantee’s consent to the extensions granted by TRB to JN.[23] Interpreting Art. 2058 of the Civil Code,[24] the appellate court explained that while the provision states that the guarantor cannot be compelled to pay unless the properties of the debtor are exhausted, the guarantor is not precluded from waiving the benefit of excussion and paying the obligation altogether.[25]

Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his signature in the Undertaking, the evidence presented not being sufficient to overcome the presumption of regularity of the Undertaking which is a notarized document. [26]

Petitioners sought reconsideration of the Decision and prayed for the admission of documents evidencing the foreclosure of the real estate mortgage, but the motion for reconsideration was denied by the CA for lack of

merit.  The CA ruled that the documentary evidence presented by petitioners cannot be considered as newly discovered evidence, it being already in existence while the case was pending before the trial court, the very forum before which it should have been presented.  Besides, a foreclosure sale per se is not proof of petitioners’ payment of the loan to PhilGuarantee, the CA added.[27]

So now before the Court are the separate petitions for review of the CA Decision.  JN and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in interpreting Articles 2079, 2058, and 2059 of the Civil Code in its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that the CA erred when it held that petitioners are liable to PhilGuarantee despite its payment after the expiration of its contract of guarantee and the lack of PhilGuarantee’s consent to the extensions granted by TRB to JN.  Moreover, Cruz questions the reversal of the ruling of the trial court anent his liability as a signatory to the Undertaking.[29]

On the other hand, PhilGuarantee maintains that the date of default, not the actual date of payment, determines the liability of the guarantor and that having paid TRB when the loan became due, it should be indemnified by petitioners.[30] It argues that, contrary to petitioners’ claim, there could be no waiver of its right to excussion more explicit than its act of payment to TRB very directly.[31] Besides, the right to excussion is for the benefit of the guarantor and is not a defense for the debtor to raise and use to evade liability.[32] Finally, PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery of Cruz’s signature on the Undertaking, which is a notarized document and as such must be accorded the presumption of regularity.[33]

The Court finds for PhilGuarantee.

Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.[34] The guarantor who pays for a debtor, in turn, must be indemnified by the latter.[35] However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor.[36] This is what is otherwise known as the benefit of excussion.

It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, “for obviously the ‘exhaustion of the principal’s property’ cannot even begin to take place before judgment has been

obtained.”[37] The law imposes conditions precedent for the invocation of the defense.  Thus, in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt.[38]

While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him.  Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it.  PhilGuarantee’s waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners.  The law clearly requires the debtor to indemnify the guarantor what the latter has paid.[39]

Petitioners’ claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of guarantee is untenable.  The guarantee, dated17 December 1979, states:

In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE shall pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid…

. . . .

This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per annum.[40]

The guarantee was only up to 17 December 1980.  JN’s obligation with TRB fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980.  That payment was actually made only on 10 March 1981 does not take it out of the terms of the guarantee.  What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in force.

There is likewise no merit in petitioners’ claim that PhilGuarantee’s failure to give its express consent to the alleged extensions granted by TRB to JN had extinguished the guarantee.  The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor.  As such, it is likewise waivable by the guarantor.  Thus, even assuming that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to such extensions.  Indeed, a guarantor is not precluded from waiving his right to be

notified of or to give his consent to extensions obtained by the debtor.  Such waiver is not contrary to public policy as it is purely personal and does not affect public interest.[41] In the instant case, PhilGuarantee’s waiver can be inferred from its actual payment to TRB after the latter’s demand, despite JN’s failure to pay the renewal/guarantee fee as indicated in the guarantee.[42]

For the above reasons, there is no basis for petitioner’s claim that PhilGuarantee was a mere volunteer payor and had no legal obligation to pay TRB.  The law does not prohibit the payment by a guarantor on his own volition, heedless of the benefit of excussion.  In fact, it recognizes the right of a guarantor to recover what it has paid, even if payment was made before the debt becomes due,[43] or if made without notice to the debtor,[44] subject of course to some conditions.

Petitioners’ invocation of our ruling in Willex Plastic Industries, Corp. v. Court of Appeals [45]  is misplaced, if not irrelevant.  In the said case, the guarantor claimed that it could not be proceeded against without first exhausting all of the properties of the debtor.  The Court, finding that there was an express renunciation of the benefit of excussion in the contract of guarantee, ruled against the guarantor.

The cited case finds no application in the case a quo.  PhilGuarantee is not invoking the benefit of excussion.  It cannot be overemphasized that excussion is a right granted to the guarantor and, therefore, only he may invoke it at his discretion.

The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor.  These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee.  However, PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors themselves, are muddling the issues and raising the same defenses against the guarantor, which only the guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee.

Petitioners assert that TRB’s alleged foreclosure of the real estate mortgage over the land executed as security for the loan agreement had extinguished PhilGuarantee’s obligation; thus, PhilGuarantee’s recourse

should be directed against TRB, as per the pari-passu provision[46] in the contract of guarantee.[47] We disagree.

The foreclosure was made on 27 August 1993, “after the case was submitted for decision in 1992 and before the issuance of the decision of the court a quo in 1998”.[48] Thus, foreclosure was resorted to by TRB against JN when they both had become aware that PhilGuarantee had already paid TRB and that there was a pending case filed by PhilGuarantee against petitioners.  This matter was not raised and proved in the trial court, nor in the appeal before the CA, but raised for the first time in petitioners’ motion for reconsideration in the CA.  In their appellants’ Brief, petitioners claimed that “there was no need for the defendant-appellee JNDC to present any evidence before the lower court to show that indeed foreclosure of the REM took place.”[49] As properly held by the CA,

… Firstly, the documents evidencing foreclosure of mortgage cannot be considered as newly discovered evidence.  The said documents were already subsisting and should have been presented during the trial of the case.  The alleged foreclosure sale was made on August 23, 1993 … while the decision was rendered by the trial court on August 20, 1998 about five (5) years thereafter.  These documents were likewise not submitted by the defendants-appellees when they submitted their appellees’ Brief to this Court.  Thus, these cannot be considered as newly discovered evidence but are more correctly ascribed as suppressed forgotten evidence… Secondly, the alleged foreclosure sale is not proof of payment of the loan by defendant-appellees to the plaintiffs-appellants.[50]

Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause of action was premised on its payment of JN’s obligation after the latter’s default.  PhilGuarantee was well within its rights to demand reimbursement for such payment made, regardless of whether the creditor, TRB, was subsequently able to obtain payment from JN.  If double payment was indeed made, then it is JN which should go after TRB, and not PhilGuarantee.  Petitioners have no one to blame but themselves, having allowed the foreclosure of the property for the full value of the loan despite knowledge of PhilGuarantee’s payment to TRB.  Having been aware of such payment, they should have opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial court informing the same of the foreclosure sale.

Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not being parties to the said agreement.  The clause is clearly for the benefit of the guarantor and no other.

The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement of JN’s obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the loan agreement.  This further weakens the position of petitioners, since it becomes obvious that they acknowledged the payment made by PhilGuarantee on their behalf and that they were in fact willing to negotiate with PhilGuarantee for the settlement of the said obligation before the filing of the complaint a quo.

Anent the issue of forgery, the CA is correct in reversing the decision of the trial court. Save for the denial of Narciso Cruz that it was not his signature in the Undertaking and the perfunctory comparison of the signatures, nothing in the records would support the claim of forgery.  Forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the burden of proof lies on the party alleging forgery.[52] Mere denial will not suffice to overcome the positive value of the Undertaking, which is a notarized document, has in its favor the presumption of regularity, and carries the evidentiary weight conferred upon it with respect to its due execution.[53] Even in cases where the alleged forged signature was compared to samples of genuine signatures to show its variance therefrom, this Court still found such evidence insufficient.[54] Mere variance of the signatures cannot be considered as conclusive proof that the same were forged.[55]

WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 61318 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Issue:Held:

PNB vs. CA, Luzon Surety Co.

Facts: Estanislao Depusoy, and the Republic of the Philippines, represented by the Director of PublicWorks, entered into a building contract, for the construction of the GSTS building at Arroceros Street,Manila, Depusoy to furnish all materials, labor, plans, and supplies needed in the construction.Depusoy applied for credit accommodation with the plaintiff. This was approved by the Board of Directors in various resolutions subject to the conditions that he would assign all payments to bereceived from the Bureau of Public Works of the GSIS to the bank, furnish a surety bond, and thesurety to deposit P10,000.00 to the plaintiff. The total accommodation granted to Depusoy wasP100,000.00. This was later extended by another P10,000.00 and P25,000.00, but in no case shouldthe loan exceed P100,000.00. In compliance with these conditions, Depusoy executed a Deed of Assignment of all money to be received by him from the GSIS to PNB. Depusoy defaulted in hisbuilding

contract with the Bureau of Public Works, and sometime in September, 1957, the Bureau of Public Works rescinded its contract with Dernisoy. No furher amounts were thereafter paid by the GSISto lie plaintiff bank. The amount of the loan of Depusoy which remains unpaid, including interest, isover P100,000.00. Demands for payment were made upon Depusoy and Luzon, and as no paymentwas made, therefore herein petitioner filed with the trial court a complaint against Estanislao Depusoyand private respondent Luzon Surety Co. Inc. (LSCI).

Issue: WON Luzon Surety is liable

Held: the bonds executed by private respondent LSCI were to guarantee the faithful performance of Depusoy of his obligation under the Deed of Assignment and not to guarantee payment of the loans orthe debt of Depusoy to petitioner to the extent of P100,000.00. Besides, even if there had been anydoubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety. As concretely put in Article 2056 of the Civil Code, "A guaranty is not presumed, it must beex-pressed and cannot extend to more than what is stipulated therein." LSCI is liable to the full extentthereof, such liability is strictly limited to that assumed by its terms."

6

Negotiable Instruments Case Digest: Ang V. Associated Bank (2007)

G.R. No. 146511 September 5, 2007

Lessons Applicable: Consideration and Accommodation (Negotiable Instruments)

FACTS:

August 28, 1990: Associated Bank (formerly Associated Banking Corporation and now known as United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong (principal debtor) and petitioner Tomas Ang (co-maker) for the 2 promissory notes

October 3 and 9, 1978: obtained a loan of P50,000 and P30,000 evidenced by promissory note payable, jointly and severally, on January 31, 1979 and December 8, 1978

Despite repeated demands for payment, the latest on September 13, 1988 and September 9, 1986, they failed to settle their obligations totalling to P539,638.96 as of July 31, 1990

Antonio Ang Eng Liong only admitted to have secured a loan amounting to P80,000

Tomas Ang: bank is not the real party in interest as it is not the holder of the promissory notes, much less a holder for value or a holder in due course; the bank knew that he did not receive any valuable consideration for affixing his signatures on the notes but merely lent his name as an accommodation party

bank granted his co-defendant successive extensions of time within which to pay, without his knowledge and consent

the bank imposed new and additional stipulations on interest, penalties, services charges and attorney's fees more onerous than the terms of the notes, without his knowledge and consent

he should be reimbursed by his co-defendant any and all sums that he may be adjudged liable to pay, plus P30,000, P20,000 and P50,000 for moral and exemplary damages, and attorney's fees, respectively.

October 19, 1990: RTC held Antonio Ang Eng Liong was ordered to pay the principal amount of P80,000 plus 14% interest per annum and 2% service charge per annum

Lower Court: Granted against the bank, dismissing the complaint for lack of cause of action.

CA: ordered Ang to pay the bank - bank is a holder

CA observed that the bank, as the payee, did not indorse the notes to the Asset Privatization Trust despite the execution of the Deeds of Transfer and Trust Agreement and that the notes continued to remain with the bank until the institution of the collection suit.

With the bank as the "holder" of the promissory notes, the Court of Appeals held that Tomas Ang is accountable therefor in his capacity as an accommodation party.

Tomas Ang cannot validly set up the defense that he did not receive any consideration therefor as the fact that the loan was granted to the principal debtor already constitutes a sufficient consideration.

ISSUE: W/N Ang is liable as accomodation party even without consideration and his co-accomodation party was granted accomodation w/o his knowledge

HELD: CA AFFIRMED

At the time the complaint was filed in the trial court, it was the Asset Privatization Trust which had the authority to enforce its claims against both debtors

accommodation party as a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person." As gleaned from the text, an accommodation party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he

must not receive value therefor; and (3) he must sign for the purpose of lending his name or credit to some other person

petitioner signed the promissory note as a solidary co-maker and not as a guarantor. This is patent even from the first sentence of the promissory note which states as follows:

"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per annum until fully paid."

immaterial so far as the bank is concerned whether one of the signers, particularly petitioner, has or has not received anything in payment of the use of his name.

since the liability of an accommodation party remains not only primary but also unconditional to a holder for value, even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor.

7

 

SECOND DIVISION

G.R. No. 187116 : October 18, 2010

ASSET BUILDERS CORPORATION, Petitioner, v. STRONGHOLD INSURANCE COMPANY, INCORPORATED, Respondent.cralaw

D E C I S I O N

MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assails the February 27, 2009 Decision1

cra1aw of the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No. 71034, ordering defendant Lucky Star to pay petitioner Asset Builders Corporation the sum ofP575,000.00 with damages, but absolving respondent Stronghold Insurance Company, Incorporated (Stronghold) of any liability on its Surety Bond and Performance Bond.

THE FACTS

On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling & Construction Corporation (Lucky Star) as part of the completion of its project to construct the ACG Commercial Complex on "NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City."2

cra1aw As can

be gleaned from the "Purchase Order,"3cra1aw Lucky Star was to supply labor, materials, tools, and

equipment including technical supervision to drill one (1) exploratory production well on the project site. The total contract price for the said project was P1,150,000.00. The salient terms and conditions of said agreement are as follows: chanroblesvirtualawlibrary

i. Lump sum price--------PHP1,150,000.00;

ii. 50% downpayment---upon submission of surety bond in an equivalent amount and performance bond equivalent to 30 % of contract amount;

iii. Completion date-----60 calendar days;

iv. Penalty----2/10 of 1% of total contract amount for every day of delay;

v. Terms---50% down payment to be released after submission of bonds;

vi. RetentionSubject to 10% retention to be released after the project is accepted by the owner;

To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold which issued two (2) bonds in favor of petitioner. The first, SURETY BOND G(16) No. 141558, dated May 9, 2006, covers the sum of P575,000.004

cra1aw or the required downpayment for the drilling work. The full text of the surety bond is herein quoted: chanroblesvirtualawlibrary

KNOW ALL MEN BY THESE PRESENTS: chanroblesvirtualawlibrary

That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168 ACACIA St., Octagon Industrial Estate Subd., Pasig City as principal, and STRONGHOLD INSURANCE COMPANY, INC., a corporation duly organized and existing under and by virtue of laws of the Philippines, as surety, are held and firmly bound unto ASSET BUILDERS CORPORATION to the sum of Pesos FIVE HUNDRED SEVENTY FIVE THOUSAND ONLY (P575,000.00) Philippine Currency, for the payment of which, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents.

THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS: chanroblesvirtualawlibrary

To fully and faithfully guarantee the repayment to be done through deductions from periodic billings of the advance payment made or to be made by the Obligee to the Principal in connection with the supply of labor, materials, tools and equipment including technical supervision to drill one (1) exploratory production well located at NIA Ave. cor. Olalia St., Brgy. dela Paz, Antipolo City. This bond is callable on demand.

The liability of the surety company upon determination under this bond shall in no case exceed the penal sum of PESOS: FIVE HUNDRED SEVENTY FIVE THOUSAND (P575,000.00) only, Philippine Currency.

WHEREAS, the Obligee requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said undertakings.

NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully observe and perform all and singular the aforesaid [co]-venants, conditions and agreements to the true intent and meaning thereof, then this obligation shall be null and void, otherwise to remain in full force and effect.

Liability of surety on this bond will expire on May 09, 2007 and said bond will be cancelled five DAYS after its expiration, unless surety is notified of and existing obligations hereunder.

x x x5chanroblesvirtuallawlibrary

With respect to the second contract, PERFORMANCE BOND G(13) No. 115388, dated May 09, 2006, it covers the sum of P345,000.00.6

cra1aw Thus:chanroblesvirtualawlibrary

KNOW ALL MEN BY THESE PRESENTS: chanroblesvirtualawlibrary

That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St., Octagon Indl., contractor, of Estate, Sub., Pasig City Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly organized and existing under and by virtue of the laws of the Philippines, with head office at Makati, as Surety, are held and firmly bound unto the ASSET BUILDERS CORPORATION and to any individual, firm, partnership, corporation or association supplying the principal with labor or materials in the penal sum of THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00), Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents.

The CONDITIONS OF THIS OBLIGATION are as follows;

WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with the ASSET BUILDERS CORPORATION represented by _________________, to fully and faithfully.

Comply with the supply of labor, materials, tools and equipment including technical supervision to drill one (1) exploratory production well located at NIA Ave. cor. Olalia St., Brgy. Dela Paz, Antipolo City. This bond is callable on demand.

WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of PESOS THREE HUNDRED FORTY FIVE THOUSAND ONLY (P345,000.00) Philippine Currency, inclusive of interest, attorneys fee, and other damages, and shall not be liable for any advances of the obligee to the principal.

WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-stated sum to secure the full and faithfull performance on its part of said contract, and the satisfaction of obligations for materials used and labor employed upon the work;

NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract during the original term of said contract and any extension thereof that may be granted by the obligee, with notice to the surety and during the life of any guaranty required under the contract, and shall also perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and agreements of any and all duly authorized modifications of said contract that may hereinafter be made, without notice to the surety except when such modifications increase the contract price; and such principal contractor or his or its sub-contractors shall promptly make payment to any individual, firm, partnership, corporation or association supplying the principal of its sub-contractors with labor and materials in the prosecution of the work provided for in the said contract, then, this obligation shall be null and void; otherwise it shall remain in full force and effect. Any extension of the period of time which may be granted by the obligee to the contractor shall be considered as given, and any modifications of said contract shall be considered as authorized, with the express consent of the Surety.

The right of any individual, firm, partnership, corporation or association supplying the contractor with labor or materials for the prosecution of the work hereinbefore stated, to institute action on the penal bond, pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed. x x x

On May 20, 2006, ABC paid Lucky Star P575,000.00 (with 2% withholding tax) as advance payment, representing 50% of the contract price.7

cra1aw Lucky Star, thereafter, commenced the drilling work. By July 18, 2006, just a few days before the agreed completion date of 60 calendar days, Lucky Star managed to accomplish only ten (10) % of the drilling work. On the same date, petitioner sent a demand letter to Lucky Star for the immediate completion of the drilling work8

cra1aw with a threat to cancel the agreement and forfeit the bonds should it still fail to complete said project within the agreed period.

On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky Star.9

cra1aw Pertinent portions of said notice read: chanroblesvirtualawlibrary

Pursuant to paragraph 1 of the Terms and Conditions of the service contract, notice is hereby made on you of the rescission of the contract and accordingly demand is hereby made on you, within seven (7) days from receipt hereof: chanroblesvirtualawlibrary

(1) to refund the down payment of PHP563,500.00, plus legal interest thereon;

(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price for every day of delay, or a total of PHP138,000.00;

(3) to pay the amount guaranteed by your performance bond in the amount of PHP345,000.00;

(4) to pay PHP150,000.00 in other consequential damages;

(5) to pay exemplary damages in the amount of PHP150,000.00;

(6) to vacate the project site, together with all your men and equipment.

Should you refuse to comply with our demand within the above period, we shall be constrained to sue you in court, in which event we shall demand payment of attorneys fees in the amount of at least PHP100,000.0.

On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its obligation under its bonds.10

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Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file its Complaint for Rescission with Damages against both before the RTC11

cra1aw on November 21, 2006.

In its "Answer (with Complusory Counterclaim and Cross-Claim)," dated January 24, 2007, Stronghold denied any liability arguing that ABC had not shown any proof that it made an advance payment of 50% of the contract price of the project. It further averred that ABCs rescission of its contract with Lucky Star virtually revoked the claims against the two bonds and absolved them from further liability.12

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Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period and, thus, was declared in default by the RTC in its Order dated August 24, 2007.13

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On February 27, 2009, the RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving Stronghold from liability.14

cra1aw Relevant parts of the decision, including the decretal portion, read:chanroblesvirtualawlibrary

On the liability of defendant Stronghold Insurance, the Court rules on the negative.

The surety bond and performance bond executed by defendants Lucky Star and Stronghold Insurance are in the nature of accessory contracts which depend for its existence upon another contract. Thus, when the agreement (Exhibit A) between the plaintiff and defendant Asset Builders was rescinded, the surety and performance bond were automatically cancelled.

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff and against defendant Lucky Star Drilling & Construction, ordering the latter as follows: chanroblesvirtualawlibrary

1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus legal interest from the filing of the complaint;

2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;

3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;

4. to pay plaintiff in the amount of PHP 50,000.00 as attorneys fees;

5. to pay the costs of the suit.

Defendant Stronghold Insurance Company, Inc.s compulsory counterclaim and cross-claim are dismissed.15

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Hence, this petition.

Petitioner ABC prays for the reversal of the challenged decision based on the following

GROUNDS

A. The Lower Court seriously erred and unjustly ACTED ARBITRARILY with manifest bias and grave abuse of discretion, CONTRARY to applicable lawsand established jurisprudence in declaring the "automatic CANCELLATION" of respondent Strongholds Surety Bond and Performance Bond, because:chanroblesvirtualawlibrary

(a) Despite rescission, there exists a continuing VALID PRINCIPAL OBLIGATION guaranteed by Respondents Bonds, arising out of the Contractors DEFAULT and Non-performance.

(b) Upon breach by its Principal/contractor, the LIABILITIES of Respondents bonds had already ACCRUED, automatically attached, and had become already DIRECT, PRIMARY andABSOLUTE, even before Petitioners legitimate exercise of itsoption under Art. 1191 of the New Civil Code.

(c) Rescission does NOT AFFECT the liabilities of the Respondent Stronghold as its LIABILITIES on its subject bonds have already become INTERWOVEN and INSEPARABLE with the liabilities of its Principal, the Contractor Lucky Star.

B. With the Lower Courts completely erroneous ruling on the liabilities of Respondents bonds, the Lower Court equally ERRED with manifest bias and grave abuse, in its FAILURE to comply with the "duty of court" to make a finding of "unreasonable denial or withholding" by Respondent Stronghold or Petitioners claims and impose upon the Respondent the penalties provided for under Section 241 and 244 of the Insurance Code.16

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Essentially, the primary issue is whether or not respondent insurance company, as surety, can be held liable under its bonds.

The Court rules in the affirmative.

Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it executed in its favor surety and performance bonds. The contents of the said contracts clearly establish that the parties entered into a surety agreement as defined under Article 2047 of the New Civil Code. Thus: chanroblesvirtualawlibrary

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. [Emphasis supplied]

As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.17

cra1aw Let it be stressed that notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.18

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Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,19cra1aw reiterating the ruling in

Garcia v. Court of Appeals,20cra1aw expounds on the nature of the suretys liability: chanroblesvirtualawlibrary

X x x. The suretys obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.

Suretyship, in essence, contains two types of relationship the principal relationship between the obligee (petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the principal (Lucky Star) and the surety (respondent). In this arrangement, the obligee accepts the suretys solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligees relationship with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in the principal contract. The suretys role arises only upon the obligors default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor.21

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In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame despite petitioners demand for completion, it was already in delay. Due to this default, Lucky Stars liability attached and, as a necessary consequence, respondents liability under the surety agreement arose.

Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return the P575,000.00 downpayment that was already advanced to it, respondent, as surety, became solidarily bound with Lucky Star for the repayment of the said amount to petitioner. The clause, "this bond is callable on demand," strongly speaks of respondents primary and direct responsibility to the petitioner.

Accordingly, after liability has attached to the principal, the obligee or, in this case, the petitioner, can exercise the right to proceed against Lucky Star or respondent or both. Article 1216 of the New Civil Code states:chanroblesvirtualawlibrary

The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Contrary to the trial courts ruling, respondent insurance company was not automatically released from any liability when petitioner resorted to the rescission of the principal contract for failure of the other party to perform its undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary obligors default. It should be emphasized that petitioner had to choose rescission in order to prevent further loss that may arise from the delay of the progress of the project. Without a doubt, Lucky Stars unsatisfactory progress in the drilling work and its failure to complete it in due time amount to non-performance of its obligation.

In fine, respondent should be answerable to petitioner on account of Lucky Stars non-performance of its obligation as guaranteed by the performance bond.

Finally, Article 121722cra1aw of the New Civil Code acknowledges the right of reimbursement from a co-

debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to reimbursement from Lucky Star for the amount it may be required to pay petitioner arising from its bonds.

WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court, Pasig City, Branch 71, is AFFIRMED with MODIFICATION. Respondent Stronghold Insurance is hereby declared jointly and severally liable with Lucky Star for the payment of P575,000.00 and the payment of P345,000.00 on the basis of its performance bond.

SO ORDERED.

8

PBCOM VS. LIM AND CALDERON

GR. No. 158138

April 12, 2005

FACTS: PBCom filed a complaint against respondents in the RTC of Manila for the collection of a deficiency. Petitioner alleged therein that respondents obtained a loan from it and executed a continuing surety agreement in favor of petitioner for all loans, credits, etc that were extended or may be extended in the future to respondents. Petitioner granted a renewal of said loan upon respondent’s request. It was expressly stipulated threrein that the venue for any legal action that may arise out of said promissory note shall be Makati City, “to the exclusion of all other courts…” Respondents allegedly failed to pay said obligation upon maturity. Thus, petitioner foreclosed the real estate mortgage executed by respondents, leaving a deficiency balance.

Respondents moved to dismiss the complaint on the ground of improper venue, invoking the stipulation contained in the last paragraph of the promissory note with respect to the restrictive/exclusive venue.

The trial court denied said motion asseverating that petitioner had separate causes of action arising from the promissory note and the continuing surety agreement. Thus, [under] Rule 4, Section 2, of the 1997 Rules of Civil Procedure, as amended, x x x venue was properly laid in Manila. An MR of said order was likewise denied.

On appeal, the CA ruled that respondents’ alleged debt was based on the Promissory Note, which had provided an exclusionary stipulation on venue “to the exclusion of all other courts.” The parties’ Surety Agreement, though silent as to venue, was an accessory contract that should have been interpreted in consonance with the Promissory Note. Hence, this Petition

ISSUE: WON the action against the sureties is covered by the restriction on venue stipulated in the PN

HELD: WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.

YES; Since the cases pertaining to both causes of action are restricted to Makati City as the proper venue, petitioner cannot rely on Section 5 of Rule 2 of the Rules of Court.

**

Section 2 of Rule 4 of the ROC provides that personal actions must be commenced and tried

(1) in the place where the plaintiff resides, or

(2) where the defendant resides, or

(3) in case of non-resident defendants, where they may be found, at the choice of the plaintiff.

This rule on venue does not apply when the law specifically provides otherwise, or when — before the filing of the action — the contracting parties agree in writing on the exclusive venue thereof. Venue is not jurisdictional and may be waived by the parties. A stipulation as to venue does not preclude the filing of the action in other places, unless qualifying or restrictive words are used in the agreement.

**

In enforcing a surety contract, the “complementary-contracts-construed-together” doctrine finds application. According to this principle, an accessory contract must be read in its entirety and together with the principal agreement[ This principle is used in construing contractual stipulations in order to arrive at their true meaning; certain stipulations cannot be segregated and then made to control. This no-segregation principle is based on Article 1374 of the Civil Code, which we quote:

“Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.”

The aforementioned doctrine is applicable to the present case. Incapable of standing by itself, the SA can be enforced only in conjunction with the PN. The latter documents the debt that is sought to be collected in the action against the sureties. The circumstances that related to the issuance of the PN and the SA are so intertwined that neither one could be separated from the other. It makes no sense to argue that the parties to the SA were not bound by the stipulations in the PN.

NOTES:

A cause of action is a party’s act or omission that violates the rights of the other. Only one suit may be commenced for a single cause of action. If two or more suits are instituted on the basis of the same cause of action, only one case should remain and the others must be dismissed.

9

After evaluating the financial statements of respondent JAPRL Development Corporation (JAPRL) for fiscal years1998, 1999 and 2000, Banco de Oro-EPCI, Inc. extended credit facilities to it. Rapid Forming Corporation (RFC) andJose U. Arollado acted as JAPRL’s sureties.-Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust receipts soon after theapproval of its loan BDO later learned from MRM Management, JAPRL’s financial adviser, that JAPRL had alteredand falsified its financial statements. It allegedly bloated its sales revenues to post a big income from operations for the concerned fiscal years to project itself as a viable investment. The information alarmed BDO. Citing relevantprovisions of the Trust Receipt Agreement, it demanded immediate payment of JAPRL’s outstanding obligations.-JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC) of Quezon City,Branch 90 (Quezon City RTC. It disclosed that it had been experiencing a decline in sales for the three precedingyears and a staggering loss in 2002.-Because the petition was sufficient in form and substance, a stay order

]

was issued. However, the proposedrehabilitation plan for JAPRL and RFC was eventually rejected by the Quezon City RTC.-Because JAPRL ignored its demand for payment, BDO filed a complaint for sum of money with an application for the issuance of a writ of preliminary attachment against JAPRL. BDO essentially asserted that JAPRL was guilty of fraud because it (JAPRL) altered and falsified its financial statements.

ISSUE:

-Whether or not BDO may annul the credit accommodations it extended to JAPRL and demand immediate paymentdue to the alteration and falsification of JAPRL’s financial statement.

HELD:

-Banks are entities engaged in the lending of funds obtained through deposits from the public. They borrow the public’s excess money (

i.e.,

deposits) and lend out the same. Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments.-Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public. They plough back the bulk of said deposits into the economy in the form of loans. Since banks deal with the public’smoney, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.-Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to pay the same.-In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioner’s exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed committed fraud in securing the credit accommodation.-Section 40 of the General Banking Law which states:Section 40.

Requirement for Grant of Loans or Other Credit Accommodations.

Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation. In formulating the rules and regulations under this Section,

the Monetary Board shall recognize the peculiar characteristics of micro financing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral.Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud.