G.R. No. 151903. October 9, 2009.

* of the obligation to pay, the law requires the companion acts of tender of payment
MANUEL GO CINCO and ARACELI S. GO CINCO, petitioners, vs. COURT and consignation.—A refusal without just cause is not equivalent to payment; to
OF APPEALS, ESTER SERVACIO and MAASIN TRADERS LENDING have the effect of payment and the consequent extinguishment of the obligation to
CORPORATION, respondents. pay, the law requires the companion acts of tender of payment and consignation.
Civil Law; Obligations and Contracts; Payment; Under Article 1232 of the Tender of payment, as defined in Far East Bank and Trust Company v. Diaz Realty,
Civil Code, payment means not only the delivery of money but also the performance, Inc., 363 SCRA 659 (2001), is the definitive act of offering the creditor what is due
in any manner, of an obligation—Article 1233 of the Civil Code states that “a debt him or her, together with the demand that the creditor accept the same. When a
shall not be understood to have been paid unless the thing or service in which the creditor refuses the debtor’s tender of payment, the law allows the consignation of
obligation consists have been completely delivered or rendered, as the case may the thing or the sum due. Tender and consignation have the effect of payment, as by
be.”—Obligations are extinguished, among others, by payment or performance, the consignation, the thing due is deposited and placed at the disposal of the judicial
mode most relevant to the factual situation in the present case. Under Article 1232 of authorities for the creditor to collect.
the Civil Code, payment means not only the delivery of money but also the Same; Same; Same; Same; Since payment was available and was unjustifiably
performance, in any other manner, of an obligation. Article 1233 of the Civil Code refused, justice and equity demand that petitioners be freed from obligation to pay
states that “a debt shall not be understood to have been paid unless the thing or interest on the outstanding amount from the time the unjust refusal took place, they
service in which the obligation consists has been completely delivered or rendered, would not have been liable for any interest from the time tender of payment was
as the case may be.” In contracts of loan, the debtor is expected to deliver the sum of made if the payment had only been accepted.—We also find that under the
money due the creditor. These provisions must be read in relation with the other circumstances, the spouses Go Cinco have undertaken, at the very least, the
rules on payment under the Civil Code, which rules impliedly require acceptance by equivalent of a tender of payment that cannot but have legal effect. Since payment
the creditor of the payment in order to extinguish an obligation. was available and was unjustifiably refused, justice and equity demand that the
Civil Procedure; Foreclosure; Section 4, Rule 68 of the 1997 Rules of Civil spouses Go Cinco be freed from the obligation to pay interest on the outstanding
Procedure on the disposition of the proceeds of sale after foreclosure actually amount from the time the unjust refusal took place; they would not have been liable
requires the payment of the proceeds to, among others, junior encumbrancers in the for any interest from the time tender of payment was made if the payment had only
order of their priority.—There is nothing legally objectionable in a mortgagor’s act been accepted. Under Article 19 of the
of taking a second or subsequent mortgage on a property already mortgaged; a
subsequent mortgage is recognized as valid by law and by commercial practice,
subject to the prior rights of previous mortgages. Section 4, Rule 68 of the 1997 110
Rules of Civil Procedure on the disposition of the proceeds of sale after foreclosure Civil Code, they should likewise be entitled to damages, as the unjust refusal
actually requires the payment of the proceeds to, among others, the junior was effectively an abusive act contrary to the duty to act with honesty and good faith
encumbrancers in the exercise of rights and the fulfillment of duty.
_______________ Same; Same; Same; Same; Damages; Moral Damages; Exemplary Damages;
Respondent’s act of refusing payment was motivated by bad faith as evidenced by
* SECOND DIVISION. the utter lack of substantial reasons to support it—and thus liable for moral and
exemplary damages.—Ester’s act of refusing payment was motivated by bad faith as
evidenced by the utter lack of substantial reasons to support it. Her unjust refusal, in
109 her behalf and for the MTLC which she represents, amounted to an abuse of rights;
in the order of their priority. Under Article 2130 of the Civil Code, a they acted in an oppressive manner and, thus, are liable for moral and exemplary
stipulation forbidding the owner from alienating the immovable mortgaged is damages. We nevertheless reduce the P1,000,000.00 to P100,000.00 as the originally
considered void. If the mortgagor-owner is allowed to convey the entirety of his awarded amount for moral damages is plainly excessive.
interests in the mortgaged property, reason dictates that the lesser right to encumber PETITION for review on certiorari of the decision and resolution of the Court of
his property with other liens must also be recognized. Ester, therefore, could not Appeals.
validly require the spouses Go Cinco to first obtain her consent to the PNB loan and The facts are stated in the opinion of the Court.
mortgage. Besides, with the payment of the MTLC loan using the proceeds of the Godofredo L. Cualteros for petitioners.
PNB loan, the mortgage in favor of the MTLC would have naturally been cancelled. Victoria G. De Los Reyes for respondents.
Same; Same; Payment; Consignation; A refusal without just cause is not BRION, J.:
equivalent to payment, to have the effect of payment and consequent extinguishment
1
 Before the Court is a petition for review on certiorari1filed by petitioners, 4 Id., at p. 46.
spouses Manuel and Araceli Go Cinco (collectively, the spouses Go Cinco), assailing 5 Id., at p. 49.
the decision2dated June 22, 2001 of the Court of Appeals (CA) in CA-G.R. CV No. 6 The net proceeds of the PNB loan were P1,203,685.17.
47578, as well as the resolution 3 dated January 25, 2002 denying the spouses Go
Cinco’s motion for reconsideration.
_______________ 113
execute a document that would allow her to collect the proceeds of the PNB loan.
1 Under Rule 45 of the 1997 Rules of Civil Procedure. Rollo, pp. 5-32. On July 20, 1989, Manuel executed a Special Power of Attorney 7 (SPA)
2 Penned by Associate Justice Renato Dacudao (retired), with Associate Justice authorizing Ester to collect the proceeds of his PNB loan. Ester again went to the
Romeo Callejo, Jr., who retired as Member of this Court, and Associate Justice bank to inquire about the proceeds of the loan. This time, the bank’s officers
Sergio Pestaño, concurring; Id., at pp. 75-84. confirmed the existence of the P1.3 Million loan, but they required Ester to first sign
3 Id., at pp. 99-100. a deed of release/cancellation of mortgage before they could release the proceeds of
the loan to her. Outraged that the spouses Go Cinco used the same properties
mortgaged to MTLC as collateral for the PNB loan, Ester refused to sign the deed
and did not collect the P1.3 Million loan proceeds.
As the MTLC loan was already due, Ester instituted foreclosure proceedings
111 against the spouses Go Cinco on July 24, 1989.
To prevent the foreclosure of their properties, the spouses Go Cinco filed an
The Factual Antecedents action for specific performance, damages, and preliminary injunction 8 before the
Regional Trial Court (RTC), Branch 25, Maasin, Southern Leyte. The spouses Go
Cinco alleged that foreclosure of the mortgage was no longer proper as there had
In December 1987, petitioner Manuel Cinco (Manuel) obtained a commercial already been settlement of Manuel’s obligation in favor of MTLC. They claimed that
loan in the amount of P700,000.00 from respondent Maasin Traders Lending the assignment of the proceeds of the PNB loan amounted to the payment of the
Corporation (MTLC). The loan was evidenced by a promissory note dated December MTLC loan. Ester’s refusal to sign the deed of release/cancellation of mortgage and
11, 1987,4 and secured by a real estate mortgage executed on December 15, 1987 to collect the proceeds of the PNB loan were, to the spouses Go Cinco, completely
over the spouses Go Cinco’s land and 4-storey building located in Maasin, Southern unjustified and entitled them to the payment of damages.
Leyte. Ester countered these allegations by claiming that she had not been previously
Under the terms of the promissory note, the P700,000.00 loan was subject to a informed of the spouses Go Cinco’s plan to obtain a loan from the PNB and to use
monthly interest rate of 3% or 36% per annum and was payable within a term of 180 the loan proceeds to settle Manuel’s loan with MTLC. She claimed that she had no
days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel’s explicit agreement with Manuel authorizing her to apply the
outstanding obligation with MTLC amounted to P1,071,256.66, which amount _______________
included the principal, interest, and penalties.5
To be able to pay the loan in favor of MTLC, the spouses Go Cinco applied for a 7 Rollo, p. 47.
loan with the Philippine National Bank, Maasin Branch (PNB or the bank) and 8 Docketed as Civil Case No. R-2575.
offered as collateral the same properties they previously mortgaged to MTLC. The
PNB approved the loan application for P1.3 Million6 through a letter dated July 8,
1989; the release of the amount, however, was conditioned on the cancellation of the 113
mortgage in favor of MTLC. proceeds of the PNB loan to Manuel’s loan with MTLC; the SPA merely authorized
On July 16, 1989, Manuel went to the house of respondent Ester Servacio her to collect the proceeds of the loan. She thus averred that it was unfair for the
(Ester), MTLC’s President, to inform her that there was money with the PNB for the spouses Go Cinco to require the release of the mortgage to MTLC when no actual
payment of his loan with MTLC. Ester then proceeded to the PNB to verify the payment of the loan had been made.
information, but she claimed that the bank’s officers informed her that Manuel had In a decision dated August 16, 1994, 9 the RTC ruled in favor of the spouses Go
no pending loan application with them. When she told Manuel of the bank’s Cinco. The trial court found that the evidence sufficiently established the existence
response, Manuel assured her there was money with the PNB and promised to of the PNB loan whose proceeds were available to satisfy Manuel’s obligation with
_______________ MTLC, and that Ester unjustifiably refused to collect the amount. Creditors, it ruled,
2
cannot unreasonably prevent payment or performance of obligation to the damage The spouses Go Cinco charge MTLC and Ester with bad faith and ill-motive for
and prejudice of debtors who may stand liable for payment of higher interest unjustly refusing to collect the proceeds of the loan and to execute the deed of
rates.10 After finding MTLC and Ester liable for abuse of rights, the RTC ordered the release of mortgage. They assert that Ester’s justifications for refusing the payment
award of the following amounts to the spouses Go Cinco: were flimsy excuses so she could proceed with the foreclosure of the mortgaged
(a) P1,044,475.15 plus 535.63 per day hereafter, representing loss of savings on properties that were worth more than the amount due to MTLC. Thus, they conclude
interest, by way of actual or compensatory damages, if defendant corporation that the acts of MTLC and of Ester amount to abuse of rights that warrants the award
insists on the original 3% monthly interest rate; of damages in their (spouses Go Cinco’s) favor.
(b) P100,000.00 as unrealized profit; In refuting the claims of the spouses Go Cinco, MTLC and Ester raise the same
(c) P1,000,000.00 as moral damages; arguments they raised before the RTC and the CA. They claim that they were not
(d) P20,000.00 as exemplary damages; aware of the loan and the mortgage to PNB, and that there was no agreement that the
(e) P22,000.00 as litigation expenses; and proceeds of the PNB loan were to be used to settle Manuel’s obligation with MTLC.
(f) 10% of the total amount as attorney’s fees plus costs.11 Since the MTLC loan remained unpaid, they insist that the institution of the
foreclosure proceedings was proper. Additionally, MTLC and Ester contend that the
Through an appeal with the CA, MTLC and Ester successfully secured a reversal present petition raised questions of fact that cannot be addressed in a Rule 45
of the RTC’s decision. Unlike the trial court, the appellate court found it significant petition.
that there was no explicit agreement between Ester and the spouses Go Cinco for the
cancellation of the MTLC mortgage in favor of PNB to facilitate the release and
collection by Ester of the 115
_______________
The Court’s Ruling
9 Penned by Judge Numeriano Avila, Jr., Rollo, pp. 60-73.
10 Id., at p. 67.
11 Id., at p. 73. The Court finds the petition meritorious.

Preliminary Considerations
114
proceeds of the PNB loan. The CA read the SPA as merely authorizing Ester Our review of the records shows that there are no factual questions involved in
to withdraw the proceeds of the loan. As Manuel’s loan obligation with MTLC this case; the ultimate facts necessary for the resolution of the case already appear in
remained unpaid, the CA ruled that no valid objection could be made to the the records. The RTC and the CA decisions differed not so much on the findings of
institution of the foreclosure proceedings. Accordingly, it dismissed the spouses Go fact, but on the conclusions derived from these factual findings. The correctness of
Cinco’ complaint. From this dismissal, the spouses Go Cinco filed the present appeal the conclusions derived from factual findings raises legal questions when the
by certiorari. conclusions are so linked to, or are inextricably intertwined with, the appreciation of
the applicable law that the case requires, as in the present case. 12 The petition raises
the issue of whether the loan due the MTLC had been extinguished; this is a
question of law that this Court can fully address and settle in an appeal by certiorari.
The Petition
Payment as Mode of
Extinguishing Obligations

The spouses Go Cinco impute error on the part of the CA for its failure to Obligations are extinguished, among others, by payment or performance, 13 the
consider their acts as equivalent to payment that extinguished the MTLC loan; their mode most relevant to the factual situation in the present case. Under Article 1232 of
act of applying for a loan with the PNB was indicative of their good faith and honest the Civil Code, payment means not only the delivery of money but also the
intention to settle the loan with MTLC. They contend that the creditors have the performance, in any other manner, of an obligation. Article 1233 of the Civil Code
correlative duty to accept the payment. states that “a debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered,
3
as the case may be.” In contracts of loan, the debtor is expected to deliver the sum of 117
money due the creditor. These provisions must be read in relation with the other the sum of money due to MTLC, and Ester could not be compelled to accept it as
rules on payment based on Article 1233. Nonetheless, the SPA stood as an authority to collect
_______________ the proceeds of the already-approved PNB loan that, upon receipt by Ester, would
have constituted as payment of the MTLC loan. 15 Had Ester presented the SPA to the
12 See Philippine American General Insurance Company v. Pks Shipping bank and signed the deed of release/cancellation of mortgage, the delivery of the sum
Company, 449 Phil. 223; 401 SCRA 222 (2003). of money would have been effected and the obligation extinguished. 16 As the records
13 Civil Code, Article 1231 (1). show, Ester refused to collect and allow the cancellation of the mortgage.
Under these facts, Manuel posits two things: first, that Ester’s refusal was based
on completely unjustifiable grounds; and second, that the refusal was equivalent to
116 payment that led to the extinguishment of the obligation.
payment under the Civil Code, 14 which rules impliedly require acceptance by the
creditor of the payment in order to extinguish an obligation. a. Unjust Refusal to Accept Payment
In the present case, Manuel sought to pay Ester by authorizing her, through an
SPA, to collect the proceeds of the PNB loan—an act that would have led to payment After considering Ester’s arguments, we agree with Manuel that Ester’s refusal
if Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the of the payment was without basis.
SPA was not, strictly speaking, a delivery of Ester refused to accept the payment because the bank required her to first sign a
_______________ deed of release/cancellation of the mortgage before the proceeds of the PNB loan
could be released. As a prior mortgagee, she claimed that the spouses Go Cinco
14 The pertinent provisions of the Civil Code on Payment are: should have obtained her consent before offering the properties already mortgaged to
Art. 1235. When the obligee accepts the performance, knowing its her as security for the PNB loan. Moreover, Ester alleged that the SPA merely
incompleteness or irregularity, and without expressing any protest or objection, the authorized her to collect the proceeds of the loan; there was no explicit
obligation is deemed fully complied with. _______________
Art. 1236. The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation, unless there is a 15 We apply here, by parity of reasoning, the principle adopted in payment using
stipulation to the contrary. mercantile documents. Payment by means of mercantile documents like checks and
Whoever pays for another may demand from the debtor what he has paid, except promissory notes in lieu of the sum of money due does not extinguish the obligation
that if he paid without the knowledge or against the will of the debtor, he can recover until they have been accepted and cashed by the creditor. See Crystal v. Court of
only insofar as the payment has been beneficial to the debtor. Appeals, 159 Phil. 557; 62 SCRA 501 (1975).
Art. 1238. Payment made by a third person who does not intend to be 16 The PNB’s officers testified that had the required document (deed of
reimbursed by the debtor is deemed to be a donation, which requires the debtor’s release/cancellation of mortgage) been submitted, the bank could have released the
consent. But the payment is in any case valid as to the creditor who has accepted it. loan proceeds. Rollo, p. 81.
Art. 1244. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more valuable than
that which is due. 118
In obligations to do or not to do, an act or forbearance cannot be substituted by agreement that the MTLC loan would be paid out of the proceeds of the PNB loan.
another act or forbearance against the obligee’s will. There is nothing legally objectionable in a mortgagor’s act of taking a second or
Art. 1248. Unless there is an express stipulation to that effect, the creditor subsequent mortgage on a property already mortgaged; a subsequent mortgage is
cannot be compelled partially to receive the prestations in which the obligation recognized as valid by law and by commercial practice, subject to the prior rights of
consists. Neither may the debtor be required to make partial payments. previous mortgages. Section 4, Rule 68 of the 1997 Rules of Civil Procedure on the
However, when the debt is in part liquidated and in part unliquidated, the disposition of the proceeds of sale after foreclosure actually requires the payment of
creditor may demand and the debtor may effect the payment of the former without the proceeds to, among others, the junior encumbrancers in the order of their
waiting for the liquidation of the latter. priority.17 Under Article 2130 of the Civil Code, a stipulation forbidding the owner
from alienating the immovable mortgaged is considered void. If the mortgagor-
owner is allowed to convey the entirety of his interests in the mortgaged property,
4
reason dictates that the lesser right to encumber his property with other liens must sum due. Tender and consignation have the effect of payment, as by consignation,
also be recognized. Ester, therefore, could not validly require the spouses Go Cinco the thing due is deposited and placed at the disposal of the judicial authorities for the
to first obtain her consent to the PNB loan and mortgage. Besides, with the payment creditor to collect.19
of the MTLC loan using the proceeds of the PNB loan, the mortgage in favor of the _______________
MTLC would have naturally been cancelled.
We find it improbable for Ester to claim that there was no agreement to apply the 18 416 Phil. 147; 363 SCRA 659 (2001).
proceeds of the PNB loan to the MTLC loan. Beginning July 16, 1989, Manuel had 19 Civil Code, Article 1258.
already expressed intent to pay his loan with MTLC and thus requested for an
updated statement of account. Given Manuel’s express intent of fully settling the
MTLC loan and of paying 120
_______________ A sad twist in this case for Manuel was that he could not avail of consignation to
extinguish his obligation to MTLC, as PNB would not release the proceeds of the
17 SEC. 4. Disposition of proceeds of sale.—The amount realized from the loan unless and until Ester had signed the deed of release/cancellation of mortgage,
foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, which she unjustly refused to do. Hence, to compel Ester to accept the loan proceeds
be paid to the person foreclosing the mortgage, and when there shall be any balance and to prevent their mortgaged properties from being foreclosed, the spouses Go
or residue, after paying off the mortgage debt due, the same shall be paid to junior Cinco found it necessary to institute the present case for specific performance and
encumbrancers in the order of their priority, to be ascertained by the court, or if there damages.
be no such encumbrancers or there be a balance or residue after payment to them,
then to the mortgagor or his duly authorized agent, or to the person entitled to it. c. Effects of Unjust Refusal

Under these circumstances, we hold that while no completed tender of payment

119 and consignation took place sufficient to constitute payment, the spouses Go Cinco
through the PNB loan he would secure (and in fact secured), we also cannot give duly established that they have legitimately secured a means of paying off their loan
credit to the claim that the SPA only allowed Ester to collect the proceeds of the with MTLC; they were only prevented from doing so by the unjust refusal of Ester to
PNB loan, without giving her the accompanying authority, although verbal, to apply accept the proceeds of the PNB loan through her refusal to execute the release of the
these proceeds to the MTLC loan. Even Ester’s actions belie her claim as she in fact mortgage on the properties mortgaged to MTLC. In other words, MTLC and Ester in
even went to the PNB to collect the proceeds. In sum, the surrounding circumstances fact prevented the spouses Go Cinco from the exercise of their right to secure
of the case simply do not support Ester’s position. payment of their loan. No reason exists under this legal situation why we cannot
compel MTLC and Ester: (1) to release the mortgage to MTLC as a condition to the
b. Unjust Refusal Cannot be Equated to Payment release of the proceeds of the PNB loan, upon PNB’s acknowledgment that the
proceeds of the loan are ready and shall forthwith be released; and (2) to accept the
While Ester’s refusal was unjustified and unreasonable, we cannot agree with proceeds, sufficient to cover the total amount of the loan to MTLC, as payment for
Manuel’s position that this refusal had the effect of payment that extinguished his Manuel’s loan with MTLC.
obligation to MTLC. Article 1256 is clear and unequivocal on this point when it We also find that under the circumstances, the spouses Go Cinco have
provides that— undertaken, at the very least, the equivalent of a tender of payment that cannot but
“ARTICLE 1256. If the creditor to whom tender of payment has been have legal effect. Since payment was available and was unjustifiably refused, justice
made refuses without just cause to accept it, the debtor shall be released from and equity demand that the spouses Go Cinco be freed from the obligation to pay
responsibility by the consignation of the thing or sum due. [Emphasis supplied.]” interest on the outstanding
In short, a refusal without just cause is not equivalent to payment; to have the effect
of payment and the consequent extinguishment of the obligation to pay, the law
requires the companion acts of tender of payment and consignation. 121
Tender of payment, as defined in Far East Bank and Trust Company v. Diaz amount from the time the unjust refusal took place;20they would not have been
Realty, Inc.,18 is the definitive act of offering the creditor what is due him or her, liable for any interest from the time tender of payment was made if the payment had
together with the demand that the creditor accept the same. When a creditor refuses only been accepted. Under Article 19 of the Civil Code, they should likewise be
the debtor’s tender of payment, the law allows the consignation of the thing or the entitled to damages, as the unjust refusal was effectively an abusive act contrary to
5
the duty to act with honesty and good faith in the exercise of rights and the nevertheless reduce the P1,000,000.00 to P100,000.00 as the originally awarded
fulfillment of duty. amount for moral damages is plainly excessive.
For these reasons, we delete the amounts awarded by the RTC to the spouses Go We affirm the grant of exemplary damages by way of example or correction for
Cinco (P1,044,475.15, plus P563.63 per month) representing loss of savings on the public good in light of the same reasons that justified the grant of moral damages.
interests for lack of legal basis. These amounts were computed based on the As the spouses Go Cinco were compelled to litigate to protect their interests, they
difference in the interest rates charged by the MTLC (36% per annum) and the PNB are entitled to payment of 10% of the total amount of awarded damages as attorney’s
(17% to 18% per annum), from the date of tender of payment up to the time of the fees and expenses of litigation.
promulgation of the RTC decision. The trial court failed to consider the effects of a WHEREFORE, we GRANT the petitioners’ petition for review on certiorari,
tender of payment and erroneously declared that MTLC can charge interest at the and REVERSE the decision of June 22, 2001 of the Court of Appeals in CA-G.R.
rate of only 18% per annum—the same rate that PNB charged, not the 36% interest CV No. 47578, as well as the resolution of January 25, 2002 that followed. We
rate that MTLC charged; the RTC awarded the difference in the interest rates as _______________
actual damages.
As part of the actual and compensatory damages, the RTC also awarded 21 398 Phil. 400; 344 SCRA 481 (2000).
P100,000.00 to the spouses Go Cinco representing unrealized profits. Apparently, if 22 Civil Code, Articles 2220 and 2232.
the proceeds of the PNB loan (P1,203,685.17) had been applied to the MTLC loan
(P1,071,256.55), there would have been a balance of P132,428.62 left, which amount
the spouses Go Cinco could have invested in their businesses that would have earned 123
them a profit of at least P100,000.00. REINSTATE the decision dated August 16, 1994 of the Regional Trial Court,
We find no factual basis for this award. The spouses Go Cinco were unable to Branch 25, Maasin, Southern Leyte, with the following MODIFICATIONS:
substantiate the amount they claimed as unrealized profits; there was only their bare (1) The respondents are hereby directed to accept the proceeds of the
claim that the spouses Go Cinco’s PNB loan, if still available, and to consent to the release
_______________ of the mortgage on the property given as security for the loan upon PNB’s
acknowledgment that the proceeds of the loan, sufficient to cover the total
20 Spouses Biesterbos v. Court of Appeals and Bartlome, G.R. 152529. indebtedness to respondent Maasin Traders Lending Corporation computed
September 22, 2003, 411 SCRA 396, citing Araneta, Inc. v. De Paterno and Vidal, as of June 20, 1989, shall forthwith be released;
91 Phil. 786 (1952). (2) The award for loss of savings and unrealized profit is deleted;
(3) The award for moral damages is reduced to P100,000.00; and
(4) The awards for exemplary damages, attorney’s fees, and expenses
122 of litigation are retained.
excess could have been invested in their other businesses. Without more, this claim The awards under (3) and (4) above shall be deducted from the amount of the
of expected profits is at best speculative and cannot be the basis for a claim for outstanding loan due the respondents as of June 20, 1989. Costs against the
damages. In Lucas v. Spouses Royo,21 we declared that: respondents.
“In determining actual damages, the Court cannot rely on speculation, conjecture or SO ORDERED.
guesswork as to the amount. Actual and compensatory damages are those Carpio-Morales** (Acting Chairperson), Corona,***Nachura**** and Abad, JJ.,
recoverable because of pecuniary loss in business, trade, property, profession, job or concur.
occupation and the same must be sufficiently proved, otherwise, if the proof is Petition granted, judgment and resolution reversed. Decision of Regional Trial
flimsy and unsubstantiated, no damages will be given.” [Emphasis supplied.] Court of Maasin, Southern Leyte, Br. 25 reinstated with modifications.
_______________
We agree, however, that there was basis for the award of moral and exemplary
damages and attorney’s fees. ** Designated Acting Chairperson of the Second Division per Special Order No.
Ester’s act of refusing payment was motivated by bad faith as evidenced by the 690 dated September 4, 2009.
utter lack of substantial reasons to support it. Her unjust refusal, in her behalf and for *** Designated additional Member of the Second Division per Special Order
the MTLC which she represents, amounted to an abuse of rights; they acted in an No. 718 dated October 2, 2009.
oppressive manner and, thus, are liable for moral and exemplary damages. 22 We **** Designated additional Member of the Second Division per Special Order
No. 730 dated October 5, 2009.
6
 333
VOL. 759, JUNE 22, 2015 333
124
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Note.—Consignation is the deposit of the proper amount with a judicial
authority, before whom the debtor must establish compliance with certain mandatory a third person, which gives said person the right to demand fulfillment of said
requirements. (Allandale Sportsline, Inc. vs. The Good Development Corporation, stipulation.—According to the principle of relativity of contracts in Article 1311 of
574 SCRA 625 [2008]). the Civil Code, a contract takes effect only between the parties, their assigns, and
heirs; except when the contract contains a stipulation in favor of a third person,
which gives said person the right to demand fulfillment of said stipulation. In this
——o0o—— case, the Surety and Performance Bonds are enforceable by and against the parties
FFMCCI (the obligor) and CCCIC (the surety), as well as the third person Kawasaki
(the obligee) in whose favor said bonds had been explicitly constituted; while the
G.R. No. 156162. June 22, 2015.* related Consortium Agreement binds the parties Kawasaki and FFMCCI. Since the
Republic is neither a party to the Surety and Performance Bonds nor the Consortium
CCC INSURANCE CORPORATION, petitioner, vs.KAWASAKI STEEL Agreement, any action or omission on its part has no effect on the liability of CCCIC
CORPORATION, F.F. MAÑACOP CONSTRUCTION CO., INC., and under said bonds.
FLORANTE F. MAÑACOP, respondents. Same; Novation; It is well-settled that novation is never presumed — novatio
Civil Law; Suretyship; Words and Phrases; Jurisprudence also defines a non praesumitur.—It is well-settled that novation is never presumed — novatio non
contract of suretyship as an agreement where a party called the surety guarantees praesumitur. As the party alleging novation, the onus of showing clearly and
the performance by another party called the principal or obligor of an obligation or unequivocally that novation had indeed taken place rests on CCCIC. The Court laid
undertaking in favor of a third person called the obligee.—The statutory definition down guidelines in establishing novation, viz.: Novation is never presumed, and
of suretyship is found in Article 2047 of the Civil Code, thus: Art. 2047. By the animus novandi, whether totally or partially, must appear by express agreement
guaranty a person, called the guarantor, binds himself to the creditor to fulfill the of the parties, or by their acts that are too clear and unequivocal to be mistaken. The
obligation of the principal debtor in case the latter should fail to do so. If a person extinguishment of the old obligation by the new one is a necessary element of
binds himself solidarily with the principal debtor, the provisions of Section 4, novation which may be effected either expressly or impliedly. The term “expressly”
Chapter 3, Title I of this Book shall be observed. In such case the contract is called means that the contracting parties incontrovertibly disclose that their object in
a suretyship. (Emphasis supplied) Jurisprudence also defines a contract of executing the new contract is to extinguish the old one. Upon the other hand, no
suretyship as “an agreement where a party called the surety guarantees the specific form is required for an implied novation, and all that is prescribed by law
performance by another party called the principal or obligor of an obligation or would be an incompatibility between the two contracts. While there is really no hard
undertaking in favor of a third person called the obligee. Specifically, suretyship is a and fast rule to determine what might constitute to be a sufficient change that can
contractual relation resulting from an agreement whereby one person, the surety, bring about novation, the touchstone for contrariety, however, would be an
engages to be answerable for the debt, default or miscarriage of another, known as irreconcilable incompatibility between the old and the new obligations. There are
the principal.” The Court expounds that “a surety’s liability is joint and several, two ways which could indicate, in fine, the presence of novation and thereby produce
limited to the amount of the bond, and determined strictly by the terms of contract of the effect of extinguishing an obligation by another which substitutes the same.
suretyship in relation to the principal contract between the obligor and the obligee. It The first is when novation has been explicitly stated and declared in unequivocal
bears stressing, however, that although the contract of suretyship is secondary to the terms. The second is when the old and the new obligations are incompatible on every
principal contract, the surety’s liability to the obligee is nevertheless direct, primary, point. The test of incompatibility is whether or not the two obligations can stand to-
and absolute.” 334
Same; Contracts; Principle of Relativity of Contracts; According to the 334 SUPREME COURT REPORTS ANNOTATED
principle of relativity of contracts in Article 1311 of the Civil Code, a contract takes CCC Insurance Corporation vs. Kawasaki Steel Corporation
effect only between the parties, their assigns, and heirs; except when the contract gether, each one having its independent existence. If they cannot, they are
contains a stipulation in favor of incompatible and the latter obligation novates the first. Corollarily, changes that
_______________ breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation,
* FIRST DIVISION. such as its object, cause or principal conditions thereof; otherwise, the change would
7
be merely modificatory in nature and insufficient to extinguish the original proper. Consequently, the trial court validly acquired jurisdiction over respondent
obligation. Baliwag. (Citation omitted) Hence, the personal service of the AliasSummons on an
Same; Same; Subrogation; In Autocorp Group v. Intra Strata Assurance FFMCCI director was sufficient for the RTC to acquire jurisdiction over FFMCCI
Corporation, 556 SCRA 250 (2008), the Court ruled that: The benefit of itself.
subrogation, an extinctive subjective novation by a change of creditor, which Same; Same; Cause of Action; Words and Phrases; A cause of action is
“transfers to the person subrogated, the credit and all the rights thereto defined as the act or omission by which a party violates a right of another.—
appertaining, either against the debtor or against third persons,” is granted by the Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and
Article 2067 of the Civil Code only to the “guarantor (or surety) who pays.”— Mañacop must be dismissed on the ground of lack of cause of action. A cause of
Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to indemnification action is defined as the act or omission by which a party violates a right of another.
and subrogation will arise only after it has paid its obligations to Kawasaki as the The essential elements of a cause of action are: (a) the existence of a legal right in
debtor-obligee. In Autocorp Group v. Intra Strata Assurance Corporation, 556 favor of the plaintiff; (b) a correlative legal duty of the defendant to respect such
SCRA 250 (2008), the Court ruled that: The benefit of subrogation, an extinctive right; and (c) an act or omission by such defendant in violation of the right of the
subjective novation by a change of creditor, which “transfers to the person plaintiff with a resulting injury or damage to the plaintiff for which the latter may
subrogated, the credit and all the rights thereto appertaining, either against the debtor maintain an action for the recovery of relief from the defendant.
or against third persons,” is granted by the Article 2067 of the Civil Code only to Attorney’s Fees; Article 2208(2) of the Civil Code allows the award of
the “guarantor (or surety) who pays.” (Emphases supplied, citations omitted) In attorney’s fees “[w]hen the defendant’s act or omission has compelled the plaintiff
the present case, CCCIC has yet to pay Kawasaki. to litigate with third persons or to incur expenses to protect his interest[.]”—Article
Remedial Law; Civil Procedure; Domestic Corporations; Service of Summons; 2208(2) of the Civil Code allows the award of attorney’s fees “[w]hen the
Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed the defendant’s act or omission has compelled the plaintiff to litigate with third persons
service of summons upon a director of a private domestic corporation.—Rule 14, or to incur expenses to protect his interest[.]” In Servicewide Specialists,
Section 13 of the 1964 Rules of Court, which was then in force, allowed the service Incorporated v. Court of Appeals, 256 SCRA 649 (1996), the Court declared that:
of summons upon a director of a private domestic corporation: Sec. 13. Service upon Article 2208 of the Civil Code allows attorney’s fees to be awarded by a court when
private domestic corporation or partnership.—If the defendant is a corporation its claimant is compelled to
organized under the laws of the Philippines or a partnership duly registered, service 336
may be made on the president, manager, secretary, cashier, agent, or any of its 336 SUPREME COURT REPORTS ANNOTATED
directors. The aforementioned rule does not require that service on the private
CCC Insurance Corporation vs. Kawasaki Steel Corporation
domestic corporation be served at its principal office in order for the court to acquire
jurisdiction over the same. The Court, in Talsan Enterprises, Inc. v. Baliwag Transit, litigate with third persons or to incur expenses to protect his interest by reason
Inc., 310 SCRA 156 (1999), of an unjustified act or omission on the part of the party from whom it is sought. To
335 be sure, private respondents were forced to litigate to protect their rights but as we
have previously held: “where no sufficient showing of bad faith would be reflected
VOL. 759, JUNE 22, 2015 335 in a party’s persistence in a case other than an erroneous conviction of the
CCC Insurance Corporation vs. Kawasaki Steel Corporation righteousness of his cause, attorney’s fee shall not be recovered as cost.”
Bad Faith; Words and Phrases; Bad faith has been defined as a breach of a
citing Baltazar v. Court of Appeals, 168 SCRA 354 (1988), affirmed that: known duty through some motive of interest or ill will.—Bad faith has been defined
[S]ervice on respondent’s bus terminal at the address stated in the summons and not as “a breach of a known duty through some motive of interest or ill will. It must,
in its main office in Baliwag do not render the service of summons invalid. however, be substantiated by evidence. Bad faith under the law cannot be presumed,
In Artemio Baltazar v. Court of Appeals, we held: “The regular mode, in other it must be established by clear and convincing evidence.” There is no evidence in
words, of serving summons upon a private Philippine Corporation is by personal this case to show bad faith on the part of CCCIC. CCCIC, in refusing the claim of
service upon one of the officers of such corporation identified in Section 13. Kawasaki, was merely acting based on its belief in the righteousness of its defense.
Ordinarily, such personal service may be expected to be made at the principal office Hence, even though Kawasaki was compelled to litigate to enforce its claim against
of the corporation. Section 13, does not, however, impose such requirement, and CCCIC, the award of attorney’s fees is not proper.
so personal service upon the corporation may be effected through service upon, Interest Rates; The Supreme Court (SC), in Nacar v. Gallery Frames, 703
for instance, the president of the corporation at his office or residential SCRA 439 (2013), modified the guidelines in imposing interests, taking into account
address.” x x x. In fine, the service of summons upon respondent Baliwag Transit is Bangko Sentral ng Pilipinas-Monetary Board (BSP-MB) Resolution No. 796 dated

8
May 16, 2013 and Circular No. 799, Series of 2013, which fixed the legal rate at six 4 Id., at pp. 64-87.
percent (6%) per annum effective July 1, 2013.—The Court, in Nacar v. Gallery 5 Article 5, Consortium Agreement.
Frames, 703 SCRA 439 (2013), modified the guidelines in imposing interests, taking 338
into account Bangko Sentral ng Pilipinas-Monetary Board Resolution No. 796 dated 338 SUPREME COURT REPORTS ANNOTATED
May 16, 2013 and Circular No. 799, Series of 2013, which fixed the legal rate at
CCC Insurance Corporation vs. Kawasaki Steel Corporation
6% per annum effective July 1, 2013. In the absence of stipulated interest in the
present case, the Court imposes upon the amounts covered by the Surety and The Project was awarded to the Kawasaki-FFMCCI Consortium for the contract
Performance Bonds the legal rate of 12% per annum from September 15, 1989, the price of P62,000,441.00, 33.37% of which or P20,692,026.00 was the price of work
date of demand, until June 30, 2013; and then the legal rate of 6% per annum from of FFMCCI. On October 4, 1988, the Republic of the Philippines (Republic), through
July 1, 2013 until full payment of the same. the Department of Public Works and Highways (DPWH), represented by former
PETITION for review on certiorari of the decision and resolution of the Court of Secretary Romulo M. del Rosario, as owner, and the Kawasaki-FFMCCI
Appeals. Consortium, represented by Shigeru Kohda, as contractor, entered into a Contract
The facts are stated in the opinion of the Court. Agreement entitled Stage I-A Construction of Pangasinan Fishing Port Network
337 (Construction Contract).6
In accordance with Article 10 of the Consortium Agreement, 7 “Consortium
VOL. 759, JUNE 22, 2015 337 Leader” Kawasaki, on behalf of the Consortium, secured from the Philippine
CCC Insurance Corporation vs. Kawasaki Steel Corporation Commercial International Bank (PCIB) Letter of Credit No. 38-001-183617 8 in the
Buñag & Uy Law Offices for petitioner. amount of P6,200,044.10 in favor of DPWH, available from September 9, 1988 to
E.B. Astudillo & Associates for respondent Kawasaki. November 19, 1990. Said Letter of
LEONARDO-DE CASTRO, J.: 6 Rollo, pp. 95-98.
7 ARTICLE 10 – BONDS
Assailed in this Petition for Review on Certiorari are: (1) the Decision1 dated 10.1 The CONSORTIUM LEADER shall arrange, at their own cost, all
May 30, 2002 of the Court of Appeals in C.A.-G.R. CV No. 54066, which reversed necessary bonds or guarantees as required under the CONTRACT on behalf of the
and set aside the Decision2 dated May 2, 1996 of the Regional Trial Court (RTC), CONSORTIUM. MAÑACOP shall, at its own cost, furnish the CONSORTIUM
Makati City, Branch 66, and held petitioner CCC Insurance Corporation (CCCIC) LEADER with a suitable counter guarantees of its advance payment under the
liable under its Surety and Performance Bonds to respondent Kawasaki Steel CONTRACT and the performance of its PORTION OF WORK in the amount of
Corporation (Kawasaki); and (2) the Resolution3 dated November 14, 2002 of the fifteen (15%) percent (in the case of the repayment guarantee for the advance) and
appellate court in the same case which denied the Motion for Reconsideration of ten (10%) percent (in the case of the performance guarantee) of the price of its
CCCIC. PORTION OF THE WORK.
The antecedents of this case are as follows: 10.2 If the EMPLOYER exercises its right on the bonds or guarantees furnished
On August 16, 1988, Kawasaki, represented by its Manager, Yoshimitsu Hosoya, by the CONSORTIUM LEADER, the PARTIES shall decide the respective
and F.F. Mañacop Construction Company, Inc. (FFMCCI), represented by its responsibilities according to the provisions of this AGREEMENT and the necessary
President, Florante F. Mañacop (Mañacop), executed a Consortium Agreement for reimbursement or compensation shall be made also according to the provisions of
Pangasinan Fishing Port Network Project (Consortium Agreement). 4 Kawasaki and this AGREEMENT. (Rollo, p. 79)
FFMCCI formed a consortium (Kawasaki-FFMCCI Consortium) for the purpose of 8 Records (Vol. I), p. 130.
contracting with the Philippine Government for the construction of a fishing port 339
network in Pangasinan (Project). According to their Consortium Agreement, VOL. 759, JUNE 22, 2015 339
Kawasaki and FFMCCI undertook to perform and accomplish their respective and
CCC Insurance Corporation vs. Kawasaki Steel Corporation
specific portions of work in the intended contract with the Philippine Government.5
_______________ Credit guaranteed the faithful performance by Kawasaki-FFMCCI Consortium of
its obligation under the Construction Contract.
1 Rollo, pp. 37-49; penned by Associate Justice Perlita J. Tria-Tirona, with The Republic made an advance payment for the Project to the Kawasaki-
Associate Justices Buenaventura J. Guerrero and Rodrigo V. Cosico, concurring. FFMCCI Consortium in the amount of P9,300,066.15, representing 15% of the
2 CA Rollo, pp. 71-79; penned by Judge Eriberto U. Rosario, Jr. contract price of P62,000,441.00.
3 Rollo, pp. 51-54. For the release of its share in the advance payment made by the Republic, and
also pursuant to Article 10 of the Consortium Agreement, FFMCCI secured from
9
CCCIC the following bonds in favor of Kawasaki: (a) Surety Bond No. B- counter-guarantees, for which CCCIC could only be held liable upon the filing of a
88/111919 in the amount of P3,103,803.90 (equivalent to 15% of the price of work of claim by the Republic against the Kawasaki-FFMCCI Consortium; (b) Kawasaki and
FFMCCI), effective from October 26, 1988 to October 26, 1989, to counter- FFMCCI, without the consent of CCCIC, executed a new Agreement dated August
guarantee the amount of advance payment FFMCCI would receive from Kawasaki; 24, 1989 novating the terms of the
and (b) Performance Bond B-88/11193 10 in the amount of P2,069,202.60 (equivalent _______________
to 10% of the price of work of FFMCCI), effective from October 27, 1988 to
October 27, 1989, to guarantee completion by FFMCCI of its scope of work in the 14 TSN, March 18, 1993, p. 32.
Project. In turn, FFMCCI and Mañacop executed two Indemnity 15 Records (Vol. I), pp. 165-167.
Agreements11 promising to compensate CCCIC for any damages the insurance 16 Id., at p. 50.
company might incur from issuing the Surety and Performance Bonds. 17 Id., at pp. 1-9.
In two letters dated October 27, 1998, 12 FFMCCI submitted the Surety and 18 Id., at pp. 157-164.
Performance Bonds to Kawasaki and requested Kawasaki to release the advance 341
payment in the amount of P3,103,803.90. FFMCCI eventually received the amount VOL. 759, JUNE 22, 2015 341
of advance payment it requested on a staggered basis.13
_______________ CCC Insurance Corporation vs. Kawasaki Steel Corporation
Consortium Agreement, which prevented CCCIC from being subrogated to the
9 Rollo, pp. 99-100. right of Kawasaki against FFMCCI; (c) Kawasaki, in completing the Transferred
10 Id., at pp. 101-102. Portion of Work was correspondingly compensated, which negated any allegation of
11 Records (Vol. I), pp. 220-223. loss on the part of Kawasaki; and (d) the obligation of CCCIC was extinguished
12 Id., at pp. 46-47. when the Republic granted the Kawasaki-FFMCCI Consortium an extension of time
13 Records (Vol. IV), pp. 59-60. to complete the Project, without the consent of CCCIC.
340 CCCIC subsequently filed on August 19, 1991 before the RTC a Third-Party
Complaint19 against FFMCCI and its President Mañacop based on the two Indemnity
340 SUPREME COURT REPORTS ANNOTATED Agreements which FFMCCI and Mañacop executed in favor of CCCIC. The RTC
CCC Insurance Corporation vs. Kawasaki Steel Corporation issued summonses but FFMCCI and Mañacop failed to file any responsive pleading
The Project commenced in November 1988. 14 Sometime in April 1989, FFMCCI to the Third-Party Complaint of CCCIC. Upon motion of CCCIC, the RTC issued an
ceased performing its work in the Project after suffering financial problems and/or Order20 dated December 2, 1991 declaring FFMCCI and Mañacop in default.
business reverses. After discussions, Kawasaki and FFMCCI then executed a new After trial, the RTC rendered a Decision on May 2, 1996 dismissing the
Agreement15 on August 24, 1989 wherein Kawasaki recognized the “Completed Complaint of Kawasaki and the counterclaim of CCCIC. The RTC agreed with
Portion of Work” of FFMCCI as of April 25, 1989, and agreed to take over the CCCIC that the Surety and Performance Bonds issued by the insurance company
unfinished portion of work of FFMCCI, referred to as “Transferred Portion of were mere counter-guarantees and the cause of action of Kawasaki based on said
Work.” Kawasaki and FFMCCI further agreed that “[a]ny profit or benefit arising Bonds had not yet accrued. Since the Republic did not exercise its right to claim
from the performance by [Kawasaki] of the Transferred Portion of Work shall accrue against the PCIB Letter of Credit No. 38-001-183617, nor compelled Kawasaki to
to [Kawasaki].” perform the unfinished work of FFMCCI, Kawasaki could not claim indemnification
In a letter dated September 14, 1989,16 Kawasaki informed CCCIC about the from CCCIC. Moreover, the RTC, citing Article 2079 of the Civil Code, ruled that
cessation of operations of FFMCCI, and the failure of FFMCCI to perform its the obligations of CCCIC under the Surety and Performance Bonds were
obligations in the Project and repay the advance payment made by Kawasaki. extinguished when the Republic granted the Kawasaki-FFMCCI Consortium a 43-
Consequently, Kawasaki formally demanded that CCCIC, as surety, pay Kawasaki day extension to finish the Project, absent the consent of CCCIC. The RTC found no
the amounts covered by the Surety and Performance Bonds. Because CCCIC did not deliberate intent on the part of Kawasaki to cause prejudice to CCCIC, so it did
act upon its demand, Kawasaki filed on November 6, 1989 before the RTC a _______________
Complaint17against CCCIC to collect on Surety Bond No. B-88/11191 and
Performance Bond No. B-88/11193. 19 Id., at pp. 207-210.
In its Answer with Counterclaims,18 CCCIC denied any liability on its Surety and 20 Id., at p. 271.
Performance Bonds on the following grounds: (a) the rights of Kawasaki under the 342
Surety and Performance Bonds had not yet accrued since the said Bonds were mere 342 SUPREME COURT REPORTS ANNOTATED

10
 CCC Insurance Corporation vs. Kawasaki Steel Corporation and faithfully guarantee the repayment of the down payment made by the principal
not grant the counterclaims for moral and exemplary damages and attorney’s fees ([FFMCCI]) to the obligee (KAWASAKI) in connection with the construction of the
of CCCIC against Kawasaki. Pangasinan Fishing Port Network Project at Pangasinan” subject only to the
Kawasaki appealed before the Court of Appeals assigning the following errors on condition that “the liability of the [herein] surety shall in no case exceed the amount
the part of the RTC: of Pesos: THREE MILLION ONE HUNDRED THREE THOUSAND EIGHT
I. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT [CCCIC] HUNDRED THREE & 90/100 (P3,103,803.90) Philippine currency; and in the case
CAN BE HELD LIABLE TO [Kawasaki] UNDER THE SUBJECT BONDS ONLY of the performance bond, the same was posted, jointly and severally by [FFMCCI]
“IF THE GOVERNMENT EXERCISES ITS RIGHTS AGAINST THE and CCCIC “to guarantee the full and faithful performance of the principal
GUARANTEE-BONDS ISSUED TO IT BY [Kawasaki]” ON THE THEORY ([FFMCCI]) of its obligation in connection with the project for the construction of
ADVANCED BY [CCCIC], WHICH THE COURT A QUO FULLY EMBRACED the Pangasinan Fishing Port Network located at Pangasinan in accordance with the
AND ADOPTED, THAT THE BONDS ARE MERE “COUNTER- plans and specifications of the contract” subject only to the condition that “the
GUARANTEES.” liability of the [herein] surety shall in no case exceed the amount of Pesos: TWO
II. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT THE MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100
EXTENSION GRANTED BY THE GOVERNMENT TO THE CONSORTIUM (P2,069,202.60) Philippine currency.”
FOR THE CONSTRUCTION OF THE PANGASINAN FISHING PORT The right of KAWASAKI as the obligee/creditor of the said bonds was not made
NETWORK PROJECT EXTINGUISHED THE LIABILITY OF [CCCIC]. subject to any other condition expressly so provided in the Consortium Agreement,
III. THE COURT A QUO GROSSLY ERRED IN HOLDING THAT ARTICLE _______________
2079 OF THE CIVIL CODE OF THE PHILIPPINES APPLIES TO THE CASE AT
BAR. IN A LONG LINE OF DECISIONS, THE SUPREME COURT HAS HELD 21 CA Rollo, pp. 42-44.
THAT THE RULE OF “STRICTISSIMI JURIS” DOES NOT APPLY TO SURETY 344
COMPANIES SUCH AS [CCCIC] HEREIN. 344 SUPREME COURT REPORTS ANNOTATED
IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER 26 AND 27, 1989 CCC Insurance Corporation vs. Kawasaki Steel Corporation
RESPECTIVELY WHILE THE ORIGINAL PERIOD OF THE CONTRACT WITH which was the reason for the bonds posted by [FFMCCI] and CCCIC, or in the
THE GOVERNMENT, THE PERFORMANCE OF WHICH BY [CCCIC] ARE subject bonds themselves.
PRECISELY GUARANTEED BY THESE BONDS, IS UNTIL DECEMBER 30, It is not provided, neither in the Consortium Agreement nor in the subject bonds
1989. ON THE OTHER HAND, THE DEFAULT BY [FFMCCI] WHICH THE themselves that before KAWASAKI may proceed against the bonds posted by
BONDS GUARANTEED AGAINST OCCURRED ON [OR] ABOUT AUGUST [FFMCCI] and CCCIC, the Philippine government as employer must first exercise
24, 1989. THEREFORE, IRRESPECTIVE OF WHETHER THERE WAS AN its rights against the bond issued in its favor by the consortium.
EXTENSION OR NOT AT THE END OF THE ORIGINAL CONTRACT PERIOD Hence, this Court finds that the court a quo did err in ruling that “[u]nder the
AND IRRESPECTIVE Consortium Agreement, the bonds are counter-guarantees which only guarantee the
343 plaintiff KAWASAKI for reimbursement to the extent of the value of the bonds in
VOL. 759, JUNE 22, 2015 343 case the employer (government) successfully exercised its rights under the bonds
CCC Insurance Corporation vs. Kawasaki Steel Corporation issued to it by plaintiff KAWASAKI”; and that “[c]onsidering that the government
OF WHETHER THIS EXTENSION IS KNOWN OR UNKNOWN TO did not exercise its rights against the bond issued to it by the Consortium Leader, it
[CCCIC], THE LIABILITY THAT IT BOUND ITSELF UNTO UNDER THE follows that the Consortium Leader cannot collect from the counter-guarantees
BONDS IS VERY CLEARLY AND UNEQUIVOCALLY FIXED UNTIL furnished by [FFMCCI].”
OCTOBER 26 AND 27, 1989 RESPECTIVELY. THEREFORE, ARTICLE 2079 Time and again, the Supreme Court has stressed the rule that a contract is the law
WILL NOT APPLY. HENCE, THE COURT A QUO GROSSLY ERRED IN between the parties, and courts have no choice but to enforce such contract so long as
HOLDING OTHERWISE.21 they are not contrary to law, morals, good customs or public policy.
With respect to the second, third and fourth issues raised, suffice it to say that
The Court of Appeals, in its Decision dated May 30, 2002, reversed the appealed this Court finds Article 2079 of the Civil Code of the Philippines not applicable.
RTC Decision, reasoning as follows: [Kawasaki] claims that since the issue in this case is the liability of CCCIC to
From the language of the aforesaid bonds, it is clear that, in the case of the surety KAWASAKI, the extension of forty-three (43) days within which to complete the
bond, the same was posted, jointly and severally, by [FFMCCI] and CCCIC “to fully Pangasinan Fishing Port Network Project granted by the Philippine government, who

11
is not a party to the two (2) bonds posted by [FFMCCI] and CCCIC, to the appellate court partially granted the Third-Party Complaint of CCCIC by holding
consortium, does not absolve CCCIC’s liabilities to KAWASAKI under the subject Mañacop liable under the Indemnity Agreements he executed in favor of the
bonds. insurance company, while declaring the RTC was without jurisdiction over FFMCCI
We agree. due to invalid service of summons. The Court of Appeals ultimately resolved:
As stated earlier, the parties insofar as the surety bond and performance bond are WHEREFORE, judgment is hereby rendered in favor of third party plaintiff
concerned are: KAWA- CCC Insurance Corporation and against third party defendant Florante F. Mañacop,
345 ordering the latter to indemnify the former the total amount paid by the former to
VOL. 759, JUNE 22, 2015 345 Kawasaki Steel Corporation representing CCC Insurance Corporation’s liabilities
under Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193 and to
CCC Insurance Corporation vs. Kawasaki Steel Corporation
pay CCC Insurance Corporation 25% of the total amount due, as and for attorney’s
SAKI, as obligee, [FFMCCI], as principal; and CCCIC, as surety. fees.24
Considering therefore that the extension of time within which to complete the
construction of the Pangasinan Fishing Port Network Project was granted by the In the instant Petition for Review on Certiorari, CCCIC assails the
Philippine government, who is not the creditor of the bonds, this Court finds that aforementioned Decision and Resolution of the Court of Appeals on six
Article 2079 of the Civil Code of the Philippines does not apply and the extension of grounds, viz.:
time granted by the Philippine government, contrary to the ruling of the trial court, A.
does not absolve the surety of its liabilities to KAWASAKI under the subject bonds. THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO
The principle of relativity of contracts provides that contracts can only bind the CONSIDER THE TRUE NATURE OF THE TRANSACTION BETWEEN THE
parties who entered into it. PARTIES AND THE TRUE NATURE OF A COUNTER-GUARANTEE.
Finally, this Court finds the award of attorney’s fees in favor of the appellant _______________
warranted under the circumstance, pursuant to paragraph (2) of Article 2208 of the
Civil Code of the Philippines.22 23 Id., at p. 48.
24 Id., at p. 54.
In the end, the Court of Appeals decreed: 347
WHEREFORE, the instant appeal is hereby GRANTED. Accordingly, the
assailed decision of the Regional Trial Court of Makati City, Branch 66, is VOL. 759, JUNE 22, 2015 347
hereby REVERSED and SET ASIDE. CCC Insurance Corporation vs. Kawasaki Steel Corporation
CCC Insurance Corporation is hereby ordered to pay KAWASAKI the B.
following: THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO
1. The amount of P3,103,803.90 representing its liability to Kawasaki Steel APPRECIATE THE APPLICABILITY OF ARTICLE 2079 OF THE CIVIL CODE,
Corporation under Surety Bond No. B-88/11191, plus legal interest at the rate of WHICH PROVIDES THAT AN EXTENSION GRANTED TO THE DEBTOR BY
12% per annum computed from 15 September 1989, until fully paid; THE CREDITOR WITHOUT THE CONSENT OF THE GUARANTOR
2. The amount of P2,069,202.80 representing its liability to Kawasaki Steel EXTINGUISHES THE GUARANTY.
Corporation under Performance Bond No. B-88/11193, plus legal interest at the rate C.
of 12% per annum computed from 15 September 1989, until fully paid; and THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
_______________ FAILED TO CONSIDER THE FACT THAT KAWASAKI AND FFMCCI HAVE
NOVATED THEIR ORIGINAL AGREEMENT WITHOUT THE KNOWLEDGE
22 Rollo, pp. 46-48. AND CONSENT OF CCCIC, THEREBY RELEASING THE LATTER FROM
346 ANY OBLIGATION UNDER THE BONDS IT ISSUED.
346 SUPREME COURT REPORTS ANNOTATED D.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
CCC Insurance Corporation vs. Kawasaki Steel Corporation
RENDERED CCCIC LIABLE TO PAY THE FULL AMOUNT OF THE SURETY
3. 15% of the total amount due as and for attorney’s fees.23 AND PERFORMANCE BONDS DESPITE THE FACT THAT FFMCCI WAS
ABLE TO PARTIALLY EXECUTE ITS PORTION OF THE WORK AND THAT
In its Resolution dated November 14, 2002, the Court of Appeals denied the
Motion for Reconsideration of CCCIC. However, in the same Resolution, the
12
KAWASAKI HAD BEEN FULLY COMPENSATED FOR TAKING OVER THE Lastly, CCCIC insists that there was proper service of summons upon FFMCCI,
UNFINISHED PORTION. through one of its directors, as authorized by the Rules of Court.
E. The Petition is partly meritorious.
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY
AWARDED ATTORNEY’S FEES TO KAWASAKI UNDER PARAGRAPH 2 OF The liability of CCCIC under the Surety and Performance Bonds is dependent on
ARTICLE 2208 OF THE CIVIL CODE. the fulfillment and/or nonfulfillment of the obligation of FFMCCI to KAWASAKI
348 under the Consortium Agreement.
348 SUPREME COURT REPORTS ANNOTATED
The statutory definition of suretyship is found in Article 2047 of the Civil Code,
CCC Insurance Corporation vs. Kawasaki Steel Corporation
thus:
F. Art. 2047. By guaranty a person, called the guarantor, binds himself to the
THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY creditor to fulfill the obligation of the principal debtor in case the latter should fail to
RULED THAT THERE WAS NO VALID SERVICE OF SUMMONS UPON do so.
FFMCCI.25 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
CCCIC avers that its liabilities under the Surety and Performance Bonds are is called a suretyship. (Emphasis supplied)
directly linked with the obligation of the Kawasaki-FFMCCI Consortium to finish
the Project for the Republic, so that its liability as surety of FFMCCI will only arise Jurisprudence also defines a contract of suretyship as “an agreement where a
if the Republic made a claim on the PCIB Letter of Credit furnished by Kawasaki, on party called the surety guarantees the performance by another party called the
behalf of the Consortium. Since the Republic has not exercised its right against said principal or obligor of an obligation or undertaking in favor of a third person called
Letter of Credit, Kawasaki does not have a cause of action against CCCIC. the obligee. Specifically, suretyship is a contractual relation resulting from an
CCCIC also maintains that its obligations under the Surety and Performance agreement whereby one person, the surety, engages to be answerable for the debt,
Bonds had been extinguished when (a) the Republic extended the completion period default or miscarriage of another, known as the principal.”26 The Court expounds
for the Project upon the request of Kawasaki but without the knowledge or consent _______________
of CCCIC, based on Article 2079 of the Civil Code; and (b) when Kawasaki and
FFMCCI executed the Agreement dated August 24, 1989, without the consent of 26 Visayan Surety & Insurance Corporation v. Court of Appeals, 417 Phil. 110,
CCCIC, there being a novation of the Consortium Agreement. 116-117; 364 SCRA 631, 636 (2001).
CCCIC further argues that when Kawasaki, under the Agreement dated August 350
24, 1989, voluntarily took over the Transferred Portion of Work from FFMCCI, it
resulted in the reduction of revenue of FFMCCI on which CCCIC relied upon as a 350 SUPREME COURT REPORTS ANNOTATED
source of indemnification. CCCIC additionally posits that Kawasaki already received CCC Insurance Corporation vs. Kawasaki Steel Corporation
compensation for doing the Transferred Portion of Work, so the Court of Appeals that “a surety’s liability is joint and several, limited to the amount of the bond,
had no basis for still ordering Kawasaki to pay the full value of the Surety and and determined strictly by the terms of contract of suretyship in relation to the
Performance Bonds, plus interest. principal contract between the obligor and the obligee. It bears stressing, however,
Moreover, CCCIC contends that the Court of Appeals erred in awarding that although the contract of suretyship is secondary to the principal contract, the
attorney’s fees in favor of Kawasaki based on surety’s liability to the obligee is nevertheless direct, primary, and absolute.” 27
_______________ At the outset, the Court ascertains that there are two principal contracts in this
case: (1) the Consortium Agreement wherein Kawasaki and FFMCCI agreed to
25 Id., at pp. 17-18. jointly enter into a contract with the Republic for the Project, each assuming the
349 performance of specific scopes of work in said Project; and (2) the Construction
VOL. 759, JUNE 22, 2015 349 Contract whereby the Republic awards the Project to the Kawasaki-FFMCCI
Consortium. While there is a connection between these two contracts, they are each
CCC Insurance Corporation vs. Kawasaki Steel Corporation
distinguishable from and enforceable independently of one another: the first governs
paragraph 2 of Article 2208 of the Civil Code as it is not a sound policy to place the rights and obligations between Kawasaki and FFMCCI, while the second covers
a penalty on the right to litigate. contractual relations between the Republic and the Kawasaki-FFMCCI Consortium.

13
The Surety and Performance Bonds from CCCIC guaranteed the performance by 352
FFMCCI of its obligations under the Consortium Agreement; whereas the Letter of 352 SUPREME COURT REPORTS ANNOTATED
Credit from PCIB warranted the completion of the Project by the Kawasaki-FFMCCI
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Consortium. At the crux of the instant controversy are the Surety and Performance
Bonds issued by CCCIC in relation to the Consortium Agreement. THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:
FFMCCI secured the Surety and Performance Bonds from CCCIC in compliance TO FULLY AND FAITHFULLY GUARANTEE THE REPAYMENT OF
with Article 10 of the Consortium Agreement which provided: THE DOWNPAYMENT MADE BY THE PRINCIPAL TO THE OBLIGEE IN
ARTICLE 10 – BONDS CONNECTION WITH THE CONSTRUCTION OF THE PANGASINAN FISHING
10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange, at [its] own cost, PORT NETWORK PROJECT AT PANGASINAN; AND
all necessary bonds or PROVIDED, HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY
_______________ SHALL IN NO CASE EXCEED THE AMOUNT OF PESOS: THREE MILLION
ONE HUNDRED THREE THOUSAND EIGHT HUNDRED THREE & 90/100
27 The Manila Insurance Company, Inc. v. Amurao, G.R. No. 179628, January ONLY (P3,103,803.90) PHILIPPINE CURRENCY.
16, 2013, 688 SCRA 609, 616-617. xxxx
351 WHEREAS, the said OBLIGEE requires said Principal to give a good and
sufficient bond in the above stated sum to secure the full and faithful performance
VOL. 759, JUNE 22, 2015 351 on his part of said UNDERTAKING.
CCC Insurance Corporation vs. Kawasaki Steel Corporation NOW, THEREFORE, if the above bounden principal shall in all respects duly
guarantees as required under the CONTRACT on behalf of the CONSORTIUM. and fully observe and perform all and singular the aforesaid covenants, conditions
[FFMCCI] shall, at its own cost, furnish the CONSORTIUM LEADER [Kawasaki] and agreements to the true intent and meaning thereof, then this obligation shall be
with a suitable counter guarantees of its advance payment under the CONTRACT null and void, otherwise to remain in full force and effect.
and the performance of its PORTION OF WORK in the amount of fifteen (15%) The liability of the Surety under this bond shall expire on October 26, 1989 and
percent (in the case of the repayment guarantee for the advance) and ten (10%) the Surety does not assume responsibility for any liability incurred or created after
percent (in the case of the performance guarantee) of the price of its PORTION OF said date. Any claims against this bond must be presented to the Surety in writing not
THE WORK. later than ten (10) days after said expiry date; otherwise, failure to do so shall
10.2 If the EMPLOYER [Republic] exercises its right on the bonds or guarantees forthwith release the Surety from all liabilities under this bond and shall be a bar to
furnished by the CONSORTIUM LEADER, the PARTIES shall decide the any court action against it and which right to sue is hereby waived by the Obligee
respective responsibilities according to the provisions of this AGREEMENT and the after the lapse of said period of ten (10) days above cited.29 (Emphases supplied)
necessary reimbursement or compensation shall be made also according to the _______________
provisions of this AGREEMENT.28
29 Id., at p. 99.
Pertinent portions of Surety Bond No. B-88/11191 read: 353
SURETY BOND VOL. 759, JUNE 22, 2015 353
KNOW ALL MEN BY THESE PRESENTS:
CCC Insurance Corporation vs. Kawasaki Steel Corporation
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as principal, and
CCC Insurance Corporation, x x x, as SURETY, are held and firmly bound unto Performance Bond No. B-88/11193 contains the following terms and conditions:
KAWASAKI STEEL CORPORATION, hereinafter referred to as the OBLIGEE: in PERFORMANCE BOND
the sum of PESOS: THREE MILLION ONE HUNDRED THREE THOUSAND KNOW ALL MEN BY THESE PRESENTS:
EIGHT HUNDRED THREE & 90/100 ONLY (P3,103,803.90), Philippine currency, That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as principal, and
for the payment of which, well and truly to be made, we bind ourselves, our heirs, CCC Insurance Corporation, x x x, as SURETY, are held and firmly bound unto
executors, administrators, successors and assigns, jointly and severally, firmly bound KAWASAKI STEEL CORPORATION, hereinafter referred to as the OBLIGEE: in
from notice of acceptance, by these presents. the sum of PESOS: TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED
_______________ TWO & 60/100 ONLY (P2,069,202.60), Philippine currency, for the payment of
which, well and truly to be made, we bind ourselves, our heirs, executors,
28 Rollo, p. 79. administrators, successors and assigns, jointly and severally, firmly bound from
notice of acceptance, by these presents.
14
 THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS: If a contract should contain some stipulation in favor of a third person, he may
TO GUARANTEE THE FULL AND FAITHFUL PERFORMANCE OF demand its fulfillment provided he communicated his acceptance to the obligor
THE PRINCIPAL OF ITS OBLIGATION IN CONNECTION WITH THE before its revocation. A mere incidental benefit or interest of a person is not
PROJECT FOR THE CONSTRUCTION OF PANGASINAN FISHING PORT sufficient. The contracting parties must have clearly and deliberately conferred a
NETWORK LOCATED AT PANGASINAN IN ACCORDANCE WITH THE favor upon a third person.
PLANS AND SPECIFICATION OF THE CONTRACT; AND 355
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE HEREIN SURETY VOL. 759, JUNE 22, 2015 355
SHALL IN NO CASE EXCEED THE AMOUNT OF PESOS: TWO MILLION
CCC Insurance Corporation vs. Kawasaki Steel Corporation
SIXTY-NINE THOUSAND TWO HUNDRED TWO & 60/100 ONLY
(P2,069,202.60) PHILIPPINE CURRENCY. contract contains a stipulation in favor of a third person, which gives said person
xxxx the right to demand fulfillment of said stipulation. In this case, the Surety and
WHEREAS, the said OBLIGEE requires said Principal to give a good and Performance Bonds are enforceable by and against the parties FFMCCI (the obligor)
sufficient bond in the above stated sum to secure the full and faithful performance and CCCIC (the surety), as well as the third person Kawasaki (the obligee) in whose
on his part of said UNDERTAKING. favor said bonds had been explicitly constituted; while the related Consortium
354 Agreement binds the parties Kawasaki and FFMCCI. Since the Republic is neither a
party to the Surety and Performance Bonds nor the Consortium Agreement, any
354 SUPREME COURT REPORTS ANNOTATED action or omission on its part has no effect on the liability of CCCIC under said
CCC Insurance Corporation vs. Kawasaki Steel Corporation bonds.
NOW, THEREFORE, if the above bounden principal shall in all respects duly The Surety and Performance Bonds state that their purpose was “to secure the
and fully observe and perform all and singular the aforesaid covenants, conditions full and faithful performance on [FFMCCI’s] part of said undertaking,” particularly,
and agreements to the true intent and meaning thereof, then this obligation shall be the repayment by FFMCCI of the down payment advanced to it by Kawasaki (in the
null and void, otherwise to remain in full force and effect. case of the Surety Bond) and the full and faithful performance by FFMCCI of its
The liability of the Surety under this bond shall expire on October 27, 1989 and portion of work in the Project (in the case of the Performance Bond). These are the
the Surety does not assume responsibility for any liability incurred or created after only undertakings expressly guaranteed by the bonds, the fulfillment of which by
said date. Any claims against this bond must be presented to the Surety in writing not FFMCCI would release CCCIC from its obligations as surety; or conversely, the
later than ten (10) days after said expiry date; otherwise, failure to do so shall nonperformance of which would give rise to the liabilities of CCCIC as a surety.
forthwith release the Surety from all liabilities under this bond and shall be a bar to The Surety and Performance Bonds do not contain any condition that CCCIC
any court action against it and which right to sue is hereby waived by the Obligee would be liable only if, in addition to the default on its undertakings by FFMCCI, the
after the lapse of said period of ten (10) days above cited.30 (Emphasis supplied) Republic also made a claim against the PCIB Letter of Credit furnished by
Kawasaki, on behalf of the Kawasaki-FFMCCI Consortium. The Court agrees with
The Court reiterates that a surety’s liability is determined strictly by the terms of the observation of the Court of Appeals that “it is not provided, neither in the
contract of suretyship, in relation to the principal contract between the obligor and Consortium Agreement nor in the subject bonds themselves that before KAWASAKI
the obligee. Hence, the Court looks at the Surety and Performance Bonds, in relation may proceed against the bonds posted by [FFMCCI] and CCCIC, the Philippine
to the Consortium Agreement. government as employer must first
According to the principle of relativity of contracts in Article 1311 of the Civil 356
Code,31 a contract takes effect only between the parties, their assigns, and heirs; 356 SUPREME COURT REPORTS ANNOTATED
except when the
CCC Insurance Corporation vs. Kawasaki Steel Corporation
_______________
exercise its rights against the bond issued in its favor by the consortium.”32
30 Id., at p. 101. The Court cannot give any additional meaning to the plain language of the
31 Art. 1311. Contracts take effect only between the parties, their assigns and undertakings in the Surety and Performance Bonds. The extent of a surety’s liability
heirs, except in case where the rights and obligations arising from the contract are is determined by the language of the suretyship contract or bond itself. Article 1370
not transmissible by their nature, or by stipulation or by provision of law. The heir is of the Civil Code provides that “[i]f the terms of a contract are clear and leave no
not liable beyond the value of the property he received from the decedent. doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.”33

15
 There is no basis for the interpretation by CCCIC of the word “counter- personal interest over the obligations nor does it receive any benefit therefrom. Let it
guarantee” in Article 10 of the Consortium Agreement. The first paragraph of Article be stressed that notwithstanding the fact that the surety contract is secondary to the
10 of the Consortium Agreement provides that Kawasaki, as the Consortium Leader, principal obligation, the surety assumes liability as a regular party to the undertaking.
shall arrange, at its own cost but on behalf of the Kawasaki-FFMCCI Consortium, _______________
for all necessary bonds and guarantees under the Construction Contract with the
Republic. The same paragraph requires, in turn, that FFMCCI, at its own cost, to 34 647 Phil. 692, 702-704; 633 SCRA 370, 379 (2010).
furnish Kawasaki with suitable counter-guarantees for the repayment by FFMCCI for 358
the advance payment from Kawasaki and performance by FFMCCI of its portion of 358 SUPREME COURT REPORTS ANNOTATED
work in the Project. Clearly, the “guarantees” and “counter-guarantees” were
securities for the fulfillment of the obligations of the Kawasaki-FFMCCI Consortium CCC Insurance Corporation vs. Kawasaki Steel Corporation
to the Republic under the Construction Contract and of FFMCCI to the Consortium Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,
Leader Kawasaki under the Consortium Agreement, respectively. The CCCIC Surety reiterating the ruling in Garcia v. Court of Appeals, expounds on the nature of the
and Performance Bonds were not counter-guarantees to the PCIB Letter of Credit. In surety’s liability:
fact, in the event that the Republic did make a claim on the PCIB Letter of Credit, x x x. The surety’s obligation is not an original and direct one for the
the second paragraph of Article 10 of the Consortium Agreement stipulates that performance of his own act, but merely accessory or collateral to the obligation
Kawasaki and FFMCCI would still have to determine their re- 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,
32 Rollo, p. 46. he is directly and equally bound with the principal.
33 Molino v. Security Diners International Corporation, 415 Phil. 587, 595; 363 Suretyship, in essence, contains two types of relationship — the principal
SCRA 358, 367-368 (2001). relationship between the obligee (petitioner) and the obligor (Lucky Star), and the
357 accessory surety relationship between the principal (Lucky Star) and the surety
(respondent). In this arrangement, the obligee accepts the surety’s solidary
VOL. 759, JUNE 22, 2015 357 undertaking to pay if the obligor does not pay. Such acceptance, however, does not
CCC Insurance Corporation vs. Kawasaki Steel Corporation change in any material way the obligee’s relationship with the principal obligor.
spective responsibilities, reimbursements, and/or compensations according to the Neither does it make the surety an active party to the principal obligee-obligor
provisions of the Consortium Agreement, instead of simply allowing Kawasaki to relationship. Thus, the acceptance does not give the surety the right to intervene in
recover on the “counter-guarantees” of FFMCCI. the principal contract. The surety’s role arises only upon the obligor’s default, at
It is not disputed that FFMCCI, due to financial difficulties, was unable to repay which time, it can be directly held liable by the obligee for payment as a solidary
the advance payment it received from Kawasaki and to finish its scope of work in the obligor.
Project, thus, FFMCCI defaulted on its obligations to Kawasaki. Given the default of In the case at bench, when Lucky Star failed to finish the drilling work within
FFMCCI, CCCIC as surety became directly, primarily, and absolutely liable to the agreed time frame despite petitioner’s demand for completion, it was
Kawasaki as the obligee under the Surety and Performance Bonds. The following already in delay. Due to this default, Lucky Star’s liability attached and, as a
pronouncements of the Court in Asset Builders Corporation v. Stronghold Insurance necessary consequence, respondent’s liability under the surety agreement arose.
Company, Inc.34 are relevant herein: Undeniably, when Lucky Star reneged on its undertaking with the petitioner and
Respondent, along with its principal, Lucky Star, bound itself to the petitioner further failed to return the P575,000.00 downpayment that was already ad-
when it executed in its favor surety and performance bonds. The contents of the said 359
contracts clearly establish that the parties entered into a surety agreement as defined VOL. 759, JUNE 22, 2015 359
under Article 2047 of the New Civil Code. x x x.
CCC Insurance Corporation vs. Kawasaki Steel Corporation
xxxx
As provided in Article 2047, the surety undertakes to be bound solidarily with vanced to it, respondent, as surety, became solidarily bound with Lucky Star for
the principal obligor. That undertaking makes a surety agreement an ancillary the repayment of the said amount to petitioner. The clause, “this bond is callable on
contract as it presupposes the existence of a principal contract. Although the contract demand,” strongly speaks of respondent’s primary and direct responsibility to the
of a surety is in essence secondary only to a valid principal obligation, the surety petitioner.
becomes liable for the debt or duty of another although it possesses no direct or

16
 Accordingly, after liability has attached to the principal, the obligee or, in equally applies to both contracts of guaranty and suretyship. The rationale therefor
this case, the petitioner, can exercise the right to proceed against Lucky Star or was explained by the Court as follows:
respondent or both. x x x. (Emphases supplied, citations omitted) The theory behind Article 2079 is that an extension of time given to the
Article 2079 of the New Civil Code is not applicable to the instant case. principal debtor by the creditor without the surety’s consent would deprive the
surety of his right to pay the creditor and to be immediately subrogated to the
To free itself from its liabilities under the Surety and Performance Bonds, creditor’s remedies against the principal debtor upon the maturity date. The
CCCIC cites Article 2079 of the Civil Code, which reads: surety is said to be entitled to protect himself against the contingency of the
Art. 2079. An extension granted to the debtor by the creditor without the princi-
consent of the guarantor extinguishes the guaranty. The mere failure on the part of 361
the creditor to demand payment after the debt has become due does not of itself VOL. 759, JUNE 22, 2015 361
constitute any extension of time referred to herein.
CCC Insurance Corporation vs. Kawasaki Steel Corporation
The aforequoted provision clearly speaks of an extension for the payment of a pal debtor or the indemnitors becoming insolvent during the extended
debt granted by the creditor to a debtor without the consent of the surety. The theory period. x x x.
behind Article 2079 was further explained by the Court in Trade and Investment Applying these principles, the Court finds that the payment extensions granted by
Development Corporation of the Philippines (formerly Philippine Export and Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement
Foreign Loan Guarantee Corporation) v. Asia Paces Corporation,35 thus: did not have the effect of extinguishing the bonding companies’ obligations to
Comparing a surety’s obligations with that of a guarantor, the Court, in the case TIDCORP under the Surety Bonds, notwithstanding the fact that said extensions
of Palmares v. CA, illumined that a surety is responsible for the debt’s pay- were made without their consent. This is because Article 2079 of the Civil Code
_______________ refers to a payment extension granted by the creditor to the principal debtor
without the consent of the guarantor or surety. In this case, the Surety Bonds are
35 G.R. No. 187403, February 12, 2014, 716 SCRA 67, 78-83. suretyship contracts which secure the debt of ASPAC, the principal debtor, under the
360 Deeds of Undertaking to pay TIDCORP, the creditor, the damages and liabilities it
may incur under the Letters of Guarantee, within the bounds of the bonds’ respective
360 SUPREME COURT REPORTS ANNOTATED coverage periods and amounts. No payment extension was, however, granted by
CCC Insurance Corporation vs. Kawasaki Steel Corporation TIDCORP in favor of ASPAC in this regard; hence, Article 2079 of the Civil Code
ment at once if the principal debtor makes default, whereas a guarantor pays only should not be applied with respect to the bonding companies’ liabilities to TIDCORP
if the principal debtor is unable to pay, viz.: under the Surety Bonds.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the The payment extensions granted by Banque Indosuez and PCI Capital pertain to
solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP)
guaranty, an undertaking that the debtor shall pay. Stated differently, a surety irrevocably and unconditionally guaranteed full payment of ASPAC’s loan
promises to pay the principal’s debt if the principal will not pay, while a guarantor obligations to the banks in the event of its (ASPAC) default. In other words, the
agrees that the creditor, after proceeding against the principal, may proceed against Letters of Guarantee secured ASPAC’s loan agreements to the banks. Under this
the guarantor if the principal is unable to pay. A surety binds himself to perform if arrangement, TIDCORP therefore acted as a guarantor, with ASPAC as the principal
the principal does not, without regard to his ability to do so. A guarantor, on the debtor, and the banks as creditors.
other hand, does not contract that the principal will pay, but simply that he is able to Proceeding from the foregoing discussion, it is quite clear that there are two
do so. In other words, a surety undertakes directly for the payment and is so sets of transactions that should be treated separately and distinctly from one
responsible at once if the principal debtor makes default, while a guarantor contracts another following the civil law principle of relativity of contracts “which
to pay if, by the use of due diligence, the debt cannot be made out of the principal provides that contracts can only bind the parties who entered into it, and it cannot
debtor. x x x. favor or prejudice a third person, even if he is
Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety & 362
Insurance Co., Inc., and later in the case of Security Bank, held that Article 2079 of 362 SUPREME COURT REPORTS ANNOTATED
the Civil Code, which pertinently provides that “[a]n extension granted to the debtor
CCC Insurance Corporation vs. Kawasaki Steel Corporation
by the creditor without the consent of the guarantor extinguishes the guaranty,”
aware of such contract and has acted with knowledge thereof.” Verily, as the
Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to
17
the banks, the payments extensions (which conversely concern TIDCORP’s debt authorized Kawasaki to continue the same. It was precisely because FFMCCI
to the banks and not ASPAC’s debt to TIDCORP) would not deprive the defaulted on its obligations under the Consortium Agreement that necessitated the
bonding companies of their right to pay their creditor (TIDCORP) and to be execution of the Agreement dated August 24, 1989 between Kawasaki and FFMCCI,
immediately subrogated to the latter’s remedies against the principal debtor and this is evident from one of the “whereas” clauses in the said Agreement which
(ASPAC) upon the maturity date. It must be stressed that these payment says that “due to some financial reverses[, FFMCCI] can no longer do its portion of
extensions did not modify the terms of the Letters of Guarantee but only provided for the work under the Contract.” The liabilities of CCCIC as surety to Kawasaki under
a new payment scheme covering TIDCORP’s liability to the banks. In fine, the Surety and Performance Bonds had already attached upon the default of FFMCCI
considering the inoperability of Article 2079 of the Civil Code in this case, the while the said bonds were still in effect and prior to the alleged novation of the
bonding companies’ liabilities to TIDCORP under the Surety Bonds — except those Consortium Agreement by the Agreement dated August 24, 1989 which resulted in
issued by Paramount and covered by its Compromise Agreement with TIDCORP — the extinguishment of the bonds.
have not been extinguished. Since these obligations arose and have been duly 364
demanded within the coverage periods of all the Surety Bonds, TIDCORP’s claim is 364 SUPREME COURT REPORTS ANNOTATED
hereby granted. x x x. (Emphases supplied, citations omitted)
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Similarly, there are two sets of transactions in the present case covered by two The Court expounded on the concept of novation in Reyes v. BPI Family Savings
different contracts: the Consortium Agreement between Kawasaki and FFMCCI and Bank, Inc.:36
the Construction Contract between the Republic and the Kawasaki-FFMCCI Novation is defined as the extinguishment of an obligation by the substitution or
Consortium. The Surety and Performance Bonds guaranteed the performance of the change of the obligation by a subsequent one which terminates the first, either by
obligations of FFMCCI to Kawasaki under the Consortium Agreement. The changing the object or principal conditions, or by substituting the person of the
Republic was not a party in either the Surety and Performance Bonds or the debtor, or subrogating a third person in the rights of the creditor.
Consortium Agreement. Under these circumstances, there was no creditor-debtor Article 1292 of the Civil Code on novation further provides:
relationship between the Republic and FFMCCI and Article 2079 of the Civil Code Article 1292. In order that an obligation may be extinguished by another which
did not apply. The extension granted by the Republic to Kawasaki modified the substitute the same, it is imperative that it be so declared in unequivocal terms, or
deadline for the completion of the Project under the Construction Contract, but had that the old and the new obligations be on every point incompatible with each other.
no effect on the obligations of FFMCCI to Kawasaki under the Consortium Agree- The cancellation of the old obligation by the new one is a necessary element of
363 novation which may be effected either expressly or impliedly. While there is really
no hard and fast rule to determine what might constitute sufficient change resulting
VOL. 759, JUNE 22, 2015 363 in novation, the touchstone, however, is irreconcilable incompatibility between the
CCC Insurance Corporation vs. Kawasaki Steel Corporation old and the new obligations.
ment, much less, on the liabilities of CCCIC under the Surety and Performance In Garcia, Jr. v. Court of Appeals, we held that:
Bonds. In every novation there are four essential requisites: (1) a previous valid
obligation; (2) the agreement of all the parties to the new contract; (3) the
CCCIC failed to discharge the burden of proving the novation of the Consortium extinguishment of the old contract; and (4) validity of the new one. There must be
Agreement which would have extinguished its obligations under the Surety and consent of all the parties to the substitution, resulting in the extinction of the old
Performance Bonds. obligation and the creation of a valid new one. x x x. (Citations omitted)
_______________
CCCIC argues that it was released from its obligations as surety under the Surety
and Performance Bonds because of the novation of the Consortium Agreement by 36 520 Phil. 801, 806-807; 486 SCRA 276, 281 (2006).
the subsequent Agreement dated August 24, 1989 executed between Kawasaki and 365
FFMCCI, without the consent of CCCIC. VOL. 759, JUNE 22, 2015 365
The Court first notes that the default of FFMCCI preceded the execution of the
Agreement on August 24, 1989 which purportedly novated the Consortium CCC Insurance Corporation vs. Kawasaki Steel Corporation
Agreement and, in effect, extinguished the Surety and Performance Bonds. As early It is well-settled that novation is never presumed — novatio non praesumitur. As
as his letter dated July 20, 1989, Mañacop, FFMCCI President, already admitted the the party alleging novation, the onus of showing clearly and unequivocally that
inability of FFMCCI to continue with its portion of work in the Project and novation had indeed taken place rests on CCCIC. 37 The Court laid down guidelines
in establishing novation, viz.:
18
 the other PARTY, the defaulting PARTY’s PORTION OF WORK may be
Novation is never presumed, and the animus novandi, whether totally or performed at the account and responsibility of the defaulting PARTY, by the non-
partially, must appear by express agreement of the parties, or by their acts that are defaulting PARTY or by any other contractor selected by the non-defaulting PARTY
too clear and unequivocal to be mistaken. and approved by the EMPLOYER. In such event, the defaulting PARTY or its
The extinguishment of the old obligation by the new one is a necessary element representative shall, in no way, interfere with the performance of the CONTRACT or
of novation which may be effected either expressly or impliedly. The term impede the progress thereof, on any ground, and shall allow such performing
“expressly” means that the contracting parties incontrovertibly disclose that their PARTY or the said contractor to use the materials and equipment of such defaulting
object in executing the new contract is to extinguish the old one. Upon the other PARTY, for the purpose of remedial action.
hand, no specific form is required for an implied novation, and all that is prescribed _______________
by law would be an incompatibility between the two contracts. While there is really
no hard and fast rule to determine what might constitute to be a sufficient change that 38 Quinto v. People, 365 Phil. 259, 267-268; 305 SCRA 708, 715-716 (1999).
can bring about novation, the touchstone for contrariety, however, would be an 367
irreconcilable incompatibility between the old and the new obligations. VOL. 759, JUNE 22, 2015 367
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which CCC Insurance Corporation vs. Kawasaki Steel Corporation
substitutes the same. The first is when novation has been explicitly stated and FFMCCI was unable to finish its portion of work in the Project because of
declared in unequivocal terms. The second is when the old and the new obligations business reverses, and by the Agreement dated August 24, 1989, Kawasaki assumed
are incompatible on every point. The test of incompatibility is whether or not the two the Transferred Portion of Work from FFMCCI and was accorded the right to receive
obligations can stand together, each one having its independent existence. If they the profits and benefits corresponding to said portion. Although the Agreement dated
cannot, they are incompatible and the latter obligation novates the first. Corollarily, August 24, 1989 resulted in the reallocation of the respective portions of work of
changes that breed incompatibility must be essential in nature and not merely Kawasaki and FFMCCI, as well as their corresponding shares in the profits and
accidental. The in- benefits under the Consortium Agreement, such changes were not incompatible with
_______________ the object, cause, and principal conditions of the Consortium Agreement.
Consequently, the changes under the Agreement dated August 24, 1989 were only
37 St. James College of Parañaque v. Equitable PCI Bank, 641 Phil. 452, 464; modificatory and did not extinguish the original obligations under the Consortium
627 SCRA 328, 341-342 (2010). Agreement.
366 Even granting that there is novation, the Court in Stronghold Insurance
Company, Incorporated v. Tokyu Construction Company, Ltd.,39 held that to release
366 SUPREME COURT REPORTS ANNOTATED the surety, the material change in the principal contract must make the obligation of
CCC Insurance Corporation vs. Kawasaki Steel Corporation the surety more onerous. The Court ratiocinated in Stronghold as follows:
compatibility must take place in any of the essential elements of the obligation, Petitioner’s liability was not affected by the revision of the contract price, scope
such as its object, cause or principal conditions thereof; otherwise, the change would of work, and contract schedule. Neither was it extinguished because of the issuance
be merely modificatory in nature and insufficient to extinguish the original of new bonds procured from Tico.
obligation.38(Citations omitted) As early as February 10, 1997, respondent already sent a letter to Gabriel
informing the latter of the delay incurred in the performance of the work, and of the
CCCIC failed to discharge the burden of proving novation of the Consortium former’s intention to terminate the subcontract agreement to prevent further losses.
Agreement by the Agreement dated August 24, 1989. The Court failed to see the Apparently, Gabriel had already been in default even prior to the aforesaid letter; and
presence of the essential requisites for a novation of contract, specifically, the demands had been previously made but to no avail. By reason of said default,
irreconcilable incompatibility between the old and new contracts. Indeed, Kawasaki Gabriel’s liability had arisen; as a consequence, so also did the liability of petitioner
and FFMCCI executed the Agreement dated August 24, 1989 pursuant to Article 8.3 as a surety arise.
of the Consortium Agreement: _______________
8.3 If, for any reason, any PARTY should fail in the performance of its
PORTION OF WORK or contractual obligations and if such defaulting PARTY 39 606 Phil. 400, 411-413; 588 SCRA 410, 421 (2009).
refuses to cure or makes no remedial action, without presenting any valid cause, 368
within fifteen (15) days following demand of rectification by registered letter sent by 368 SUPREME COURT REPORTS ANNOTATED

19
 CCC Insurance Corporation vs. Kawasaki Steel Corporation petitioner never assumed added obligations, nor were there any additional
xxxx obligations imposed, due to the modification of the terms of the contract. Failure to
By the language of the bonds issued by petitioner, it guaranteed the full and receive any notice of such change did not, therefore, exonerate petitioner from its
faithful compliance by Gabriel of its obligations in the construction of the SDS and liabilities as surety. (Emphasis supplied, citations omitted)
STP specifically set forth in the subcontract agreement, and the repayment of the
15% advance payment given by respondent. These guarantees made by petitioner There is no showing herein that the obligations of CCCIC as surety had become
gave respondent the right to proceed against the former following Gabriel’s more onerous with the execution of the Agreement dated August 24, 1989 between
noncompliance with her obligation. Kawasaki and FFMCCI. The Agreement dated August 24, 1989 did not alter in any
Confusion, however, transpired when Gabriel and respondent agreed, on way the original coverage and the terms and conditions of the Surety and
February 26, 1997, to reduce the scope of work and, consequently, the contract price. Performance Bonds of CCCIC. If truth be told, the Agreement dated August 24,
Petitioner viewed such revision as novation of the original subcontract agreement; 1989 made it more onerous for Kawasaki which had to take over the Transferred
and since no notice was given to it as a surety, it resulted in the extinguishment of its Portion of Work from FFMCCI.
obligation. That Kawasaki was to receive the profits and benefits corresponding to the
We wish to stress herein the nature of suretyship, which actually involves two Transferred Portion of Work would not extinguish the liabilities of CCCIC under the
types of relationship — the underlying principal relationship between the creditor Surety and Performance Bonds. The right of Kawasaki to the profits and benefits
(respondent) and the debtor (Gabriel), and the accessory surety relationship between corresponding to the Transferred Portion of Work was granted under the Agreement
the principal (Gabriel) and the surety (petitioner). The creditor accepts the surety’s dated August 24, 1989 because Kawasaki was the one that would actually perform
solidary undertaking to pay if the debtor does not pay. Such acceptance, however, 370
does not change in any material way the creditor’s relationship with the principal 370 SUPREME COURT REPORTS ANNOTATED
debtor nor does it make the surety an active party to the principal creditor-debtor CCC Insurance Corporation vs. Kawasaki Steel Corporation
relationship. In other words, the acceptance does not give the surety the right to the remaining portion of work and complete the Project and should be duly
intervene in the principal contract. The surety’s role arises only upon the debtor’s compensated for the same. It is separate and distinct from the right of Kawasaki to
default, at which time, it can be directly held liable by the creditor for payment as a demand payment of the amounts guaranteed by CCCIC as surety upon the default of
solidary obligor. FFMCCI on its undertakings under the Surety and Performance Bonds. CCCIC
The surety is considered in law as possessed of the identity of the debtor in cannot standby passively and be benefitted by payments made by the Republic, as
relation to whatever is adjudged touching upon the obligation of the latter. Their owner of the Project, to Kawasaki, as contractor, for the Transferred Portion of
liabilities are so interwoven as to be inseparable. Although the contract of a surety is, Work. The only way CCCIC can extinguish its liabilities as surety, which already
in essence, secondary only to a valid principal obligation, the surety’s liability to the attached upon the default of FFMCCI, is to make its own payments to Kawasaki of
creditor is direct, primary, and absolute; he becomes liable for the debt and duty of the amounts guaranteed under the Surety and Performance Bonds.
another although he pos- Equally without merit is the averment of CCCIC that by executing the
369 Agreement dated August 24, 1989, which gave Kawasaki the right to the profits and
VOL. 759, JUNE 22, 2015 369 benefits corresponding to the Transferred Portion of Work, Kawasaki and FFMCCI
CCC Insurance Corporation vs. Kawasaki Steel Corporation colluded or connived to deprive CCCIC of its source of indemnification. Other than
sesses no direct or personal interest over the obligations nor does he receive any its allegation, CCCIC failed to present any evidence of collusion or connivance
benefit therefrom. between Kawasaki and FFMCCI to intentionally prejudice CCCIC. The Court
Indeed, a surety is released from its obligation when there is a material alteration reiterates that the execution of the Agreement dated August 24, 1989 was actually
of the principal contract in connection with which the bond is given, such as a authorized under Article 8.3 of the Consortium Agreement. Kawasaki was given the
change which imposes a new obligation on the promising party, or which takes away right to the profits and benefits corresponding to the Transferred Portion of Work
some obligation already imposed, or one which changes the legal effect of the because it would be the one to perform the same. It would be the height of inequity
original contract and not merely its form. However, a surety is not released by a to allow FFMCCI to continue collecting payments for work it was not able to do.
change in the contract, which does not have the effect of making its obligation Besides, there is utter lack of basis for the claim of CCCIC that without the
more onerous. compensation for the Transferred Portion of Work, FFMCCI would have no means
In the instant case, the revision of the subcontract agreement did not in any way to indemnify CCCIC for any payments the latter would have to make to Kawasaki
make the obligations of both the principal and the surety more onerous. To be sure,

20
under the Surety and Performance Bonds. As the succeeding discussion will show, it “[t]he reference in the second paragraph of [Article 2047] to the provisions of
is premature for CCCIC to question the capacity of FFMCCI to indemnify it. Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however,
371 does not mean that suretyship is withdrawn from the applicable provisions governing
VOL. 759, JUNE 22, 2015 371 guaranty.” For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors,
CCC Insurance Corporation vs. Kawasaki Steel Corporation
for both classes of obligors would be governed by exactly the same rules and
CCCIC must first pay its liabilities to Kawasaki under the Surety and Performance limitations.
Bonds before it could be indemnified and subrogated to the rights of Kawasaki Accordingly, the rights to indemnification and subrogation as established and
against FFMCCI. granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as
defined under Article 2047. x x x. (Citations omitted)
The rights of a guarantor who pays for the debt of the debtor are governed by the
following provisions of the Civil Code: Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to
Art. 2066. The guarantor who pays for a debtor must be indemnified by the indemnification and subrogation will arise only after it has paid its obligations to
latter. Kawasaki as the debtor-obligee. In Autocorp Group v. Intra Strata Assurance
The indemnity comprises: Corporation,41 the Court ruled that:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to The benefit of subrogation, an extinctive subjective novation by a change of
the debtor, even though it did not earn interest for the creditor; creditor, which “transfers to the person subrogated, the credit and all the rights
(3) The expenses incurred by the guarantor after having notified the debtor that thereto
payment had been demanded of him; _______________
(4) Damages, if they are due.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the 41 578 Phil. 804, 822-823; 556 SCRA 250, 267 (2008).
rights which the creditor had against the debtor. 373
If the guarantor has compromised with the creditor, he cannot demand of the
debtor more than what he has really paid. VOL. 759, JUNE 22, 2015 373
CCC Insurance Corporation vs. Kawasaki Steel Corporation
Although the foregoing provisions only speak of a guarantor, they also apply to a appertaining, either against the debtor or against third persons,” is granted by
surety, as the Court held in Escaño v. Ortigas, Jr.:40 the Article 2067 of the Civil Code only to the “guarantor (or surety) who
What is the source of this right to full reimbursement by the surety? We find the pays.” (Emphases supplied, citations omitted)
right under Article 2066
_______________ In the present case, CCCIC has yet to pay Kawasaki.

40 553 Phil. 24, 43-44; 526 SCRA 26, 45-46 (2007). While summons was validly served upon FFMCCI, the Third-Party Complaint of
372 CCCIC against FFMCCI is dismissed on the ground of lack of cause of action.
372 SUPREME COURT REPORTS ANNOTATED
The Court disagrees with the ruling of the Court of Appeals that there was no
CCC Insurance Corporation vs. Kawasaki Steel Corporation
proper service of summons upon FFMCCI. The appellate court overlooked the fact
of the Civil Code, which assures that “[t]he guarantor who pays for a debtor must that the service of summons on FFMCCI at its principal address at #86 West
be indemnified by the latter,” such indemnity comprising of, among others, “the total Avenue, Quezon City failed because FFMCCI had already vacated said premises
amount of the debt.” Further, Article 2067 of the Civil Code likewise establishes that without notifying anyone as to where it transferred. For this reason, the RTC, upon
“[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the the motion of CCCIC, issued an Order 42 dated September 4, 1991, directing the
creditor had against the debtor.” issuance and service of Alias Summons to the individual directors of FFMCCI.
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that Eventually, the Alias Summons was personally served upon FFMCCI director
the provisions should not extend to sureties, especially in light of the qualifier in Vicente Concepcion on September 25, 1991.43
Article 2047 that the provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr. Tolentino’s observation that
21
 Rule 14, Section 13 of the 1964 Rules of Court, which was then in force, allowed A cause of action is defined as the act or omission by which a party violates a
the service of summons upon a director of a private domestic corporation: right of another. The essential elements of a cause of action are: (a) the existence of a
Sec. 13. Service upon private domestic corporation or partnership.—If the legal right in favor of the plaintiff; (b) a correlative legal duty of the defendant to
defendant is a corporation organized under the laws of the Philippines or a respect such right; and (c) an act or omission by such defendant in violation of the
partnership duly registered, service may be made on the presi- right of the plaintiff with a resulting injury or damage to the plaintiff for which the
_______________ latter may maintain an action for the recovery of relief from the defendant. 46
As discussed earlier, the rights to indemnification and subrogation of a surety
42 Records (Vol. I), p. 250. only arise upon its payment of the obligation to the obligee. In the case at bar, since
43 Id., at p. 255. CCCIC up to this point refuses to acknowledge and pay its obligation to Kawasaki
374 under the Surety and Performance Bonds, it has not yet acquired the rights to seek
374 SUPREME COURT REPORTS ANNOTATED indemnification from FFMCCI and subrogation to Kawasaki as against FFMCCI. In
the same vein, the corresponding obligation of FFMCCI to indemnify CCCIC under
CCC Insurance Corporation vs. Kawasaki Steel Corporation the Indemnity Agreements has yet to accrue. Thus far, there is no act or omission on
dent, manager, secretary, cashier, agent, or any of its directors. the part of FFMCCI which violated the right of CCCIC and for which CCCIC may
seek relief from the courts. In the absence of these elements, CCCIC has no cause of
The aforementioned rule does not require that service on the private domestic action against FFMCCI and/or FFMCCI President Mañacop. Resultantly, the Third-
corporation be served at its principal office in order for the court to acquire Party Complaint of CCCIC should be dismissed.
jurisdiction over the same. The Court, in Talsan Enterprises, Inc. v. Baliwag Transit,
Inc.,44 citing Baltazar v. Court of Appeals,45affirmed that: There is no basis for awarding attorney’s fees in favor of Kawasaki. In addition,
[S]ervice on respondent’s bus terminal at the address stated in the summons and the rate of legal interest imposed shall conform with latest jurisprudence.
not in its main office in Baliwag do not render the service of summons invalid. In _______________
Artemio Baltazar v. Court of Appeals, we held:
“The regular mode, in other words, of serving summons upon a private 46 Turner v. Lorenzo Shipping Corporation, 650 Phil. 372, 388; 636 SCRA 13,
Philippine Corporation is by personal service upon one of the officers of such 30 (2010).
corporation identified in Section 13. Ordinarily, such personal service may be 376
expected to be made at the principal office of the corporation. Section 13, does not,
however, impose such requirement, and so personal service upon the 376 SUPREME COURT REPORTS ANNOTATED
corporation may be effected through service upon, for instance, the president of CCC Insurance Corporation vs. Kawasaki Steel Corporation
the corporation at his office or residential address.” x x x. Article 2208(2) of the Civil Code allows the award of attorney’s fees “[w]hen the
In fine, the service of summons upon respondent Baliwag Transit is proper. defendant’s act or omission has compelled the plaintiff to litigate with third persons
Consequently, the trial court validly acquired jurisdiction over respondent Baliwag. or to incur expenses to protect his interest[.]” In Servicewide Specialists,
(Citation omitted) Incorporated v. Court of Appeals,47 the Court declared that:
Article 2208 of the Civil Code allows attorney’s fees to be awarded by a court
Hence, the personal service of the Alias Summons on an FFMCCI director was when its claimant is compelled to litigate with third persons or to incur expenses to
sufficient for the RTC to acquire jurisdiction over FFMCCI itself. protect his interest by reason of an unjustified act or omission on the part of the party
_______________ from whom it is sought. To be sure, private respondents were forced to litigate to
protect their rights but as we have previously held: “where no sufficient showing of
44 369 Phil. 409, 419-420; 310 SCRA 156, 165 (1999). bad faith would be reflected in a party’s persistence in a case other than an erroneous
45 250 Phil. 349, 360-361; 168 SCRA 354, 362 (1988). conviction of the righteousness of his cause, attorney’s fee shall not be recovered as
375 cost.” (Citation omitted)
VOL. 759, JUNE 22, 2015 375
Bad faith has been defined as “a breach of a known duty through some motive of
CCC Insurance Corporation vs. Kawasaki Steel Corporation interest or ill will. It must, however, be substantiated by evidence. Bad faith under
Nevertheless, the Third-Party Complaint filed by CCCIC against FFMCCI and the law cannot be presumed, it must be established by clear and convincing
Mañacop must be dismissed on the ground of lack of cause of action. evidence.”48 There is no evidence in this case to show bad faith on the part of

22
CCCIC. CCCIC, in refusing the claim of Kawasaki, was merely acting based on its of an obligation or undertaking in favor of another party called the obligee.
belief in the righteousness of its defense. Hence, even though Kawasaki was (American Home Insurance Co. of New York vs. F.F. Cruz & Co., Inc., 655
compelled to litigate to enforce its claim against CCCIC, the award of attorney’s fees SCRA 248 [2011])
is not proper. Although the contract of suretyship is secondary only to a valid principal
Finally, the Court, in Nacar v. Gallery Frames,49modified the guidelines in obligation, the surety’s liability to the creditor is direct, primary, and absolute. (Id.)
imposing interests, taking into account Bangko Sentral ng Pilipinas-Monetary Board ——o0o——
Resolution No. 796 dated May 16, 2013 and Circular No. 799, Series of 2013,
_______________

47 326 Phil. 660, 669; 256 SCRA 649, 655 (1996).

48 GF Equity, Inc. v. Valenzona, 501 Phil. 153, 168; 462 SCRA 466, 482
(2005).
49 G.R. No. 189871, August 13, 2013, 703 SCRA 439, 454-456.
377
VOL. 759, JUNE 22, 2015 377
CCC Insurance Corporation vs. Kawasaki Steel Corporation
which fixed the legal rate at 6% per annum effective July 1, 2013. In the absence
of stipulated interest in the present case, the Court imposes upon the amounts
covered by the Surety and Performance Bonds the legal rate of 12% per annum from
September 15, 1989, the date of demand, until June 30, 2013; and then the legal rate
of 6% per annum from July 1, 2013 until full payment of the same.
WHEREFORE, premises considered, the instant Petition for Review
on Certiorari is PARTLY GRANTED.The Decision dated May 30, 2002 and
Resolution dated November 14, 2002 of the Court of Appeals are AFFIRMED with
the following MODIFICATIONS:
1) The Third-Party Complaint filed by CCC Insurance Corporation against F.F.
Mañacop Construction Company, Inc. and Mr. Florante F. Mañacop
is DISMISSED on the ground of lack of cause of action; G.R. No. 203133. February 18, 2015.*
2) The award of attorney’s fees in favor of Kawasaki Steel Corporation
is DELETED; and YULIM INTERNATIONAL COMPANY LTD., JAMES YU, JONATHAN YU,
3) In addition to the amounts CCC Insurance Corporation is ordered to pay and ALMERICK TIENG LIM, petitioners, vs. INTERNATIONAL
Kawasaki Steel Corporation under Surety Bond No. B-88/11191 and Performance EXCHANGE BANK (now Union Bank of the Philippines), respondent.
Bond No. B-88/11193, CCC Insurance Corporation is further ORDERED to pay Civil Law; Suretyship; Solidary Obligations; In a contract of suretyship, one
Kawasaki Steel Corporation legal interest on said amounts at the rates of 12% per lends his credit by joining in the principal debtor’s
annumfrom September 15, 1989 to June 30, 2013 and 6% per annum from July 1, _______________
2013 until full payment thereof.
SO ORDERED. * THIRD DIVISION.
Sereno (CJ., Chairperson), Bersamin, Perez and Perlas-Bernabe, JJ., concur. 130
Petition partly granted, judgment and resolution affirmed with modifications.
378 130 SUPREME COURT REPORTS ANNOTATED
378 SUPREME COURT REPORTS ANNOTATED Yulim International Company Ltd. vs. International Exchange Bank (now Union
CCC Insurance Corporation vs. Kawasaki Steel Corporation Bank of the Philippines)
Notes.—A contract of suretyship is an agreement whereby a party called the obligation so as to render himself directly and primarily responsible with him
surety, guarantees the performance by another party, called the principal or obligor, without reference to the solvency of the principal.—In a contract of suretyship, one

23
lends his credit by joining in the principal debtor’s obligation so as to render himself
directly and primarily responsible with him without reference to the solvency of the On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic
principal. According to the above Article, if a person binds himself solidarily with partnership, a credit facility in the form of an Omnibus Loan Line for P5,000,000.00,
the principal debtor, the provisions of Articles 1207 to 1222, or Section 4, Chapter 3, as evidenced by a Credit Agreement3 which was secured by a Chattel Mortgage 4 over
Title I, Book IV of the Civil Code on joint and solidary obligations, shall be Yulim’s inventories in its merchandise warehouse at 106 4th Street, 9th Avenue,
observed. Thus, where there is a concurrence of two or more creditors or of two or Caloocan City. As further guarantee, the partners, namely, James, Jonathan and
more debtors in one and the same obligation, Article 1207 provides that among them, Almerick, executed a Continuing Surety Agreement5 in favor of iBank.
“[t]here is a solidary liability only when the obligation expressly so states, or when Yulim availed of its aforesaid credit facility with iBank, as follows:
the law or the nature of the obligation requires solidarity.” “A surety is considered _______________
in law as being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are interwoven as to be 1 Penned by Associate Justice Josefina Guevara-Salonga, with Associate
inseparable.” And it is well-settled that when the obligor or obligors undertake to be Justices Ramon M. Bato, Jr. and Priscilla J. Baltazar-Padilla, concurring; Rollo, pp.
“jointly and severally” liable, it means that the obligation is solidary, as in this case. 420-431.
Same; Mortgages; The assignment being in its essence a mortgage, it was but 2 Issued by Acting Presiding Judge Cesar O. Untalan; id., at pp. 367-372.
a security and not a satisfaction of the petitioners’ indebtedness.—To stress, the 3 Id., at p. 84.
assignment being in its essence a mortgage, it was but a security and not a 4 Id., at pp. 92-98.
satisfaction of the petitioners’ indebtedness. Article 1255 of the Civil Code invoked 5 Id., at pp. 90-91.
by the petitioners contemplates the existence of two or more creditors and involves
the assignment of the entire debtor’s property, not a dacion en pago. Under Article 132
1245 of the Civil Code, “[d]ation in payment, whereby property is alienated to the 132 SUPREME COURT REPORTS ANNOTATED
creditor in satisfaction of a debt in money, shall be governed by the law on sales.”
Nowhere in the Deed of Assignment can it be remotely said that a sale of the Yulim International Company Ltd. vs. International Exchange Bank (now Union
condominium unit was contemplated by the parties, the consideration for which Bank of the Philippines)
would consist of the amount of outstanding loan due to iBank from the petitioners. The above promissory notes (PN) were later consolidated under a single
PETITION for review on certiorari of a decision of the Court of Appeals. promissory note, PN No. SADDK001014188, for P4,246,310.00, to mature on
The facts are stated in the opinion of the Court. February 28, 2002.7 Yulim defaulted on the said note. On April 5, 2002, iBank sent
Teresita De Leon-Nuguid for petitioners. demand letters to Yulim, through its President, James, and through Almerick, 8 but
131 without success. iBank then filed a Complaint for Sum of Money with
VOL. 751, FEBRUARY 18, 2015 131 Replevin9 against Yulim and its sureties. On August 8, 2002, the Court granted the
application for a writ of replevin. Pursuant to the Sheriff’s Certificate of Sale dated
Yulim International Company Ltd. vs. International Exchange Bank (now Union November 7, 2002,10 the items seized from Yulim’s warehouse were worth only
Bank of the Philippines) P140,000.00, not P500,000.00 as the petitioners have insisted.11
Macalino and Associates for respondent. On October 2, 2002, the petitioners moved to dismiss the complaint insisting that
their loan had been fully paid after they assigned to iBank their Condominium Unit
REYES, J.: No. 141, with parking space, at 20 Landsbergh Place in Tomas Morato Avenue,
Quezon City.12 They claimed that while the preselling value of the condominium unit
In the assailed Decision1 dated February 1, 2012 in C.A.-G.R. CV No. 95522, the was P3.3 Million, its market value has since risen to P5.5 Million. 13 The RTC,
Court of Appeals (CA) modified the Decision2 dated December 21, 2009 of the however, did
Regional Trial Court (RTC) of Makati City, Branch 145, in Civil Case No. 02-749, _______________
holding that James Yu (James), Jonathan Yu (Jonathan) and Almerick Tieng Lim
(Almerick), who were capitalist partners in Yulim International Company Ltd. 6 Id., at pp. 195-204.
(Yulim), collectively called as the petitioners, were jointly and severally liable with 7 Id., at pp. 177-178.
Yulim for its loan obligations with respondent International Exchange Bank (iBank). 8 Id., at pp. 205-208.
9 Id., at pp. 66-83.
The Facts 10 Id., at p. 192.

24
 11 Id., at p. 245. and Almerick, stating that there was no iota of evidence that the loan proceeds
12 Id., at pp. 120-123. benefited their families.16
13 Id., at p. 58. The petitioners moved for reconsideration on January 12, 2010; 17 iBank on
133 January 19, 2010 likewise filed a motion for partial reconsideration. 18 In its Joint
VOL. 751, FEBRUARY 18, 2015 133 Order19dated March 8, 2010, the RTC denied both motions.
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Ruling of the CA
Bank of the Philippines)
On March 23, 2010, Yulim filed a Notice of Partial Appeal, followed on March
not entertain the motion to dismiss for noncompliance with Rule 15 of the Rules 30, 2010 by iBank with a Notice of Appeal.
of Court. Yulim interposed the following as errors of the court a quo:
On May 16, 2006, the petitioners filed their Answer reiterating that they have I. THE LOWER COURT ERRED IN ORDERING [YULIM] TO PAY [iBANK]
paid their loan by way of assignment of a condominium unit to iBank, as well as THE AMOUNT OF P4,246,310.00 WITH INTEREST AT 16.5% PER
insisting that iBank’s penalties and charges were exorbitant, oppressive and ANNUM FROM FEBRUARY 28, 2002 UNTIL FULLY PAID.
unconscionable.14 II. THE LOWER COURT ERRED IN NOT ORDERING [iBANK] TO PAY
ATTORNEY’S FEES, MORAL DAMAGES AND EXEMPLARY DAMAGES.20
Ruling of the RTC
For its part, iBank raised the following as errors of the RTC:
After trial on the merits, the RTC rendered judgment on December 21, 2009, the I. THE TRIAL COURT ERRED IN NOT HOLDING INDIVIDUAL
dispositive portion of which reads, as follows: [PETITIONERS JAMES, JONATHAN AND ALMERICK] SOLIDARILY LIABLE
WHEREFORE, in view of the foregoing considerations, the Court finds the WITH [YULIM] ON THE BASIS OF THE CONTINUING SURETYSHIP
individual defendants James Yu, Jonathan Yu and Almerick Tieng Lim, not liable to AGREEMENT EXECUTED BY THEM.
the plaintiff, iBank, hence the complaint against them is hereby DISMISSED for _______________
insufficiency of evidence, without pronouncement as to cost.
This court, however, finds defendant corporation Yulim International Company 16 Id., at p. 370.
Ltd. liable; and it hereby orders defendant corporation to pay plaintiff the sum of 17 Id., at pp. 277-282.
P4,246,310.00 with interest at 16.50% per annum from February 28, 2002 until fully 18 Id., at pp. 283-294.
paid plus cost of suit. 19 Id., at pp. 311-312.
The counterclaims of defendants against plaintiff iBank are hereby DISMISSED 20 Id., at p. 399.
for insufficiency of evidence. 135
SO ORDERED.15 VOL. 751, FEBRUARY 18, 2015 135
Thus, the RTC ordered Yulim alone to pay iBank the amount of P4,246,310.00, Yulim International Company Ltd. vs. International Exchange Bank (now Union
plus interest at 16.50% per annum from February 28, 2002 until fully paid, plus costs Bank of the Philippines)
of suit, and dismissed the complaint against petitioners James, Jonathan II. THE TRIAL COURT ERRED IN NOT HOLDING ALL THE
_______________ [PETITIONERS] LIABLE FOR PENALTY CHARGES UNDER THE CREDIT
AGREEMENT AND PROMISSORY NOTES SUED UPON.
14 Id., at pp. 137-145. III. THE TRIAL COURT ERRED IN NOT HOLDING [THE PETITIONERS]
15 Id., at p. 372. LIABLE TO [iBANK] FOR ATTORNEY’S FEES AND INDIVIDUAL
134 [PETITIONERS] JOINTLY AND SEVERALLY LIABLE WITH [YULIM] FOR
134 SUPREME COURT REPORTS ANNOTATED COSTS OF SUIT INCURRED BY [iBANK] IN ORDER TO PROTECT ITS
RIGHTS.21
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines) Chiefly, the factual issue on appeal to the CA, raised by petitioners James,
Jonathan and Almerick, was whether Yulim’s loans have in fact been extinguished

25
with the execution of a Deed of Assignment of their condominium unit in favor of
iBank, while the corollary legal issue, raised by iBank, was whether they should be In the instant petition, the following assigned errors are before this Court:
held solidarily liable with Yulim for its loans and other obligations to iBank. 1. The CA erred in ordering petitioners James, Jonathan and Almerick jointly
The CA ruled that the petitioners failed to prove that they have already paid and severally liable with petitioner
Yulim’s consolidated loan obligations totaling P4,246,310.00, for which it issued to _______________
iBank PN No. SADDK001014188 for the said amount. It held that the existence of a
debt having been established, the burden to prove with legal certainty that it has been 22 G.R. No. 53955, January 13, 1989, 169 SCRA 95.
extinguished by payment devolves upon the debtors who have offered such defense. 23 Rollo, pp. 430-431.
The CA found the records bereft of any evidence to show that Yulim had fully 137
settled its obligation to iBank, further stating that the so-called assignment by Yulim VOL. 751, FEBRUARY 18, 2015 137
of its condominium unit to iBank was nothing but a mere temporary arrangement to
provide security for its loan pending the subsequent execution of a real estate Yulim International Company Ltd. vs. International Exchange Bank (now Union
mortgage. Specifically, the CA found nothing in the Deed of Assignment which Bank of the Philippines)
could signify that iBank had accepted the said property as full payment of the Yulim to pay iBank the amount of P4,246,310.00 with interest at 16.5% per
petitioners’ loan. The CA cited Manila Banking Corporation v. annum from February 28, 2002 until fully paid.
_______________ 2. The CA erred in not ordering iBank to pay the petitioners moral damages,
exemplary damages, and attorney’s fees.24
21 Id., at pp. 335-336.
136 The petitioners insist that they have paid their loan to iBank. They maintain that
136 SUPREME COURT REPORTS ANNOTATED the letter of iBank to them dated May 4, 2001, which “expressly stipulated that the
petitioners shall execute a Deed of Assignment over one condominium unit No. 141,
Yulim International Company Ltd. vs. International Exchange Bank (now Union 3rd Floor and a parking slot located at 20 Landsbergh Place, Tomas Morato Avenue,
Bank of the Philippines) Quezon City,” was with the understanding that the Deed of Assignment, which they
Teodoro, Jr.22 which held that an assignment to guarantee an obligation is in in fact executed, delivering also to iBank all the pertinent supporting documents,
effect a mortgage and not an absolute conveyance of title which confers ownership would serve to totally extinguish their loan obligation to iBank. In particular, the
on the assignee. petitioners state that it was their understanding that upon approval by iBank of their
Concerning the solidary liability of petitioners James, Jonathan and Almerick, Deed of Assignment, the same “shall be considered as full and final payment of the
the CA disagreed with the trial court’s ruling that it must first be shown that the petitioners’ obligation.” They further assert that iBank’s May 4, 2001 letter expressly
proceeds of the loan redounded to the benefit of the family of the individual carried the said approval.
petitioners before they can be held liable. Article 161 of the Civil Code and Article The petitioner invoked Article 1255 of the Civil Code, on payment by cession,
121 of the Family Code cited by the RTC apply only where the liability is sought to which provides:
be enforced against the conjugal partnership itself. In this case, regardless of whether Art. 1255. The debtor may cede or assign his property to his creditors in
the loan benefited the family of the individual petitioners, they signed as sureties, payment of his debts. This cession, unless there is stipulation to the contrary, shall
and iBank sought to enforce the loan obligation against them as sureties of Yulim. only release the debtor from responsibility for the net proceeds of the thing assigned.
Thus, the appellate court granted the appeal of iBank, and denied that of the The agreements which, on the effect of the cession, are made between the debtor and
petitioners, as follows: his creditors shall be governed by special laws.
WHEREFORE, the foregoing considered, [iBank’s] appeal is PARTLY
GRANTED while [the petitioners’] appeal is DENIED. Accordingly, the appealed Ruling of the Court
decision is hereby MODIFIED in that [petitioners] James Yu, Jonathan Yu and
A[l]merick Tieng Lim are hereby held jointly and severally liable with defendant- The petition is bereft of merit.
appellant Yulim for the payment of the monetary awards. The rest of the assailed _______________
decision is AFFIRMED.
SO ORDERED.23 24 Id., at p. 55.
138
Petition for Review to the Supreme Court 138 SUPREME COURT REPORTS ANNOTATED
26
 Yulim International Company Ltd. vs. International Exchange Bank (now Union SECTION 1.01. The SURETIES, jointly and severally with the PRINCIPAL,
hereby unconditionally and irrevocably guarantee full and complete payment when
Bank of the Philippines)
due, whether at stated maturity, by acceleration, or otherwise, of any and all credit
Firstly, the individual petitioners do not deny that they executed the Continuing accommodations that have been granted or may be granted, renewed and/or extended
Surety Agreement, wherein they “jointly and severally with the PRINCIPAL by the BANK to the PRINCIPAL.
[Yulim], hereby unconditionally and irrevocably guarantee full and complete The liability of the SURETIES shall not be limited to the maximum principal
payment when due, whether at stated maturity, by acceleration, or otherwise, of any amount of FIVE MILLION PESOS (P5,000,000.00) but shall include interest, fees,
and all credit accommodations that have been granted” to Yulim by iBank, penalty and other charges due thereon.
including interest, fees, penalty and other charges. 25Under Article 2047 of the Civil SECTION 1.02. This INSTRUMENT is a guarantee of payment and not
Code, these words are said to describe a contract of suretyship. It states: merely of collection and is intended to be a perfect and continuing indemnity in favor
Art. 2047. By guaranty a person, called the guarantor, binds himself to the of the BANK for the amounts and to the extent stated above.
creditor to fulfill the obligation of the principal debtor in case the latter should fail to The liability of the SURETIES shall be direct, immediate and not contingent
do so. upon the pursuit of the
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. 27 Philippine National Bank v. Pineda, 274 Phil. 274, 282; 197 SCRA 1, 10-11
(1991).
In a contract of suretyship, one lends his credit by joining in the principal 28 Crystal v. Bank of the Philippine Islands, G.R. No. 172428, November 28,
debtor’s obligation so as to render himself directly and primarily responsible with 2008, 572 SCRA 697, 703. See also Escano v. Ortigas, Jr., 553 Phil. 24; 526 SCRA
him without reference to the solvency of the principal. 26According to the above 26 (2007).
Article, if a person binds himself solidarily with the principal debtor, the provisions 140
of Articles 1207 to 1222, or Section 4, Chapter 3, Title I, Book IV of the Civil Code
on joint and solidary obligations, shall be observed. Thus, where there is a 140 SUPREME COURT REPORTS ANNOTATED
concurrence of two or more creditors or of two or more debtors in one and the same Yulim International Company Ltd. vs. International Exchange Bank (now Union
obligation, Article 1207 provides that among them, “[t]here is a solidary liability Bank of the Philippines)
only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.” BANK of whatever remedies it may have against the PRINCIPAL of the other
_______________ securities for the Accommodation.29

25 Id., at p. 90. Thereunder, in addition to binding themselves “jointly and severally” with Yulim
26 See Palmares v. Court of Appeals, 351 Phil. 664; 288 SCRA 422 (1998). to “unconditionally and irrevocably guarantee full and complete payment” of any
139 and all credit accommodations that have been granted to Yulim, the petitioners
VOL. 751, FEBRUARY 18, 2015 139 further warrant that their liability as sureties “shall be direct, immediate and not
Yulim International Company Ltd. vs. International Exchange Bank (now Union contingent upon the pursuit [by] the BANK of whatever remedies it may have against
the PRINCIPAL of other securities.” There can thus be no doubt that the individual
Bank of the Philippines)
petitioners have bound themselves to be solidarily liable with Yulim for the payment
“A surety is considered in law as being the same party as the debtor in relation to of its loan with iBank.
whatever is adjudged touching the obligation of the latter, and their liabilities are As regards the petitioners’ contention that iBank in its letter dated May 4, 2001
interwoven as to be inseparable.”27 And it is well-settled that when the obligor or had “accepted/approved” the assignment of its condominium unit in Tomas Morato
obligors undertake to be “jointly and severally” liable, it means that the obligation is Avenue as full and final payment of their various loan obligations, the Court is far
solidary,28 as in this case. There can be no mistaking the same import of Article I of from persuaded. On the contrary, what the letter accepted was only the collaterals
the Continuing Surety Agreement executed by the individual petitioners: provided for the loans, as well as the consolidation of the petitioners’ various PN’s
under one PN for their aggregate amount of P4,246,310.00. The letter goes on to
ARTICLE I spell out the terms of the new PN, such as, that its expiry would be February 28,
LIABILITIES OF SURETIES

27
2002 or a term of 360 days, that interest would be due every 90 days, and that the officio once title to the condominium unit has been delivered to iBank. This is so
rate would be based on the 91-day Treasury Bill rate or other market reference. because the petitioners would then execute a Deed of Real Estate Mortgage over the
Nowhere can it be remotely construed that the letter even intimates an property in favor of iBank as security for their loan obligations.
understanding by iBank that the Deed of Assignment would serve to extinguish the Respondent iBank certainly does not share the petitioners’ interpretation of its
petitioners’ loan. Otherwise, there would have been no need for iBank to mention May 4, 2001 letter. Joy Valerie Gatdula, Senior Bank Officer of iBank and the Vice
therein the three “collaterals” or “supports” provided by the petitioners, namely, the President of iBank’s Commercial Banking Group, declared in her testimony that the
Deed of Assignment, the Chattel purpose of the Deed of Assignment was merely to serve as collateral for their loan:
_______________ Q: And during the time that the defendant[,] James Yu[,] was negotiating with
your bank, [is it] not a fact that the defendant offered to you a [condominium] unit so
29 Rollo, p. 90. that — that will constitute full payment of his obligation?
141 A: No ma’am. It was not offered that way. It was offered as security or collateral
VOL. 751, FEBRUARY 18, 2015 141 to pay the outstanding loans. But the premise is, that he will pay x x x in cash. So,
that property was offered as a security or collateral.
Yulim International Company Ltd. vs. International Exchange Bank (now Union Q: That was your position?
Bank of the Philippines) A: That was the agreement and that was how the document was signed. It was
Mortgage and the Continuing Surety Agreement executed by the individual worded out[.]
petitioners. In fact, Section 2.01 of the Deed of Assignment expressly acknowledges xxxx
that it is a mere “interim security for the repayment of any loan granted and those Q: Do you remember if a real estate mortgage was executed over this property
that may be granted in the future by the BANK to the ASSIGNOR and/or the that was being assigned to the plaintiff?
BORROWER, for compliance with the terms and conditions of the relevant credit A: To my recollection, none at all.
and/or loan documents thereof.”30 The condominium unit, then, is a mere temporary Q: Madam Witness, this Deed of Assignment was considered as full payment by
security, not a payment to settle their promissory notes.31 the plaintiff bank, what document was executed by the plaintiff bank?
Even more unmistakably, Section 2.02 of the Deed of Assignment provides that A: It should have been a Dacion en Pago.
as soon as title to the condominium unit is issued in its name, Yulim shall Q: Was there such document executed in this account?
“immediately execute the necessary Deed of Real Estate Mortgage in favor of the A: None.33
BANK to secure the loan obligations of the ASSIGNOR and/or the _______________
BORROWER.”32This is a plain and direct acknowledgment that the parties really
intended to merely constitute a real estate mortgage over the property. In fact, the 33 Rollo, p. 427.
Deed of Assignment expressly states, by way of a resolutory condition concerning 143
the purpose or use of the Deed of Assignment that after the petitioners have delivered VOL. 751, FEBRUARY 18, 2015 143
or caused the delivery of their title to iBank, the Deed of Assignment shall then
become null and void. Shorn of its legal efficacy as an interim security, the Deed of Yulim International Company Ltd. vs. International Exchange Bank (now Union
Assignment would then become functus Bank of the Philippines)
_______________ To stress, the assignment being in its essence a mortgage, it was but a security
and not a satisfaction of the petitioners’ indebtedness. 34 Article 125535 of the Civil
30 Section 2.01. This ASSIGNMENT is executed as an interim security for Code invoked by the petitioners contemplates the existence of two or more creditors
the repayment of any loan granted and those that may be granted in the future by the and involves the assignment of the entire debtor’s property, not a dacion en
BANK to the ASSIGNOR and/or the BORROWER, for compliance with the terms pago.36 Under Article 1245 of the Civil Code, “[d]ation in payment, whereby
and conditions of the relevant credit and/or loan documents thereof x x x. property is alienated to the creditor in satisfaction of a debt in money, shall be
31 Rollo, pp. 427-428. governed by the law on sales.” Nowhere in the Deed of Assignment can it be
142 remotely said that a sale of the condominium unit was contemplated by the parties,
142 SUPREME COURT REPORTS ANNOTATED the consideration for which would consist of the amount of outstanding loan due to
iBank from the petitioners.
Yulim International Company Ltd. vs. International Exchange Bank (now Union WHEREFORE, premises considered, the petition is DENIED.
Bank of the Philippines) SO ORDERED.

28
 Velasco, Jr. (Chairperson), Peralta, Del Castillo** and Villarama, Jr., JJ.,
concur.
Petition denied.
Notes.—There is solidary liability when the obligation expressly so states, when
the law so provides or when the nature of the obligation so requires. ( Alba vs.
Yupangco,622 SCRA 503 [2010])
_______________

34 Philippine Bank of Commerce v. De Vera, 116 Phil. 1326, 1329; 6 SCRA

1026, 1029 (1962).
35 Art. 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the contrary, shall
only release the debtor from responsibility for the net proceeds of the thing assigned.
The agreements which, on the effect of the cession, are made between the debtor and
his creditors shall be governed by special laws.
36 DBP v. Court of Appeals, 348 Phil. 15, 29-30; 284 SCRA 14, 25 (1998).
* * Designated acting member per Special Order No. 1934 dated February 11,
2015 vice Associate Justice Francis H. Jardeleza.
144
144 SUPREME COURT REPORTS ANNOTATED
Yulim International Company Ltd. vs. International Exchange Bank (now Union
Bank of the Philippines)
A contract of suretyship is defined as an agreement whereby a party, called the
surety, guarantees the performance by another party, called the principal or obligor,
of an obligation or undertaking in favor of a third party, called the obligee. (The
Manila Insurance Company, Inc. vs. Amurao, 688 SCRA 609 [2013])
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