(1)

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

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

D E C I S I O N

PANGANIBAN,J.:Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor.The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof.Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto.This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred.He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.The CaseThis is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court.Petitioner assails the December 22, 1998 Decision[1]of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca[herein respondent] isRELEASEDfrom liability to pay any amount stated in the judgment.Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is herebyDISMISSEDfor lack of merit.In all other respect[s], the decision appealed from isAFFIRMED.[2]Also challenged is the April 14, 1999 CA Resolution,[3]which denied petitioners Motion for Reconsideration.Modified by the CA was the March 6, 1997 Decision[4]of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum ofP39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum ofP100,000.00 as attorneys fees and litigation expenses and to pay the costs.SO ORDERED.The FactsThe facts are narrated by the Court of Appeals as follows:[5]The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations.It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR).On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations.The Credit Approval Memorandum expressly stated that theP8M Credit Loan Facility shall be effective until 30 November 1981:JOINT CONDITIONS:1.Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.2.Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly authorized signatory/ies;3.Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened prior to availment on lines;4.Lines shall expire on November 30, 1981; and5.The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.(Emphasis supplied.)To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC.As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:x x xx x xx x xRodolfo M. Cuencax x xhereby binds himself x x xjointly and severallywith the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x xthe client may be indebted to the bank x x xby virtue of aforesaid credit accommodation(s)including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x .(Emphasis supplied).On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of theP8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00).To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C).Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines.Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca.Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50).Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line.Appellant SIMC, however, encountered difficulty[6]in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness.SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines.[Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans:a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[]total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) andb. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:PROMISSORY NOTE NO.AMOUNTRL/74/596/88P8,800,000.00RL/74/597/88P3,400,000.00-------------------TOTALP12,200,000.00(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41).Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan).The loan shall be released in two (2) tranches ofP8,800,000.00 for the first tranche (the First Loan) andP3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.1.02. Purpose - The First Loan shall be applied toliquidatethe principal portion of the Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be appliedto liquidatethe past due interest and penalty portion of the Indebtedness. (Underscoring supplied.)(cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.Appellants individually and collectively refused to pay the [Petitioner] SBTC.Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x xfrom which [Respondent] Cuenca appealed.Ruling of the Court of AppealsIn releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines.Accordingly, such novation extinguished the Indemnity Agreement,by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation.It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount ofP8 million, and that its expiry date was November 30, 1981.Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount not exceedingP8 million.It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety.Under Article 2079 of the Civil Code, such extension extinguished the surety.The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation.Hence, this recourse to this Court.[7]The IssuesIn its Memorandum, petitioner submits the following for our consideration:[8]A.Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon;i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981;ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under theP8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under theP8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuencas liability under the indemnity agreement;B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC;C. Whether or not petitioners Motion for Reconsideration was pro-forma;D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.Distilling the foregoing, the Court will resolve the followingissues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation.As preliminary matters, the procedural questions raised by respondent will also be addressed.The Courts RulingThe Petition has no merit.

Preliminary Matters:Procedural QuestionsMotion for Reconsideration Not Pro FormaRespondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.[9]Consequently,the Petition was filed out of time.[10]We disagree.A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court.The Court has explained that a movant may raise the same arguments, preciselyto convince the court that its ruling was erroneous.[11]Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings.InMarikina Valley Development Corporation v. Flojo,[12]the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings.Hence, where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro forma.It held:We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally.The right to appeal, where it exists, is an important and valuable right.Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.Service by Registered Mail Sufficiently ExplainedSection 11, Rule 13 of the 1997 Rules of Court, provides as follows:SEC. 11.Priorities in modes of service and filing.--Whenever practicable, the service and filing of pleadings and other papers shall be done personally.Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally.A violation of this Rule may be cause to consider the paper as not filed.Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail.We do not think so.The Court held inSolar Entertainment v. Ricafort[13]that the aforecited rule was mandatory, and that only when personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with.In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and distance.[14]This explanation sufficiently shows that personal service was not practicable.In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.First Issue:Original Obligation Extinguished by NovationAn obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:ART. 1292.In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.Novation of a contract is never presumed.It has been held that [i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[15]Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16]Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one.It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred.It adds that the terms of the 1989 Contract were not more onerous.[17]Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liableunder the Indemnity Agreement.We reject these contentions.Clearly, the requisites of novation are present in this case.The 1989 Loan Agreement extinguished the obligation[18]obtained under the 1980 credit accomodation.This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows:1.02.Purpose.The First Loan shall be applied toliquidatethe principal portion of the Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied toliquidatethe past due interest and penalty portion of the Indebtedness.[19](Italics supplied.)The testimony of an officer[20]of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the original indebtedness serves to strengthen this ruling.[21]Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist.While the 1980 credit accommodation had stipulated that the amount of loan was not to exceedP8 million,[22]the 1989 Agreement provided that the loan wasP12.2 million.The periods for payment were also different.Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier obligation.As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23]Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.[24]Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:ART. 1296.When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.Alleged ExtensionPetitioner insists that the 1989 Loan Agreement was a mere renewal or extension of theP8 million original accommodation; it was not a novation.[25]This argument must be rejected.To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness.Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the originalP8 million credit facility.Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x.In an earlier case,[26]the Court explained the rationale of this provision in this wise:The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the suretys consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditors remedies against the principal debtor upon the maturity date.The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.Binding Nature of the Credit Approval MemorandumAs noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only forP8 million, and that it was for a period of one year ending on November 30, 1981.Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding agreement because it was not signed by the parties.It adds that it was merely for its internal use.We disagree.It was petitioner itself which presented the said document to prove the accommodation.Attached to the Complaint as Annex A was a copy thereof evidencing the accommodation.[27]Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:4.1On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations.For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980.Clearly, respondent is estopped from denying the terms and conditions of theP8 million credit accommodation as contained in the very document it presented to the courts.Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.Second Issue:Alleged Waiver of ConsentPursuing another course, petitioner contends that Respondent Cuencaimpliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same.[28]Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the credit accommodation including [its] substitutions,renewals, extensions,increases, amendments, conversions and revival. It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely itsrenewal,which connotes cessation of an old contract and birth of another onex x x.[29]At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation.As the Court held inNational Bank v. Veraguth,[30][i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the text of the Indemnity Agreement, whichisreproduced hereunder:Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK herebybind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s),as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by reference.While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of theP8 million limit and the November 30, 1981 term.It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable.Taking the banks submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say,P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to allalterations and extensions thereof.Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated.It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.[31]Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x.Ambiguous contracts are construed against the party who caused the ambiguity.[32]In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver.It should also be observed that the Credit Approval Memorandumclearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation.Indeed, it may do so only upon notice to the borrower, pursuant to this condition:5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.[33]We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original loan accommodation.[34]Following the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given.The latters liability would thus be more burdensome than that of the former.Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35]The present controversy must be distinguished fromPhilamgen v. Mutuc,[36]in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, but to any extension thereafter made, an extension x x x that could be had without his having to be notified.In that case, the surety agreement contained this unequivocal stipulation:It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and thatwe hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement.In the present case, there is no such express stipulation.At most, the alleged basis of respondents waiver is vague and uncertain.It confers no clear authorization on the bank orSta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto.Continuing SuretyContending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement.This argument is incorrect.That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately.[37]InDino v. CA,[38]the Court held that a continuing guaranty is one which covers all transactions, including those arising in the future,which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof.To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation:(1) that the obligation should not exceedP8 million, and(2) that the accommodation should expire not later than November 30, 1981.Hence, itwas a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total ofP8 million.Accordingly, the surety of Cuenca secured only the first loan ofP6.1 million obtained on November 26, 1991.It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in1986.Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.Petitioner, however, cites theDinoruling in which the Court found the surety liable for the loan obtainedafterthe payment of the original one, which was covered by a continuing surety agreement.At the risk of being repetitious, we hold that inDino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in full force and effectuntil this bank is notified of its revocation. Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower.No similar provision is found in the present case.On the contrary, respondents liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.Special Nature of the JSSIt is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer, as an additional security for loans granted to corporations.There are at least two reasons for this.First, in case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate corporate personality,would extend to the personal assets of the surety.Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted.There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation.Verily, he was not in a position then to ensure the payment of the obligation.Neither did he have any reason to bind himself further to a bigger and more onerous obligation.Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor.Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan.Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time.As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety.For its defeat in this litigation, the bank has only itself to blame.In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980P8 million credit accommodation.Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished.Furthermore, we reject petitioners submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid.WHEREFORE, the Petition isDENIEDand the assailed DecisionAFFIRMED.Costs against petitioner.SO ORDERED.

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

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

D E C I S I O N

REGALADO,J.:Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor?Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount ofP30,000.00 payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days from the date thereof.[1]On four occasions after the execution of the promissory note and even after the loan matured, petitioner and the Azarraga spouses were able to pay a total ofP16,300.00, thereby leaving a balance ofP13,700.00.No payments were made after the last payment on September 26, 1991.[2]Consequently, on the basis of petitioners solidary liability under the promissory note, respondent corporation filed a complaint[3]against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.In her Amended Answer with Counterclaim,[4]petitioner alleged that sometime in August 1990, immediately after the loan matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in the amount ofP17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan.During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court:(1) what the rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a co-maker with primary liability.[5]Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them.On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses Osmea and Merlyn Azarraga who are primarily liable on the instrument.[6]This was based on the findings of the courta quothat the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is considered a valid tender of payment sufficient to discharge a persons secondary liability on the instrument; that petitioner, as co-maker, is only secondarily liable on the instrument; and that the promissory note is a contract of adhesion.Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein petitioner Palmares liable to pay respondent corporation:1.The sum ofP13,700.00 representing the outstanding balance still due and owing with interest at six percent (6%) per month computed from the date the loan was contracted until fully paid;2.The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding balance;3.Attorneys fees at 25% of the total amount due per stipulations;4.Plus costs of suit.[7]Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker.As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation.It also adverted to the fact that petitioner admitted her liability in her Answer although she claims that the Azarraga spouses should have been impleaded.Respondent court ordered the imposition of the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to Central Bank Circular No. 905.Finally, it rationalized that even if the promissory note were to be considered as a contract of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to reject it entirely; if he adheres, he gives his consent.Hence this petition for review oncertiorariwherein it is asserted that:A.The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable to pay the promissory note.1.The terms of the promissory note are vague.Its conflicting provisions do not establish Palmares solidary liability.2.The promissory note contains provisions which establish the co-makers liability as that of a guarantor.3.Thereisnosufficientbasisfor concluding that Palmares liability is solidary.4.The promissory note is a contract of adhesion and should be construed against M.B. Lending Corporation.5.Palmarescannot be compelled to pay the loan at this point.B.Assumingthat Palmares liability is solidary, the Court of Appeals erred in strictly imposing the interests and penalty charges on the outstanding balance of the promissory note.The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation.They are further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on suretyship and guaranty.This case then affords us the opportunity to make an extended exposition on the ramifications of these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future.The basis of petitioner Palmares liability under the promissory note is expressed in this wise:ATTENTION TO CO-MAKERS:PLEASE READ WELLI,Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan:That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note;That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker,Mrs. Merlyn Azarragadefaults in the payment of the note subject to the same conditions above-contained.[8]Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty.More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor.According to petitioner, these are two conflicting provisions in the promissory note and the rule is that clauses in the contract should be interpreted in relation to one another and not by parts.In other words, the second paragraph should not be taken in isolation, but should be read in relation to the third paragraph.In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable only as a guarantor for several reasons.First, the words jointly and severally or solidarily liable used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability.On the contrary, the wordings used in the third paragraph are easier to comprehend.Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor or the creditor.Third, the promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation.The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon.Thus, any apparent ambiguity in the contract should be strictly construed against private respondent pursuant to Art. 1377 of the Civil Code.[9]Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a guarantor.Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be considered in default in the absence of a judicial or extrajudicial demand.It is true that the complaint alleges the fact of demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the trial court.And, while petitioner may have admitted in her Amended Answer that she received a demand letter from respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the simple reason that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was never controverted by herein private respondent.Finally, it is argued that the Court of Appeals gravely erred in awarding the amount ofP2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding balance of the loan is onlyP13,700.00.Where the interest charged on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may equitably reduce the penalty[10]on grounds of substantial justice.More importantly, respondent corporation never refuted petitioners allegation that immediately after the loan matured, she informed said respondent of her desire to settle the obligation.The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a compromise.[11]After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.At the outset, let it here be stressed that even assumingarguendothat the promissory note executed between the parties is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalidper seand that on numerous occasions the binding effects thereof have been upheld.The peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply.Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding circumstances.[12]The factual scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation.The Civil Code pertinently provides:Art. 2047.By guaranty, a person called the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.If a person binds himself solidarily with the principal debtor, the provisions of Section 4,Chapter 3, Title I of this Book shall be observed.In such case the contract is called a suretyship.It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control.[13]In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note.The terms of the contract are clear, explicit and unequivocal that petitioners liability is that of a surety.Her pretension that the terms jointly and severally or solidarily liable contained in the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she fully understood the contents of the promissory note and that she is fully aware of her solidary liability with the principal maker.Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise.Any reference to the existence of fraud is unavailing.Fraud must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate.Petitioners attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations.[14]Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking.[15]The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship.And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability.[16]Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she agreed that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note, which makes her contract one of guaranty and not suretyship.The purported discordance is more apparent than real.A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.[17]A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay.[18]Stated differently, a surety promises to pay the principals debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay.[19]A surety binds himself to perform if the principal does not, without regard to his ability to do so.A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so.[20]In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.[21]Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship.The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of respondent corporations right against petitioner.It has not been shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein petitioneronly if and whenthe defaulting principal has become insolvent.A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtors obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the principal.[22]In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule onstrictissimi juris, which holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus interpreted and construed, is not to be extended beyond its strict meaning.[23]The rule, however, will apply only after it has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty.It cannot be used as an aid in determiningwhethera partys undertaking is that of a surety or a guarantor.Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof.Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above.It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall also be principally considered.[24]Several attendant factors in that genre lend support to our finding that petitioner is a surety.For one, when petitioner was informed about the failure of the principal debtor to pay the loan, she immediately offered to settle the account with respondent corporation.Obviously, in her mind, she knew that she was directly and primarily liable upon default of her principal.For another, and this is most revealing, petitioner presented the receipts of the payments already made, from the time of initial payment up to the last, which were all issued in her name and of the Azarraga spouses.[25]This can only be construed to mean that the payments made by the principal debtors were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner.The concomitant and simultaneous compliance of petitioners obligation with that of her principals only goes to show that, from the very start, petitioner considered herself equally bound by the contract of the principal makers.In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal,[26]and as such is deemed an original promisor and debtor from the beginning.[27]This is because in suretyship there is but one contract, and the surety is bound by the same agreement which binds the principal.[28]In essence, the contract of a surety starts with the agreement,[29]which is precisely the situation obtaining in this case before the Court.It will further be observed that petitioners undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal obligors.A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and direct.[30]Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were sureties jointly liable with the buyer.[31]A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety.[32]There is no merit in petitioners contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation.Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note.Significantly, paragraph (G) of the note states that should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand.Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares.[33]As a surety, petitioner is equally bound by such waiver.Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand.[34]On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principals default.Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety.The surety is bound to take notice of the principals default and to perform the obligation.He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.[35]The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies thereof to its pleadings, is likewise immaterial.In the absence of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account.[36]The underlying principle therefor is that a suretyship is a direct contract to pay the debt of another.A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal whatsoever or any notice of default.[37]As an original promisor and debtor from the beginning, he is held ordinarily to know every default of his principal.[38]Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors who allegedly were the only ones who benefited from the proceeds of the loan.What petitioner is trying to imply is that the creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation as surety.We disagree.A creditors right to proceed against the surety exists independently of his right to proceed against the principal.[39]Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone.[40]Since, generally, it is not necessary for a creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the principal, then as soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal.[41]Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound.[42]We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability.Where a creditor refrains from proceeding against the principal, the surety is not exonerated.In other words, mere want of diligence or forbearance does not affect the creditors rights vis--vis the surety, unless the surety requires him by appropriate notice to sue on the obligation.Such gratuitous indulgence of the principal does not discharge the surety whether given at the principals request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness.The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent.[43]And, in the absence of proof of resultant injury, a surety is not discharged by the creditors mere statement that the creditor will not look to the surety,[44]or that he need not trouble himself.[45]The consequences of the delay, such as the subsequent insolvency of the principal,[46]or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.[47]Theraison dtrefor the rule is that there is nothing to prevent the creditor from proceeding against the principal at any time.[48]At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.[49]It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release the surety.[50]In order to constitute an extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable agreement between the principal and the creditor, and that it was made without the consent of the surety or with a reservation of rights with respect to him.The contract must be one which precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which precludes the surety from paying the debt.[51]None of these elements are present in the instant case.Verily, the mere fact that respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation did not effectively absolve herein petitioner from the consequences of her undertaking.Besides, the burden is on the surety, herein petitioner, to show that she has been discharged by some act of the creditor,[52]herein respondent corporation, failing in which we cannot grant the relief prayed for.As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty charges on the outstanding balance of the loan cannot be imposed for being illegal and unconscionable.Petitioner additionally theorizes that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges would accumulate.The statement, likewise traversed by said respondent, is misleading.In an affidavit[53]executed by petitioner, which was attached to her petition, she stated, among others, that:8.During the latter part of 1990, Iwas surprised to learn that Merlyn Azarragas loan has been released and that she has not paid the same upon its maturity.I received a telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the promissory note which I signed.9.IrequestedMr. Banusing to try to collect first from Merlyn and Osmea Azarraga.At the same time, I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect from Merlyn and Osmea Azarraga.Mr. Banusing advised me not to worry because he will try to collect first from Merlyn and Osmea Azarraga.10.A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been paid.Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a parcel of land which I own.Mr. Banusings secretary, however, refused my offer for the reason that they are not interested in real estate.11.In March 1992, I received a copy of the summons and of the complaint filed against me by MB Lending before the RTC-Iloilo.After learning that a complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in the amount ofP30,000.00.12.Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB Lending.13.Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable.Later, Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively discharge her from liability.There are a number of circumstances which conjointly inveigh against her aforesaid theory.1. Respondent corporation cannot be faulted for not immediately demanding payment from petitioner.It was petitioner who initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to collect.The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of petitioner.At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal does not pay.2. Petitionermade a second attempt to settle the obligation by offering a parcel of land which she owned.Respondent corporation was acting well within its rights when it refused to accept the offer.The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is due.[54]The obligee is entitled to demand fulfillment of the obligation or performance as stipulated.A change of the object of the obligation would constitute novation requiring the express consent of the parties.[55]3.Afterthecomplaint was filedagainsther, petitioner reiterated her offer to pay the outstanding balance of the obligation in the amount ofP30,000.00 but the same was likewise rejected.Again, respondent corporation cannot be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests and penalty charges, as owing and due from herein petitioner.A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.[56]In other words, the prestation must be fulfilled completely.A person entering into a contract has a right to insist on its performance in all particulars.[57]Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then the obligation shall be deemed fully complied with.[58]Precisely, this is what respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually due under their contract.This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorneys fees equivalent to 25% of the total amount due are highly inequitable and unreasonable.It must be remembered that from the principal loan ofP30,000.00, the amount ofP16,300.00 had already been paid even before the filing of the present case.Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor.And, even if there has been no performance, the penalty may also be reduced if it is iniquitous or leonine.In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being excessive and unwarranted under the following rationalization:Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of the penalty interest of three percent (3%) per month on total amount due but unpaid should be equitably reduced.The purpose for which the penalty interest is intended - that is, to punish the obligor - will have been sufficiently served by the effects of compounded interest.Under the exceptional circumstances in the case at bar, e.g., the original amount loaned was onlyP15,000.00; partial payment ofP8,600.00 was made on due date; and the heavy (albeit still lawful) regular compensatory interest, the penalty interest stipulated in the parties promissory note is iniquitous and unconscionable and may be equitably reduced further by eliminating such penalty interest altogether.[59]Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.Finally, with respect to the award of attorneys fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may nevertheless reduce such attorneys fees fixed in the contract when the amount thereof appears to be unconscionable or unreasonable.[60]To that end, it is not even necessary to show, as in other contracts, that it is contrary to morals or public policy.[61]The grant of attorneys fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a sum of money.We, therefore, hold that the amount ofP10,000.00 as and for attorneys fee would be sufficient in this case.[62]WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award of attorneys fees is reduced toP10,000.00.SO ORDERED.

(4) E. ZOBEL, INC.,petitioner, vs.THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA,respondents.

[G.R. No. 113931.May 6, 1998]

D E C I S I O N

MARTINEZ,J.:This petition for review on certiorari seeks the reversal of the decision[1]of the Court of Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as the Resolution[2]dated February 15, 1994 denying the motion for reconsideration thereto.The facts are as follows:Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2, 875,000.00) to finance the purchase of two (2) maritime barges and one tugboat[3]which would be used in their molasses business. The loan was granted subject to the condition that respondent spouses execute a chattel mortgage over the three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty[4]were executed.Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on January 31,1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-55909 in the Regional Trial Court of Manila.Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the appropriate government agency.SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner is not a guarantor but a surety.On February 18, 1993, the trial court issued an Order, portions of which reads:"After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss without merit. The document referred to as 'Continuing Guaranty'dated August 21,1985 (Exh. 7) states as follows:'For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety and in order to induce you, in your discretion, at any other manner, to, or at the request or for the account of the borrower, x x x '"The provisions of the document are clear, plain and explicit."Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is 'Continuing Guaranty', the Court's interpretation is not limited to the title alone but to the contents and intention of the parties more specifically if the language is clear and positive. The obligation of the defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those acting as guarantor.In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor of the plaintiff thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition of the guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is rendered unnecessary and redundant."With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes the obligation a guaranty, the same merits a scant consideration and could not be taken by this Court as the basis of the extinguishment of the obligation of the defendant corporation to the plaintiff as surety. The chattel mortgage is an additional security and should not be considered as payment of the debt in case of failure of payment. The same is true with the failure to register, extinction of the liability would not lie."WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its answer to the complaint within ten (10) days from receipt of a copy of this Order."[5]Petitioner moved for reconsideration but was denied on April 26,1993.[6]Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a petition for certiorari, alleging that the trial court committed grave abuse of discretion in denying the motion to dismiss.On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion of which reads:"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in issuing the herein assailed orders, We hereby DISMISS the petition."A motion for reconsideration filed by petitioner was denied for lack of merit on February 15,1994.Petitioner now comes to usviathis petition arguing that the respondent Court of Appeals erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.We shall first resolve the issue ofwhether or not petitioner under the "Continuing Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.A contract of surety is anaccessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.[7]A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt.[8]Strictly speaking, guaranty and surety are nearlyrelated, and many of the principles are common to both. However, under our civil law,theymay be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal.[9]Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal isunable to paywhile a surety is the insurer of the debt, and he obligates himself to pay if the principaldoes not pay.[10]Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor of SOLIDBANK,albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to respondent spouses. This can be seen in the following stipulations."For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address x x x (hereinafter called the Borrower), for the payment of which theundersigned is now obligated to you as surety and in order to induce you,in your discretion, at any time or from time to time hereafter, to make loans or advances or to extend credit in any other manner to, or at the request or for the account of the Borrower, either with or without purchase or discount, or to make any loans or advances evidenced or secured byany notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of indebtedness x x upon which the Borroweris or may become liable as maker, endorser, acceptor, or otherwise,the undersigned agrees to guarantee, and does hereby guarantee, the punctual payment, at maturity or upon demand, to you of any and all such instruments,loans, advances, credits and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower,together with any and all expenses which may be incurred by you in collecting all or any such instruments or other indebtednessor obligations hereinbeforereferred to, and or in enforcing any rights hereunder, and also to make or cause any and all such payments to be made strictly in accordance with the terms and provisions of any agreement (g), express or implied, which has (have) been or may hereafter be made or entered into by the Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in effect which might in any manner affect any of the terms or provisions of any such agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to be invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments, obligations or indebtedness;x x x " (Italics Ours)One need not look too deeply at the contract to determine the nature of the undertaking and the intention of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the obligation. This can be gleaned from a reading of the stipulations in the contract, to wit:'x x xIf default be made in the payment of any of the instruments, indebtedness or other obligation hereby guaranteedby the undersigned, or if the Borrower, or the undersigned should die, dissolve, fail in business, or become insolvent, x x x ,or if any funds or other property of the Borrower, or of the undersigned which may be or come into your possession or control or that of any third party acting in your behalf as aforesaid should be attached of distrained, or should be or become subject to any mandatory order of court or other legal process, then, or any time after the happening of any such event any or all of the instruments of indebtedness or other obligations hereby guaranteed shall, at your option become (for the purpose of this guaranty) due and payable by the undersigned forthwith without demand of notice,and full power and authority are hereby given you, in your discretion, to sell, assign and deliver all or any part of the property upon which you may then have a lien hereunder at any broker's board, or at public or private sale at your option, either for cash or for credit or for future delivery without assumption by you of credit risk, and without either the demand, advertisement or notice of any kind, all of which are hereby expressly waived. At any sale hereunder, you may, at your option, purchase the whole or any part of the property so sold, free from any right of redemption on the part of the undersigned, all such rights being also hereby waived and released.In case of any sale and other disposition of any of the property aforesaid, after deducting all costs and expenses of every kind for care, safekeeping, collection, sale, delivery or otherwise, you may apply the residue of the proceeds of the sale and other disposition thereof, to the payment or reduction, either in whole or in part, of any one or more of the obligations or liabilities hereunder of the undersigned whether or not except for disagreement such liabilities or obligations would then bedue, making proper allowance or interest on the obligations and liabilities not otherwise then due, and returning the overplus, if any, to the undersigned; all without prejudice to your rights as against the undersigned with respect to anyand all amounts which may be or remain unpaid on any of the obligations or liabilities aforesaid at any time (s)"xxxxxxxxx'Should the Borrower at this or at any future time furnish, or should be heretofore have furnished, another surety or sureties to guarantee the payment of his obligations to you, the undersigned hereby expressly waives all benefits to which the undersigned might be entitled under the provisions of Article 1837 of the Civil Code (beneficio division), the liability of the undersigned under any and all circumstances being joint and several;" (Italics Ours)The use of the term "guarantee" does notipso factomean that the contract is one of guaranty. Authorities recognize that the word "guarantee"is frequently employed in business transactions to describe not the security of the debt but an intention to be bound by a primary or independent obligation.[11]As aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to the contents and intention of the parties.Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by petitioner, finds no application to the case at bar. InBicol Savings and Loan Association vs. Guinhawa,[12]we have ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety, not as a guarantor.But even assuming that Article 2080 is applicable, SOLIDBANK'sfailure to register the chattel mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even released SOLIDBANK from any fault or negligence that may impair the contract.The pertinent portions of the contract so provides:"x x x the undersigned (petitioner)who hereby agrees to be and remain bound upon this guaranty, irrespective of the existence, value or condition of any collateral,and notwithstanding any such change, exchange, settlement, compromise, surrender, release, sale, application, renewal or extension, and notwithstanding also that all obligations of the Borrower to you outstanding and unpaid at any time (s) may exceed the aggregate principal sum herein above prescribed.'This is a Continuing Guaranty andshall remain in full force and effect until written notice shall have been received by you that it has been revoked by the undersigned, but any such notice shall not be released the undersigned from any liability as to any instruments, loans, advances or other obligations hereby guaranteed, which may be held by you, or in which you may have any interest, at the time of the receipt of such notice.No act or omission of any kind on your part in the premises shall in any event affect or impair this guaranty,nor shall same be affected by any change which may arise by reason of the death of the undersigned, of any partner (s) of the undersigned, or ofthe Borrower, or of the accession to any such partnership of any one or more new partners." (Italics supplied)In fine, we find the petition to be without merit as no reversible error was committed by respondent Court of Appeals in rendering the assailed decision.WHEREFORE,the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs against the petitioner.SO ORDERED.

(5) INTERNATIONAL FINANCEG.R. No. 160324CORPORATION, Petitioner, Present: Panganiban,J., Chairman, - versus - Sandoval-Gutierrez,* Corona,Carpio Morales, and Garcia,JJ IMPERIAL TEXTILE MILLS, Promulgated:INC.,** Respondent. November 15, 2005x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- xDECISIONPANGANIBAN,J.:

The terms of a contract govern the rights and obligations of the contracting parties. When the obligor undertakes to be jointly and severally liable, it means that the obligation is solidary.If solidary liability was instituted to guarantee a principal obligation, the law deems the contract to be one of suretyship. The creditor in the present Petition was able to show convincingly that, although denominated as a Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use of the words guarantee and guarantor, the subject Contract was indeed a surety, because its terms were clear and left no doubt as to the intention of the parties.The CaseBefore us is a Petition for Review[1]under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision[2]and September 30, 2003 Resolution[3]of the Court of Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows:WHEREFORE, the appeal isPARTIALLY GRANTED. The decision of the trial court isMODIFIEDto read as follows:1. Philippine Polyamide Industrial Corporation isORDEREDto pay [Petitioner] International Finance Corporation, the following amounts:(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;(b) Interest of 12% per annum on accrued interest, which shall be counted from the date of filing of the instant action up to the actual payment;(c)P73,340.00 as attorneys fees;(d) Costs of suit.2. The guarantor Imperial Textile Mills, Inc. together with Grandtex isHELDsecondarily liable to pay the amount herein adjudged to [Petitioner] International Finance Corporation.[