G.R. No. 80078 May 18, 1993

ATOK FINANCE CORPORATION,petitioner,vs.COURT OF APPEALS, SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI,respondents.

Syquia Law Offices for petitioner.

Batino, Angala, Allaga & Zara Law Offices for private respondents.

FELICIANO,J.:Atok Finance Corporation ("Atok Finance") asks us to review and set aside the Decision of the Court of Appeals which reversed a decision of the trial court ordering private respondents to pay jointly and severally to petitioner Atok Finance certain sums of money.

On 27 July 1979, private respondents Sanyu Chemical corporation ("Sanyu Chemical") as principal and Sanyu Trading Corporation ("Sanyu Trading") along with individual private stockholders of Sanyu Chemical, namely, private respondent spouses Danilo E. Halili and Pablico Bermundo as sureties, executed in the continuing Suretyship Agreement in favor of Atok Finance as creditor. Under this Agreement, Sanyu Trading and the individual private respondents who were officers and stockholders of Sanyu Chemical did:

(1) For valuable and/or other consideration..., jointly and severally unconditionally guarantee to ATOK FINANCE CORPORATION(hereinafter called Creditor),the full, faithful and prompt payment and discharge of any and all indebtedness of [Sanyu Chemical]. . . (hereinafter called Principal)to the Creditor. The word"indebtedness"is used hereinin its most comprehensive sense and includes any and all advances, debts, obligations and liabilitiesof Principal or any one or more of them,here[to]fore, now or hereafter made, incurred or created, whether voluntary or involuntary andhowever arising, whether direct or acquired by the Creditor by assignment or succession,whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined and whether the Principal may be may be liable individually of jointly with others, orwhether recovery upon such indebtedness may be or hereafter become barred by any statute of limitations,or whether such indebtedness may be or otherwise becomeunenforceable.1(Emphasis supplied)

Other relevant provisions of the Continuing Suretyship Agreement follow:

(2) This is acontinuing suretyshiprelating to any indebtedness,including that arising under successive transactions which shall either continue the indebtedness from time to time or renew it after it has been satisfied. This suretyship is binding upon the heirs, successors, executors, administrators and assigns of the surety, and the benefits hereof shall extend to and include the successors and assigns of the Creditor.

(3) The obligations hereunder arejoint and several and independent of the obligations of the Principal. A separate action or actions may be prosecuted against the Principal and whether or not the Principal be joined in any such action or actions.

xxx xxx xxx.

(6) In addition to liens upon, and rights of set-off against the moneys, securities or other property of the Surety given to the Creditor by law, the Creditor shall have the lien upon and a right of self-off against all moneys, securities, and other property of the Surety now and hereafter in the possession of the Creditor; and every such lien or right of self-off may be exercised without need of demands upon or notice to the Surety. No lien or right of set-off shall be deemed to have been waived by any act, omission or conduct on the part of the Creditor, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off or lien shall continue in full force and effect until such right of set-off of lien is specifically waived or released by an instrument in writing executed by the Creditor.

(7) Any indebtedness of the Principal now or hereafter held by the Surety is hereby subordinated to the indebtedness of the Principal to the Creditor; and if the Creditor so requests, such indebtedness of the Principal of the Surety shall be collected, enforced and shall be paid over to the Creditor and shall be paid over to the Creditor and shall be paid over to the Creditor on account of the indebtedness of the Principal to the Creditor but without reducing or affecting in any manner the liability of the Surety under the provisions of this suretyship.

xxx xxx xxx2(Emphases supplied)

On 27 November 1981, Sanyu Chemical assigned its trade receivables outstanding as of 27 November 1981 with a total face value of P125,871.00, to Atok Finance in consideration of receipt from Atok Finance of the amount of P105,000.00. The assigned receivables carried a standard term of thirty (30) days; it appeared, however, that the standard commercial practice was to grant an extension up to one hundred twenty (120) days without penalties. The relevant portions of this Deed of Assignment read as follows:

1. FOR VALUE RECEIVED, the ASSIGNOR does hereby SELL, TRANSFER and ASSIGN all his/its rights, title and interest in the contracts, receivables, accounts, notes, leases, deeds of sale with reservation of title, invoices, mortgages, checks, negotiable instruments and evidences of indebtedness listed in the schedule forming part hereinafter called "Contract" or "Contracts."

2. To induce the ASSIGNEE to purchase the above Contracts, the ASSIGNOR does hereby certify,warrant and representthat :

(a). He/It is the sole owner of the assigned Contracts free and clear of claims of any other party except the herein ASSIGNEE and has the right to transfer absolute title thereto the ASSIGNEE;

(b). Each assigned Contract is bonafide and the amount owing and to become due on each contract is correctly stated upon the schedule or other evidences of the Contract delivered pursuant thereto;

(c). Each assigned Contract arises out of the sale of merchandise/s which had been delivered and/or services which have been rendered and none of the Contract is now, nor will at any time become, contingent upon the fulfillment of any contract or condition whatsoever, or subject to any defense, offset or counterclaim; x (d). No assigned Contract is represented by any note or other evidence of indebtness or other security document except such as may have been endorsed, assigned and delivered by the ASSIGNOR to the ASSIGNEE simultaneously with the assignment of such Contract;

(e). No agreement has been made, or will be made, with any debtor for any deduction discount or return of merchandise, except as may be specifically noted at the time of the assignment of the Contract;

(f). None of the terms or provisions of the assigned Contracts have been amended, modified or waived;

(g). The debtor/s under the assigned Contract/s are solvent and his/its/their failure to pay the assigned Contractsand/or any installment thereon upon maturity thereof shall beconclusively considered as a violation of this warranty; and(h). Each assigned Contract is a valid obligation of the buyer of the merchandise and/or service rendered under the Contract And that no Contract is overdue.

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws.Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

4. The ASSIGNOR shall without compensation or cost, collect and receive in trust for the ASSIGNEE all payments made upon the assigned contracts and shall remit to the ASSIGNEE all collections on the said Contracts as follows :

P5,450.00 due on January 2, 1982 on every 15th day (semi-monthly) until November 1, 1982.

P110,550.00 balloon payment after 12 months.3(Emphasis supplied)

Later, additional trade receivables were assigned by Sanyu Chemical to Atok Finance with a total face value of P100,378.45.

On 13 January 1984, Atok Finance commenced action against Sanyu Chemical, the Arrieta spouses, Pablito Bermundo and Leopoldo Halili before the Regional Trial Court of Manila to collect the sum of P120,240.00 plus penalty charges amounting to P0.03 for every peso due and payable for each month starting from 1 September 1983. Atok Finance alleged that Sanyu Chemical had failed to collect and remit the amount due under the trade receivables.

Sanyu Chemical and the individual private respondents sought dismissal of Atok's claim upon the ground that such claim had prescribed under Article 1629 of the Civil Code and for lack of cause of action. The private respondents contended that the Continuing Suretyship Agreement, being an accessory contract, was null and void since, at the time of its execution, Sanyu Chemical had no pre-existing obligation due to Atok Finance.

At the trial, Sanyu Chemical and the individual private respondents failed to present any evidence on their behalf, although the individual private respondents submitted a memorandum in support of their argument. After trial, on 1 April 1985, the trial court rendered a decision in favor of Atok Finance. The dispositive portion of this decision reads as follows:

ACCORDINGLY, judgment is hereby rendered in favor of the plaintiff ATOK FINANCE CORPORATION; and against the defendants SANYU CHEMICAL CORPORATION, DANILO E. ARRIETA, NENITA B. ARRIETA, PABLITO BERMUNDO and LEOPOLDO HALILI, ordering the said defendants, jointly and severally, to pay the plaintiff:

(1) P120,240.00 plus P0.03 for each peso for each month from September 1, 1983 until the whole amount is fully paid;

(2) P50,000.00 as attorney's fees; and

(3) To pay the costs.

SO ORDERED.4Private respondents went on appeal before the then Intermediate Appellate Court ("IAC"), and the appeal was there docketed as AC-G.R. No. 07005-CV. The case was raffled to the Third Civil Cases Division of the IAC. In a resolution dated 21 March 1986, that Division dismissed the appeal upon the ground of abandonment, since the private respondents had failed to file their appeal brief notwithstanding receipt of the notice to do so. On 4 June 1986, entry of judgment was made by the Clerk of Court of the IAC. Accordingly, Atok Finance went before the trial court and sought a writ of execution to enforce the decision of the trial court of 1 April 1985. The trial court issued a writ of execution on 23 July 1986.5Petitioner alleged that the writ of execution was served on private respondents.6However, on 27 August 1986, private respondents filed a Petition for Relief from Judgment before the Court of Appeals. This Petition was raffled off to the 15th Division of the Court of Appeals. In that Petition, private respondents claimed that their failure to file their appeal brief was due to excusable negligence, that is, that their previous counsel had entrusted the preparation and filing of the brief to one of his associates, which associate, however, had unexpectedly resigned from the law firm without returning the records of cases he had been handling, including the appeal of private respondents. Atok Finance opposed the Petition for Relief arguing that no valid ground existed for setting aside the resolution of the Third Division of the then IAC.

The 15th Division of the Court of Appeals nonetheless granted the Petition for Relief from Judgment "in the paramount interest of justice,"7set aside the resolution of the Third Civil Cases Division of the then IAC, and gave private respondents a non-extendible period of fifteen (15) days within which to file their appeal brief. Private respondents did file their appeal brief.

The 15th Division, on 18 August 1987, rendered a Decision on the merits of the appeal, and reversed and set aside the decision of the trial court and entered a new judgment dismissing the complaint of Atok Finance, ordering it to pay private respondents P3,000.00 as attorney's fees and to pay the costs.

Atok Finance moved to set aside the decision of the 15th Division of the Court of Appeals, inviting attention to the resolution of the IAC's Third Civil Cases Division of 21 March 1986 originally dismissing private respondent's appeal for abandonment thereof. In a resolution dated 18 August 1987, the 15th Division denied Atok Finance's motion stating that it had granted the Petition for Relief from Judgment and given private respondents herein fifteen (15) days within which to file an appeal brief, while Atok Finance did not file an appellee's brief, and that its decision was arrived at "on the basis of appellant's brief and the original records of the appeal case."

In the present Petition for Review, Atok Finance assigns the following as errors on the part of the Court of Appeals in rendering its decision of 18 August 1987:

(1) that it had erred in ruling that a continuing suretyship agreement cannot be effected to secure future debts;

(2) that it had erred in ruling that the continuing suretyship agreement was null and void for lack of considerationwithout any evidence whatsoever [being] adduced by private respondents;

(3) that it had erred in granting the Petition for Relief from Judgment while execution proceedings [were] on-going on the trial court.8(Emphasis in the original)

As a preliminary matter, we note that a Division of the Court of Appeals is co-equal with any other Division of the same court. Accordingly, a Division of the Court of Appeals has no authority to consider and grant a petition for relief from a judgment rendered by another Division of the same court. In the case at bar, however, we must note that an intervening event had occurred between the resolution of 21 March 1986 of the Third Civil Cases Division of the IAC dismissing private respondents' appeal and the 30 September 1986 order of the 15th Division of the Court of Appeals granting the Petition for Relief from Judgment. On 28 July 1986, the old Intermediate Appellate Court went out of existence and a new court, the Court of Appeals, came into being, was organized and commenced functioning.9This event, and the probability that some confusion may have accompanied the period of transition from the IAC to the Court of Appeals, lead us to believe that the defect here involved should be disregarded as being of secondary importance. At the same time, nothing in this decision should be read as impliedly holding that a petition from relief judgment is available in respect of a decision rendered by the Court of Appeals; this issue is best reserved for determination in some future cases where it shall have been adequately argued by the parties.

We turn, therefore, to a consideration of the first substantive issue addressed by the Court of Appeals in rendering its Decision on the merits of the appeal: whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it.

The Court of Appeals held on this first issue as follows:

It is the contention of private appellants that the suretyship agreement is null and void because it is not in consonance with the laws on guaranty and security. The said agreement was entered into by the parties two years before the Deed of Assignment was executed. Thus, allegedly, it ran counter to the provision that guaranty cannot exist independently because by nature it is merely an accessory contract. The law on guaranty is applicable to surety to some extentManila Surety and Fidelity Co.v.Baxter Construction & Co., 53 O.G.8836; and, Arran v.Manila Fidelity & Surety Co., 53 O.G. 7247.

We find merit in this contention.

Although obligations arising from contracts have the force of law between the contracting parties, (Article 1159 of the Civil Code) this does not mean that the law is inferior to it; the terms of the contract could not be enforces if not valid. So, even if, as in this case, the agreement was for acontinuing suretyshipto include obligations enumerated in paragraph 2 of the agreement,the same could not be enforced.First, because this contract, just like guaranty, cannot exist without a valid obligation(Art. 2052, Civil Code); and,second, although it may be given as security for future debt(Art. 2053, C.C.),the obligation contemplated in the case at bar cannot be considered "future debt" as envisioned by this law.

There isno proof that when the suretyship agreement was entered into, there was a pre-existing obligation which served the principal obligation between the parties. Furthermore,the "future debts" alluded to in Article 2053 refer to debts already existing at the time of the constitution of the agreement but the amount thereof is unknown, unlike in the case at bar where the obligation was acquired two years after the agreement.10(Emphasis supplied).

We consider that the Court of Appeals here was in serious error. It is true that a serious guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." This legal proposition is not, however, like most legal principles, to be read in an absolute and literal manner and carried to the limit of its logic. This is clear from Article 2052 of the Civil Code itself:

Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guaranty a natural obligation." (Emphasis supplied).

Moreover, Article 2053 of the Civil Code states:

Art. 2053.A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated.A conditional obligation may also be secured. (Emphasis supplied)

The Court of Appeals apparently overlooked our caselaw interpreting Articles 2052 and 2053 of the Civil Code. InNational Rice and Corn Corporation (NARIC) v.Jose A.Fojas and Alto Surety Co., Inc.,11the private respondents assailed the decision of the trial court holding them liable under certain surety bonds filed by private respondent Fojas and issued by private respondent Alto Surety Co. in favor of petitioner NARIC, upon the ground that those surety bonds were null and void "there being no principal obligation to be secured by said bonds." In affirming the decision of the trial court, this Court, speaking through Mr. Justice J.B.L. Reyes, made short shrift of the private respondents' doctrinaire argument:

Under his third assignment of error, appellantFojas questions the validity of the additional bonds(Exhs. D and D-1)on the theory that when they were executed, the principal obligation referred to in said bonds had not yet been entered into, as no copy thereof was attached to the deeds of suretyship.This defense is untenable, because in its complaint the NARIC averred, and the appellant did not deny that these bonds were posted to secure the additional credit that Fojas has applied for, and the credit increase over his original contract was sufficient consideration for the bonds.That the latter were signed and filed before the additional credit was extended by the NARIC is no ground for complaint.Article 1825 of the Civil Code of 1889, in force in 1948,expressly recognized that "a guaranty may also be given as security for future debtsthe amount of which is not yet known." (Emphasis supplied)

InRizal Commercial Banking Corporation v.Arro,12the Court was confronted again with the same issue, that is, whether private respondent was liable to pay a promissory note dated 29 April 1977 executed by the principal debtor in the light of the provisions of a comprehensive surety agreement which petitioner bank and the private respondent had earlier entered into on 19 October 1976. Under the comprehensive surety agreement, the private respondents had bound themselves as solidary debtors of the Diacor Corporation not only in respect of existing obligations but also in respect of future ones. In holding private respondent surety (Residoro Chua) liable under the comprehensive surety agreement, the Court said:

The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an accessory obligation, it being dependent upon a principal one, which, in this case is the loan obtained by Daicor as evidenced by a promissory note.What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity. By terms that are unequivocal, it can be clearly seen thatthe surety agreement was executed to guarantee future debts which Daicor may incur with petitioner, as is legally allowable under the Civil Code. Thus

Article 2053. A guarantee may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.13(Emphasis supplied)

It is clear to us that theRizal Commercial Banking Corporationand theNARICcases rejected the distinction which the Court of Appeals in the case at bar sought to make with respect to Article 2053, that is, that the "future debts" referred to in that Article relate to "debts already existing at the time of the constitution of the agreement but the amount [of which] is unknown," and not to debts not yet incurred and existing at that time. Of course, a surety is not bound under any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more that there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.14Comprehensive or continuing surety agreements are in fact quite commonm place in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such surety agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

We turn to the second substantive issue, that is, whether private respondents are liable under the Deed of Assignment which they, along with the principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby assigned.

The contention of Sanyu Chemical was that Atok Finance had no cause of action under the Deed of Assignment for the reason that Sanyu Chemical's warranty of the debtors' solvency had ceased. In submitting this contention, Sanyu Chemical relied on Article 1629 of the Civil Code which reads as follows:

Art. 1629. In case the assignor in good faith should have made himself responsible for the solvency of the debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one year only, from the time of the assignment if the period had already expired.

If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year after maturity.

Once more, the Court of Appeals upheld the contention of private respondents and held that Sanyu Chemical was free from liability under the Deed of Assignment. The Court of Appeals said:

. . . Article 1629 provides for the duration of assignor's warranty of debtor's solvency depending on whether there was a period agreed upon for the existence of such warranty, analyzing the law thus:

(1) if there is a period (or length of time) agreed upon, then for such period;

(2) if no period (or length of time) was agreed upon, then:

(a) one year from assignment if debt was due at the time of the assignment

(b) one year from maturity if debt was not yet due at the time of the assignment..

The debt referred to in this law is the debt under the assigned contract or the original debts in favor of the assignor which were later assigned to the assignee. The debt alluded to in the law, is not the debt incurred by the assignor to the assignee as contended by the appellant.

Applying the said law to the case at bar, the records disclose that none of the assigned receivables had matured on November 27, 1981 when the Deed of Assignment was executed. The oldest debt then existing was that contracted on November 3, 1981 and the latest was contracted on December 4, 1981.

Each of the invoices assigned to the assignee contained a term of 30 days (Exhibits B-3-A to 5 and extended by the notation which appeared in the "Schedule of Assigned Receivables" which states that the ". . . the terms stated on our invoices were normally extended up to a period of 120 days. . ." (Exhibit B-2).Considering the terms in the invoices plus the ordinary practice of the company, thus, the assigned debts matured between April 3, 1982 to May 4, 1982.The assignor's warranty for debtor's warranty, in this case, would then be from the maturity period up to April 3, 1983 or May 4, 1983 to cover all of the receivables in the invoices.

The letter of demand executed by appellee was dated August 29, 1983 (Exhibit D) and the complaint was filed on January 13, 1984.Both dates were beyond the warranty period.

In effect, therefore, company-appellant was right when it claimed that appellee had no cause of action against it or had lost its cause ofaction.15(Emphasis supplied)

Once again, however, we consider that the Court of Appeals was in reversible error in so concluding. The relevant provision of the Deed of Assignment may be quoted again in this connection:

2. To induce the ASSIGNEE [Atok Finance] to purchase the above contracts, the ASSIGNOR [Sanyu Chemical] does hereby certify, warrant and represent that . . .

(g) the debtor/s under the assigned contract/s are solvent and his/its/theirfailure to pay the assigned contract/s and/or any installment thereon upon maturity thereof shall be conclusively considered as a violation of this warranty; and . . .

The foregoing warranties and representations are in addition to those provided for in the Negotiable Instruments Law and other applicable laws.Any violation thereof shall render the ASSIGNOR immediately and unconditionally liable to pay the ASSIGNEE jointly and severally with the debtors under the assigned contracts, the amounts due thereon.

xxx xxx xxx

(Emphasis supplied)

It may be stressed as a preliminary matter that the Deed of Assignment was valid and binding upon Sanyu Chemical. Assignment of receivables is a commonplace commercial transaction today. It is an activity or operation that permits the assignee to monetize or realize the value of the receivables before the maturity thereof. In other words, Sanyu Chemical received from Atok Finance the value of its trade receivables it had assigned; Sanyu Chemical obviously benefitted from the assignment. The payments due in the first instance from the trade debtors of Sanyu Chemical would represent the return of the investment which Atok Finance had made when it paid Sanyu Chemical the transfer value of such receivables.

Article 1629 of the Civil Code invoked by private respondents and accepted by the Court of Appeals is not, in the case at bar, material. The liability of Sanyu Chemical to Atok Finance restsnoton the breach of the warranty of solvency; the liability of Sanyu Chemical was notex lege(ex Article 1629) but ratherex contractu.Under the Deed of Assignment, the effect of non-payment by the original trade debtors was breach of warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary liability by the assignor under the receivables assigned.In other words,the assignor Sanyu Chemical becomes a solidary debtor under the terms of the receivablescovered and transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical became, under the terms of the Deed of Assignment, solidary obligor under each of the assigned receivables, the other private respondents (the Arrieta spouses, Pablito Bermundo and Leopoldo Halili), became solidarily liable for that obligation of Sanyu Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little differently, the obligations of individual private respondent officers and stockholders of Sanyu Chemical under the Continuing Suretyship Agreement, were activated by the resulting obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu Chemical is not subject to the limiting period set out in Article 1629 of the Civil Code.

It follows that at the time the original complaint was filed by Atok Finance in the trial court, it had a valid and enforceable cause of action against Sanyu Chemical and the other private respondents. We also agree with the Court of Appeals that the original obligors under the receivables assigned to Atok Finance remain liable under the terms of such receivables.

WHEREFORE, for all the foregoing, the Petition for Review is hereby GRANTED DUE COURSE, and the Decision of the Court of Appeals dated 18 August 1987 and its Resolution dated 30 September 1987 are hereby REVERSED and SET ASIDE. A new judgment is hereby entered REINSTATING the Decision of the trial court in Civil Case No. 84-22198 dated 1 April 1985, except only that, in the exercise of this Court's discretionary authority equitably to mitigate the penalty clause attached to the Deed of Assignment, that penalty is hereby reduced to eighteen percent (18%)per annum(instead of P0.03 for every peso monthly [or 36%per annum]). As so modified, the Decision of the trial court is hereby AFFIRMED. Costs against private respondents.

G.R. No. 185945 December 05, 2012FIDELIZA J. AGLIBOT,Petitioner,vs.INGERSOL L. SANTIA,Respondent.

D E C I S I O N

REYES,J.:Before the Court is a Petition for Review onCertiorariunder Rule 45 of the 1997 Rules of Civil Procedure seeking to annul and set aside the Decision1dated March I 8, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 100021, which reversed the Decision2dated April 3, 2007 of the Regional Trial Court (RTC) of Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-D to 2006-0569-D and entered a new judgment. Thefalloreads as follows:

WHEREFORE, the instant petition isGRANTEDand the assailed Joint Decision dated April 3, 2007 of the RTC of Dagupan City, Branch 40, and its Order dated June 12, 2007 areREVERSED AND SET ASIDEand a new one is entered ordering private respondent Fideliza J. Aglibot to pay petitioner the total amount ofP3,000,000.00 with 12% interest per annum from the filing of the Informations until the finality of this Decision, the sum of which, inclusive of interest, shall be subject thereafter to 12% annual interest until fully paid.

SO ORDERED.3On December 23, 2008, the appellate court denied herein petitioners motion for reconsideration.

Antecedent FactsPrivate respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the amount ofP2,500,000.00 to Pacific Lending & Capital Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was evidenced by a Promissory Note dated July 1, 2003, issued by Aglibot in behalf of PLCC, payable in one year subject to interest at 24%per annum. Allegedly as a guaranty or security for the payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-dated personal checks drawn from her own demand account maintained at Metrobank, Camiling Branch. Aglibot is a major stockholder of PLCC, with headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote, Las Pias, Metro Manila, where most of the stockholders also reside.4Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for having been drawn against insufficient funds or closed account. Santia thus demanded payment from PLCC and Aglibot of the face value of the checks, but neither of them heeded his demand. Consequently, eleven (11) Informations for violation of Batas Pambansa Bilang 22 (B.P. 22), corresponding to the number of dishonored checks, were filed against Aglibot before the Municipal Trial Court in Cities (MTCC), Dagupan City, Branch 3, docketed as Criminal Case Nos. 47664 to 47674. Each Information, except as to the amount, number and date of the checks, and the reason for the dishonor, uniformly alleged, as follows:

That sometime in the month of September, 2003 in the City of Dagupan, Philippines and within the jurisdiction of this Honorable Court, the above-named accused,FIDELIZA J. AGLIBOT, did then and there, willfully, unlawfully and criminally, draw, issue and deliver to one Engr. Ingersol L. Santia, a METROBANK Check No. 0006766, Camiling Tarlac Branch, postdated November 1, 2003, in the amount ofP50,000.00, Philippine Currency, payable to and in payment of an obligation with the complainant, although the said accused knew fully well that she did not have sufficient funds in or credit with the said bank for the payment of such check in full upon its presentment, such that when the said check was presented to the drawee bank for payment within ninety (90) days from the date thereof, the same was dishonored for reason "DAIF", and returned to the complainant, and despite notice of dishonor, accused failed and/or refused to pay and/or make good the amount of said check within five (5) days banking days [sic], to the damage and prejudice of one Engr. Ingersol L. Santia in the aforesaid amount ofP50,000.00 and other consequential damages.5Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia, but claimed that she did so in behalf of PLCC; that before granting the loan, Santia demanded and obtained from her a security for the repayment thereof in the form of the aforesaid checks, but with the understanding that upon remittance in cash of the face amount of the checks, Santia would correspondingly return to her each check so paid; but despite having already paid the said checks, Santia refused to return them to her, although he gave her assurance that he would not deposit them; that in breach of his promise, Santia deposited her checks, resulting in their dishonor; that she did not receive any notice of dishonor of the checks; that for want of notice, she could not be held criminally liable under B.P. 22 over the said checks; and that the reason Santia filed the criminal cases against her was because she refused to agree to his demand for higher interest.

On August 18, 2006, the MTCC in its Joint Decision decreed as follows:

WHEREFORE, in view of the foregoing, the accused,FIDELIZA J. AGLIBOT, is herebyACQUITTEDof all counts of the crime of violation of the bouncing checks law on reasonable doubt. However, the said accused is ordered to pay the private complainant the sum ofP3,000,000.00representing the total face value of the eleven checks plus interest of 12% per annum from the filing of the cases on November 2, 2004 until fully paid, attorneys fees ofP30,000.00as well as the cost of suit.

SO ORDERED.6On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case Nos. 2006-0559-D to 2006-0569-D, which further absolved Aglibot of any civil liability towards Santia, to wit:

WHEREFORE, premises considered, the Joint Decision of the courta quoregarding the civil aspect of these cases is reversed and set aside and a new one is entered dismissing the said civil aspect on the ground of failure to fulfill, a condition precedent of exhausting all means to collect from the principal debtor.

SO ORDERED.7Santias motion for reconsideration was denied in the RTCs Order dated June 12, 2007.8On petition for review to the CA docketed as CA-G.R. SP No. 100021, Santia interposed the following assignment of errors, to wit:

"In brushing aside the law and jurisprudence on the matter, the Regional Trial Court seriously erred:

1. In reversing the joint decision of the trial court by dismissing the civil aspect of these cases;

2. In concluding that it is the Pacific Lending and Capital Corporation and not the private respondent which is principally responsible for the amount of the checks being claimed by the petitioner;

3. In finding that the petitioner failed to exhaust all available legal remedies against the principal debtor Pacific Lending and Capital Corporation;

4. In finding that the private respondent is a mere guarantor and not an accommodation party, and thus, cannot be compelled to pay the petitioner unless all legal remedies against the Pacific Lending and Capital Corporation have been exhausted by the petitioner;

5. In denying the motion for reconsideration filed by the petitioner."9In its now assailed decision, the appellate court rejected the RTCs dismissal of the civil aspect of the aforesaid B.P. 22 cases based on the ground it cited, which is that the "failure to fulfill a condition precedent of exhausting all means to collect from the principal debtor." The appellate court held that since Aglibots acquittal by the MTCC in Criminal Case Nos. 47664 to 47674 was upon a reasonable doubt10on whether the prosecution was able to satisfactorily establish that she did receive a notice of dishonor, a requisite to hold her criminally liable under B.P. 22, her acquittal did not operate to bar Santias recovery of civil indemnity.

It is axiomatic that the "extinction of penal action does not carry with it the eradication of civil liability, unless the extinction proceeds from a declaration in the final judgment that the fact from which the civil liability might arise did not exist. Acquittal will not bar a civil action in the following cases: (1) where the acquittal is based on reasonable doubt as only preponderance of evidence is required in civil cases; (2) where the court declared the accuseds liability is not criminal but only civil in nature[;] and (3) where the civil liability does not arise from or is not based upon the criminal act of which the accused was acquitted."11(Citation omitted)

The CA therefore ordered Aglibot to personally pay SantiaP3,000,000.00 with interest at 12%per annum, from the filing of the Informations until the finality of its decision. Thereafter, the sum due, to be compounded with the accrued interest, will in turn be subject to annual interest of 12% from the finality of its judgment until full payment. It thus modified the MTCC judgment, which simply imposed a straight interest of 12%per annumfrom the filing of the cases on November 2, 2004 until theP3,000,000.00 due is fully paid, plus attorneys fees ofP30,000.00 and the costs of the suit.

IssueNow before the Court, Aglibot maintains that it was error for the appellate court to adjudge her personally liable for issuing her own eleven (11) post-dated checks to Santia, since she did so in behalf of her employer, PLCC, the true borrower and beneficiary of the loan. Still maintaining that she was a mere guarantor of the said debt of PLCC when she agreed to issue her own checks, Aglibot insists that Santia failed to exhaust all means to collect the debt from PLCC, the principal debtor, and therefore he cannot now be permitted to go after her subsidiary liability.

Ruling of the CourtThe petition is bereft of merit.

Aglibot cannot invoke the benefit of excussionThe RTC in its decision held that, "It is obvious, from the face of the Promissory Note x x x that the accused-appellant signed the same on behalf of PLCC as Manager thereof and nowhere does it appear therein that she signed as an accommodation party."12The RTC further ruled that what Aglibot agreed to do by issuing her personal checks was merely to guarantee the indebtedness of PLCC. So now petitioner Aglibot reasserts that as a guarantor she must be accorded the benefit of excussion prior exhaustion of the property of the debtor as provided under Article 2058 of the Civil Code, to wit:

Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.

It is settled that the liability of the guarantor is only subsidiary, and all the properties of the principal debtor, the PLCC in this case, must first be exhausted before the guarantor may be held answerable for the debt.13Thus, the creditor may hold the guarantor liable only after judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the exhaustion of the principals property the benefit of which the guarantor claims cannot even begin to take place before judgment has been obtained."14This rule is contained in Article 206215of the Civil Code, which provides that the action brought by the creditor must be filed against the principal debtor alone, except in some instances mentioned in Article 205916when the action may be brought against both the guarantor and the principal debtor.

The Court must, however, reject Aglibots claim as a mere guarantor of the indebtedness of PLCC to Santia for want of proof, in view of Article 1403(2) of the Civil Code, embodying the Statute of Frauds, which provides:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

x x x x

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the making thereof;

b)A special promise to answer for the debt, default, or miscarriage of another;

c) An agreement made in consideration of marriage, other than a mutual promise to marry;

d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, or such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of purchasers and person on whose account the sale is made, it is a sufficient memorandum;

e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein;

f) A representation to the credit of a third person. (Italics ours)

Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt or default of another,17the law clearly requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified,18although under Article 135819of the Civil Code, a contract of guaranty does not have to appear in a public document.20Contracts are generally obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present, and the Statute of Frauds simply provides the method by which the contracts enumerated in Article 1403(2) may be proved, but it does not declare them invalid just because they are not reduced to writing. Thus, the form required under the Statute is for convenience or evidentiary purposes only.21On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but must be express, and cannot extend to more than what is stipulated therein. This is the obvious rationale why a contract of guarantee is unenforceable unless made in writing or evidenced by some writing. For as pointed out by Santia, Aglibot has not shown any proof, such as a contract, a secretarys certificate or a board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly, there is nothing shown in the Promissory Note signed by Aglibot herself remotely containing an agreement between her and PLCC resembling her guaranteeing its debt to Santia. And neither is there a showing that PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing her own checks to Santia.

Thus did the CA reject the RTCs ruling that Aglibot was a mere guarantor of the indebtedness of PLCC, and as such could not "be compelled to pay [Santia], unless the latter has exhausted all the property of PLCC, and has resorted to all the legal remedies against PLCC x x x."22Aglibot is an accommodation party and therefore liable to SantiaSection 185 of the Negotiable Instruments Law defines a check as "a bill of exchange drawn on a bank payable on demand," while Section 126 of the said law defines a bill of exchange as "an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer."

The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself personally and solidarily to pay Santia, and dismissed her claim that she issued her said checks in her official capacity as PLCCs manager merely to guarantee the investment of Santia. It noted that she could have issued PLCCs checks, but instead she chose to issue her own checks, drawn against her personal account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of the loan, pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to Santia, and only raised payment as her defense, a clear admission of her liability for the said loan.

The appellate court refused to give credence to Aglibots claim that she had an understanding with Santia that the checks would not be presented to the bank for payment, but were to be returned to her once she had made cash payments for their face values on maturity. It noted that Aglibot failed to present any proof that she had indeed paid cash on the above checks as she claimed. This is precisely why Santia decided to deposit the checks in order to obtain payment of his loan.

The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate its loan to Santia by issuing her own post-dated checks in payment thereof. She is what the Negotiable Instruments Law calls an accommodation party.23Concerning the liability of an accommodation party, Section 29 of the said law provides:

Sec. 29.Liability of an accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.

As elaborated inThe Phil. Bank of Commerce v. Aruego:24An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. x x x.25(Citation omitted)

The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety the accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promisor and debtor from the beginning. The liability is immediate and direct.26It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument; nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party.271wphi1Moreover, it was held inAruegothat unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value, such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor.

The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the latter on her checks without the need for Santia to first go after PLCC for the payment of its loan.28It would have been otherwise had it been shown that Aglibot was a mere guarantor, except that since checks were issued ostensibly in payment for the loan, the provisions of the Negotiable Instruments Law must take primacy in application.

WHEREFORE,premises considered, the Petition for Review onCertiorariisDENIEDand the Decision dated March 18, 2008 of the Court of Appeals in CA-G.R. SP No. I 00021 is herebyAFFIRMED.G.R. No. 189563 April 7, 2014GILAT SATELLITE NETWORKS, LTD.,Petitioner,vs.UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC.,Respondent.

D E C I S I O N

SERENO,CJ:This is an appeal via a Petition for Review on Certiorari1filed 6 November 2009 assailing the Decision2and Resolution3of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision4of the Regional Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461, ordering respondent to pay petitioner a sum of money.

The antecedent facts, as culled from the CA, are as follows:

On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications equipment (sic), accessories, spares, services and software, at a total purchase price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB General Insurance Co., Inc.s surety bond dated 3 December 1999, in favor of GILAT.

During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of the equipment (including the software components for which payment was secured by the surety bond, was shipped by GILAT and duly received by One Virtual. Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtuals conformity, an amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of May 30, 2000 in accordance with the payment schedule attached as Annex "A" to the surety bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said amount of US$400,000.00. No part of the amount set forth in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment instalment date of 30 November 2000 as set out in Annex "A" of the surety bond, prompting GILAT to send a second demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses (Exhibits "H") and which letter was received by the defendant surety on January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant complaint."5(Emphases in the original)

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6against respondent UCPB General Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses. After due hearing, the RTC rendered its Decision,7the dispositive portion of which is herein quoted:

WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against the defendant, ordering, to wit:

1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand Dollars (US$1,200,000.00) representing the principal debt under the Surety Bond, with legal interest thereon at the rate of 12% per annum computed from the time the judgment becomes final and executory until the obligation is fully settled; and

2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars and Four Cents (US$44,004.04) representing attorneys fees and litigation expenses.

Accordingly, defendants counterclaim is hereby dismissed for want of merit.

SO ORDERED. (Emphasis in the original)

In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject equipments [sic] and the same was installed. Even with the delivery and installation made, One Virtual failed to pay any of the payments agreed upon. Demand notwithstanding, defendant failed and refused and continued to fail and refused to settle the obligation."8Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by and between One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond Obligee,"9respondent agreed and bound itself to pay in accordance with the Payment Milestones. This obligation was not made dependent on any condition outside the terms and conditions of the Surety Bond and Payment Milestones.10Insofar as the interests were concerned, the RTC denied petitioners claim on the premise that while a surety can be held liable for interest even if it becomes more onerous than the principal obligation, the surety shall only accrue when the delay or refusal to pay the principal obligation is without any justifiable cause.11Here, respondent failed to pay its surety obligation because of the advice of its principal (One Virtual) not to pay.12The RTC then obligated respondent to pay petitioner the amount of USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the rate of 12% per annum computed from the time the judgment becomes final and executory, and USD44,004.04 representing attorneys fees and litigation expenses.

On 18 October 2007, respondent appealed to the CA.13The appellate court rendered a Decision14in the following manner:

WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial courts Decision dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to proceed to arbitration, the outcome of which shall necessary bind the parties, including the surety, defendant-appellant United Coconut Planters Bank General Insurance Co., Inc.

SO ORDERED. (Emphasis in the original)

The CA ruled that in "enforcing a surety contract, the complementary-contracts-construed-together doctrine finds application." According to this doctrine, the accessory contract must be construed with the principal agreement.15In this case, the appellate court considered the Purchase Agreement entered into between petitioner and One Virtual as the principal contract,16whose stipulations are also binding on the parties to the suretyship.17Bearing in mind the arbitration clause contained in the Purchase Agreement18and pursuant to the policy of the courts to encourage alternative dispute resolution methods,19the trial courts Decision was vacated; petitioner and One Virtual were ordered to proceed to arbitration.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion was denied for lack of merit in a Resolution20issued by the CA on 16 September 2009.

Hence, the instant Petition.

On 31 August 2010, respondent filed a Comment21on the Petition for Review. On 24 November 2010, petitioner filed a Reply.22ISSUES

From the foregoing, we reduce the issues to the following:

1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate; and

2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its obligation under the Suretyship Agreement.

THE COURTS RULING

The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.

Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this relief.23This referral, however, can only be demanded by one who is a party to the arbitration agreement.24Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the CAs order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code25clearly provide that the creditor may proceed against the surety without having first sued the principal debtor.26Even the Surety Agreement itself states that respondent becomes liable upon "mere failure of the Principal to make such prompt payment."27Thus, petitioner should not be ordered to make a separate claim against One Virtual (via arbitration) before proceeding against respondent.28On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist without a valid obligation.29Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt30 that is, the right to invoke the arbitration clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the principal debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal contract.31Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, its liability to the creditor or "promise" of the principal is said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the principal.32He becomes liable for the debt and duty of the principal obligor, even without possessing a direct or personal interest in the obligations constituted by the latter.33Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion.34It may in fact be sued separately or together with the principal debtor.35After a thorough examination of the pieces of evidence presented by both parties,36the RTC found that petitioner had delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its obligation,37triggering respondents liability to petitioner as the formers surety.1wphi1In other words, the failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the surety.

Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the principal contract to which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes.

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,38that "[the] acceptance [of a surety agreement], however, does not change in any material way the creditors relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the principal contract. The suretys role arises only upon the debtors default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor." Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that contract.39An arbitration agreement being contractual in nature,40it is binding only on the parties thereto, as well as their assigns and heirs.41Second, Section 24 of Republic Act No. 928542is clear in stating that a referral to arbitration may only take place "if at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter." Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43They are contracted precisely to mitigate risks of non-performance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the principal debtor.44The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This is the reason why excussion cannot be invoked.45To require the creditor to proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v. Court of Appeals,46"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."

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of the latters obligation, provided that the delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of the latters delay in discharging its monetary obligation.47Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the time it demanded the fulfilment of respondents obligation under the suretyship contract. Significantly, respondent does not contest this point, but instead argues that it is only liable for legal interest of 6% per annum from the date of petitioners last demand on 24 January 2001.

In rejecting petitioners position, the RTC stated that interests may only accrue when the delay or the refusal of a party to pay is without any justifiable cause.48In this case, respondents failure to heed the demand was due to the advice of One Virtual that petitioner allegedly breached its undertakings as stated in the Purchase Agreement.49The CA, however, made no pronouncement on this matter.

We sustain petitioner.

Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest."

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation, and the latter fails to comply.50Delay, as used in Article 1169, is synonymous with default or mora, which means delay in the fulfilment of obligations.51It is the nonfulfillment of an obligation with respect to time.52In order for the debtor (in this case, the surety) to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.53Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation.54The increased liability is not because of the contract, but because of the default and the necessity of judicial collection.55However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la Hotel,56citing RCPI v. Verchez,57we held thus:

In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee that may include his "expectation interest," which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, or his "reliance interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make RECOMPENSE to the one who has been injured by the failure of another to observe his contractual obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability. (Emphasis ours)

We agree with petitioner that records are bereft of proof to show that respondents delay was indeed justified by the circumstances that is, One Virtuals advice regarding petitioners alleged breach of obligations. The lower courts Decision itself belied this contention when it said that "plaintiff is not disputing that it did not complete commissioning work on one of the two systems because One Virtual at that time is already in default and has not paid GILAT."58Assuming arguendo that the commissioning work was not completed, respondent has no one to blame but its principal, One Virtual; if only it had paid its obligation on time, petitioner would not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated that petitioner had delivered all equipment, including the licensed software; and that the equipment had been installed and in fact, gone into operation.59Notwithstanding these compliances, respondent still failed to pay.

As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the amount due begins to run, not from the date of the filing of the complaint, but from the date of that extra-judicial demand.60Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000,61we agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that time.

With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames,62which modified the guidelines established in Eastern Shipping Lines v. CA63in relation to Bangko Sentral-Monetary Board Circular No. 799 (Series of 2013), to wit:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.1wphi1In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

x x x x

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

Applying the above-discussed concepts and in the absence of an agreement as to interests, we are hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000, its first date of extra judicial demand, until the satisfaction of the debt in accordance with the revised guidelines enunciated in Nacar.

WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the Regional Trial Court, Branch 141, Makati City is REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned. Respondent is hereby ordered to pay legal interest at the rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship Contract and Purchase Agreement.

G.R. No. 199481 December 3, 2012ILDEFONSO S. CRISOLOGO,Petitioner,vs.PEOPLE OF THE PHILIPPINES and CHINA BANKING CORPORATION,Respondents.

D E C I S I O N

PERLAS-BERNABE,J.:This Petition for Review on Certiorari1under Rule 45 of the Rules of Court assails the November 23, 2011 Decision2of the Court of Appeals (CA) in CA-G.R. CV No. 80350, which affirmed the December 4, 2002 Decision3of the Regional Trial Courtt (RTC); Manila, Branch 21. The RTC Decision acquitted petitioner Ildefonso S. Crisologo (petitioner) of the charges for violation of Presidential Decree (P.D.) No. 115 (Trust Receipts Law) in relation to Article 315 1(b) of the Revised Penal Code (RPC), but adjudged him civilly liable under the subject letters of credit.

The Factual Antecedents

Sometime in January and February 1989, petitioner, as President of Novachemical Industries, Inc. (Novachem), applied for commercial letters of credit from private respondent China Banking Corporation (Chinabank) to finance the purchase of 1,6004kgs. of amoxicillin trihydrate micronized from Hyundai Chemical Company based in Seoul, South Korea and glass containers from San Miguel Corporation (SMC). Subsequently, Chinabank issued Letters of Credit Nos. 89/03015and DOM-330416in the respective amounts of US$114,400.007(originally US$135,850.00)8with a peso equivalent of P2,139,119.809and P1,712,289.90. After petitioner received the goods, he executed for and in behalf of Novachem the corresponding trust receipt agreements dated May 24, 1989 and August 31, 1989 in favor of Chinabank.

On January 28, 2004, Chinabank, through its Staff Assistant, Ms. Maria Rosario De Mesa (Ms. De Mesa), filed before the City Prosecutor's Office of Manila a Complaint-Affidavit10charging petitioner for violation of P.D. No. 115 in relation to Article 315 1(b) of the RPC for his purported failure to turn-over the goods or the proceeds from the sale thereof, despite repeated demands. It averred that the latter, with intent to defraud, and with unfaithfulness and abuse of confidence, misapplied, misappropriated and converted the goods subject of the trust agreements, to its damage and prejudice.

In his defense, petitioner claimed that as a regular client of Chinabank, Novachem was granted a credit line and letters of credit (L/Cs) secured by trust receipt agreements. The subject L/Cs were included in the special term-payment arrangement mutually agreed upon by the parties, and payable in installments. In the payment of its obligations, Novachem would normally give instructions to Chinabank as to what particular L/C or trust receipt obligation its payments would be applied. However, the latter deviated from the special arrangement and misapplied payments intended for the subject L/Cs and exacted unconscionably high interests and penalty charges.

The City Prosecutor found probable cause to indict petitioner as charged and filed the corresponding informations before the RTC of Manila, docketed as Criminal Case Nos. 94-139613 and 94-139614.

The RTC Ruling

After due proceedings, the RTC rendered a Decision11dated December 4, 2002 acquitting petitioner of the criminal charges for failure of the prosecution to prove his guilt beyond reasonable doubt. It, however, adjudged him civilly liable to Chinabank, without need for a separate civil action, for the amounts of P1,843,567.90 and P879,166.81 under L/C Nos. 89/0301 and DOM-33041, respectively, less the payment of P500,000.00 made during the preliminary investigation, with legal interest from the filing of the informations on October 27, 1994 until full payment, and for the costs.

The CA Ruling

On appeal of the civil aspect, the CA affirmed12the RTC Decision holding petitioner civilly liable. It noted that petitioner signed the "Guarantee Clause" of the trust receipt agreements in his personal capacity and even waived the benefit of excussion against Novachem. As such, he is personally and solidarily liable with Novachem.

The Petition

In the instant petition, petitioner contends that the CA erred in declaring him civilly liable under the subject L/Cs which are corporate obligations of Novachem, and that the adjudged amounts were without factual basis because the obligations had already been settled. He also questions the unilaterally-imposed interest rates applied by Chinabank and, accordingly, prays for the application of the stipulated interest rate of 18% per annum (p.a.) on the corporations obligations. He further assails the authority of Ms. De Mesa to prosecute the case against him sans authority from Chinabank's Board of Directors.

The Court's Ruling

The petition is partly meritorious.

Section 13 of the Trust Receipts Law explicitly provides that if the violation or offense is committed by a corporation, as in this case, the penalty provided for under the law shall be imposed upon the directors, officers, employees or other officials or person responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

In this case, petitioner was acquitted of the charge for violation of the Trust Receipts Law in relation to Article 315 1(b)13of the RPC. As such, he is relieved of the corporate criminal liability as well as the corresponding civil liability arising therefrom. However, as correctly found by the RTC and the CA, he may still be held liable for the trust receipts and L/C transactions he had entered into in behalf of Novachem.

Settled is the rule that debts incurred by directors, officers, and employees acting as corporate agents are not their direct liability but of the corporation they represent, except if they contractually agree/stipulate or assume to be personally liable for the corporations debts,14as in this case.

The RTC and the CA adjudged petitioner personally and solidarily liable with Novachem for the obligations secured by the subject trust receipts based on the finding that he signed the guarantee clauses therein in his personal capacity and even waived the benefit of excussion. However, a review of the records shows that petitioner signed only the guarantee clauses of the Trust Receipt dated May 24, 198915and the corresponding Application and Agreement for Commercial Letter of Credit No. L/C No. 89/0301.16With respect to the Trust Receipt17dated August 31, 1989 and Irrevocable Letter of Credit18No. L/C No. DOM-33041 issued to SMC for the glass containers, the second pages of these documents that would have reflected the guarantee clauses were missing and did not form part of the prosecution's formal offer of evidence. In relation thereto, Chinabank stipulated19before the CA that the second page of the August 31, 1989 Trust Receipt attached to the complaint before the court a quo would serve as the missing page. A perusal of the said page, however, reveals that the same does not bear the signature of the petitioner in the guarantee clause. Hence, it was error for the CA to hold petitioner likewise liable for the obligation secured by the said trust receipt (L/C No. DOM-33041). Neither was sufficient evidence presented to prove that petitioner acted in bad faith or with gross negligence as regards the transaction that would have held him civilly liable for his actions in his capacity as President of Novachem.1wphi1On the matter of interest, while petitioner assailed the unilateral imposition of interest at rates above the stipulated 18% p.a., he failed to submit a summary of the pertinent dates when excessive interests were imposed and the purported over-payments that should be refunded. Having failed to prove his affirmative defense, the Court finds no reason to disturb the amount awarded to Chinabank. Settled is the rule that in civil cases, the party who asserts the affirmative of an issue has the onus to prove his assertion in order to obtain a favorable judgment. Thus, the burden rests on the debtor to prove payment rather than on the creditor to prove non-payment.20Lastly, the Court affirms Ms. De Mesa's capacity to sue on behalf of Chinabank despite the lack of proof of authority to represent the latter. The Court noted that as Staff Assistant of Chinabank, Ms. De Mesa was tasked, among others, to review applications for L/Cs, verify the documents of title and possession of goods covered by L/Cs, as well as pertinent documents under trust receipts (TRs); prepare/send/cause the preparation of statements of accounts reflecting the outstanding balance under the said L/Cs and/or TRs, and accept the corresponding payments; refer unpaid obligations to Chinabank's lawyers and follow-up results thereon. As such, she was in a position to verify the truthfulness and correctness of the allegations in the Complaint-Affidavit. Besides, petitioner voluntarily submitted21to the jurisdiction of the court a quo and did not question Ms. De Mesa's authority to represent Chinabank in the instant case until an adverse decision was rendered against him.

WHEREFORE, the assailed November 23, 2011 Decision of the Court of Appeals in CA-G.R. CV No. 80350 is AFFIRMED with the modification absolving petitioner lldefonso S. Crisologo from any civil liability to private respondent China Banking Corporation with respect to the Trust Receipt dated August 31, 1989 and L/C No. DOM-33041. The rest of the Decision stands.

G.R. No. L-48979 September 29, 1943MIRA HERMANOS, INC.,plaintiff-appellee,vs.MANILA TOBACCONISTS, INC., ET AL.,defendants.PROVIDENT INSURANCE CO.,defendant-appellant.

E. V. Filamor for appellant.Ramirez and Ortigas for appellee.Ernesto Zaragoza for defendant, Manila Compaia de Seguras.OZAETA,J.:This appeal has been certified to this court by the Court of Appeals because it involves only a question of law arising from the following facts:

By virtue of a written contract (Exhibit A) entered into between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed to deliver to the latter merchandise for sale on consignment under certain specified terms and the latter agreed to pay to the former on or before the 20th day of each month the invoice value of all the merchandise sold during the preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of P3,000, which was executed by the Provident Insurance Co., on September 2, 1939 (Exhibit B), to secure the fulfillment of the obligation of the Tobacconists under the contract (Exhibit A) up to the sum of P3,000.

In the month of October, 1940, the volume of the business of the Tobacconists having increased so that the merchandise received by it on consignment from Mira Hermanos exceeded P3,000 in value, Mira Hermanos required of the Tobacconist an additional bond of P2,000, and in compliance with that requirement the defendant Manila Compaia de Seguros, on October 16, 1940, executed a bond of P2,000 (Exhibit C) with the same terms and conditions (except as to the amount) as the bond of the Provident Insurance Co.

On June 1, 1941, a final and complete liquidation was made of the transactions between Mira Hermanos and the Tobacconists, as a result of which there was found a balance due from the latter to the former of P2,272.79, which indebtedness the Tobacconists recognized but was unable to pay. Thereupon Mira Hermanos made a demand upon the two surety companies for the payment of said sum.

The Provident Insurance Co., paid only the sum of P1,363.67, which is 60% of the amount owned by the Tobacconists to Mira Hermanos, alleging that the remaining 40% should be paid by the other surety, Manila Compaia de Seguros, in accordance with article 8137 of the Civil Code. The Manila Compaia de Seguros refused to pay the balance, contending that so long as the liability of the Tobacconists did not exceed P3,000, it was not bound to pay anything because its bond referred only to the obligation of the Tobacconists in excess of P3,000 and up to P5,000. Hence Mira Hermanos, Inc., brought this action against the Manila Tobacconists, Inc., Provident Insurance Co., and Manila Compaia de Seguros to recover from them jointly and severally the sum of P909.12 with legal interest thereon from the date of the complaint.

The controversy is mainly between the two surety companies. In its answer the defendant Manila Compaia de Seguros alleged as a special defense:

4. Que la fianza otorgada por esta demandada 'Manila Compania de Seguros', el Octubre de 1940 fue exigida por la demandante solo cuando el importe de las mercancias servidas por esta y pedidas por la demandada Manila Tobacconists, Inc., excedio de la suma de P3,000 garantizada por la otra demandada Provident Insurance Co.; por lo que quedo entendido entre la demandante y las tres demandadas que la fianza de P2,000 prestada el Octubre de 1940 por esta demandada, 'Manila Compaia de Seguros', se limitaba y era para responder solamente del importe de mercancias servidad a la demandada Manila Tobacconists, Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000 asegurada por la fianza P3,000 de la Manila Tobacconists, Inc.

To that the defendant Provident Insurance Co. replied:

Que no es verdad el hecho alegado por la demandada 'Manila Compaia de Seguros' en el parrafo 4 de su contestacion que dice: 'que quedo entendido entre la demandante y las tres demandadas que la fianza de P2,000 prestada el Octubre de 1940 por esta demandada "Manila Compaia de Seguros" se limitaba y era para responder solamente del importe de mercancias servidas a la demandada Manila Tocacconists, Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000 asegurada por la fianza de P3,000 de la "Manila Tobacconists, Inc."

Que la demandada, aqui compareciente, nunca ha tenido conocimiento ni menos prestado su consentimiento a esa supuesta inteligencia.

Que esta demandada no puede ser privada del beneficio de division a que tiene derecho como co-fiador, sin que conste expresamente, por escrito, su conformidad y consentimiento de renunciar a su derecho.

Thus there was an issue of fact between the two surety companies, viz.: whether the understanding between the plaintiff and the three defendants was, that the bond of P2,000 given by the Manila Compaia de Seguros was limited to and responded for the obligation of the Tobacconists only insofar as it might exceed the amount of P3,000 secured by the bond of the Provident Insurance Co. That issue of fact was decided by the trial court in favor of the contention of the Manila Compaia de Seguros; and judgment was rendered by it against the Provident Insurance Co. alone for the amount claimed by the plaintiff.

Appellant's first two assignments of error (the third being a mere consequence of the first two) read as follows:

1. El juzgado inferior incurrio en error al hacer caso omiso del beneficio de division reclamado por la demandada Provident Insurance Co. of the Philippines con arreglo a lo dispuesto en el Art. 1837 del Codigo Civil.

2. El juzgado erro al aplicar, en lugar de lo dispuesto en el Art. 1837 del Codigo Civil, una teoria suya, declarando que la fianza de P3,000.00 prestada por Provident Insurance Co. of the Philippines y la fianza de P2,000 de Manila Compaia de Seguros, cada una tiene una esfera de responsabilidad propia e independiente la una de la otra.

Discussing these two assignments of error jointly, counsel says:

La unica cuestion que se presenta en esta causa es puramente de derecho. Si el saldo deudor de P2,272.79 que Tobacconists ha dejado de pagar, deben pagarlo en su lugar, los dos fiadores proporcionalmente a la cuantia en que se obligaron o debe pagarlo sola y exclusivamente la fiadora Provident Insurance Co., como ordena la sentencia opelada.

Thus it appears that the issue of fact raised by and between the two surety companies before the trial court and decided by the latter in favor of the appellee Manila Compaia de Seguros is no longer raised before this Court, appellant Provident Insurance Co. having limited the issue in this appeal to whether or not it is entitled to the "benefit of division" provided in article 1837 of the Civil Code, which reads as follows:

Art. 1837. Should there be several sureties of only one debtor for the same debt, the liability therefor shall be divided among them all. The creditor can claim from each surety only his proportional part unless liabilityin solidumhas been expressly stipulated.

The right to the benefit of division against the co-sureties for their respective shares ceases in the same cases and for the same reason as that to an exhaustion of property against the principal debtor.

With particular reference to the second assignment of error, we find that the statement of the trial court to the effect that the bond of P3,000 responded for the obligation of the Tobacconists up to the sum of P3,000 and the bond of P2,000 responded for the obligation of the Tobacconists only insofar as it might exceed P3,000 and up to P5,000, is not a mere theory but a finding of fact based upon the undisputed testimony of the witnesses called by the defendant Manila Compaia de Seguros in support of its special defense hereinbefore quoted. While on its face the bond given by the Manila Compaia de Seguros contains the same terms and conditions (except as to the amount) as