G.R. No. 187403

Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 187403 February 12, 2014

TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES (Formerly PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION.), Petitioner,
vs.
ASIA PACES CORPORATION, PACES INDUSTRIAL CORPORATION, NICOLAS C. BALDERRAMA, SIDDCOR INSURANCE CORPORATION (now MEGA PACIFIC INSURANCE CORPORATION), PHILIPPINE PHOENIX SURETY AND INSURANCE, INC., PARAMOUNT INSURANCE CORPORATION,* AND FORTUNE LIFE AND GENERAL INSURANCE COMPANY, Respondents.

D E C I S I O N

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated April 30, 2008 and Resolution3 dated March 27, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 86558 which affirmed the Decision4 dated April 29, 2005 of the Regional Trial Court of Makati, Branch 132 (RTC) in Civil Case No. 95-1812. The CA upheld the RTC’s finding that the liabilities of Paramount Insurance Corporation (Paramount), and respondents Philippine Phoenix Surety and Insurance, Inc. (Phoenix), Mega Pacific Insurance Corporation5 (Mega Pacific), and Fortune Life and General Insurance Company (Fortune) on their respective counter-surety bonds have been extinguished due to the extension of the principal obligations these bonds covered, to which said respondents did not give their consent.

The Facts

On January 19, 1981, respondents Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered into a sub-contracting agreement, denominated as "200 KV Transmission Lines Contract No. 20-/80-II Civil Works & Electrical Erection," with the Electrical Projects Company of Libya (ELPCO), as main contractor, for the construction and erection of a double circuit bundle phase conductor transmission line in the country of Libya. To finance its working capital requirements, ASPAC obtained loans from foreign banks Banque Indosuez and PCI Capital (Hong Kong) Limited (PCI Capital) which, upon the latter’s request, were secured by several Letters of Guarantee issued by petitioner Trade and Investment Development Corporation of the Philippines (TIDCORP),6 then Philippine Export and Foreign Loan Guarantee Corp., a government owned and controlled corporation created for the primary purpose of, among others, "guarantee[ing], with the prior concurrence of the Monetary Board, subject to the rules and regulations that the Monetary Board may prescribe, approved foreign loans, in whole or in part, granted to any entity, enterprise or corporation organized or licensed to engage in business in the Philippines."7 Under the Letters of Guarantee, TIDCORP irrevocably and unconditionally guaranteed full payment of ASPAC’s loan obligations to Banque Indosuez and PCI Capital in the event of default by the latter.8 The denominations of these letters, including the loan agreements secured by each, are detailed as follows:9

LETTER OF GUARANTEE LOAN AGREEMENT SECURED CREDITOR
Letter of Guarantee No. 82-446 F
dated March 11, 1982
(LG No. 82-446 F)
Loan Agreement dated March 9, 1982 (with an extension dated March 25, 1983), in the amount of US$250,000.00
Banque
Indosuez
Letter of Guarantee No. 82-498 F
dated June 10, 1982
(LG No. 82-498 F) Loan Agreement dated June 10, 1982, in the amount of US$250,000.00 PCI
Capital
Letter of Guarantee No. 82-548 F
dated October 5, 1982
(LG No. 82-548 F) Loan Agreement dated October 5, 1982, in the amount of US$2,000,000.00 PCI
Capital

As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC, PICO, and ASPAC’s President, respondent Nicolas C. Balderrama (Balderrama) had to execute several Deeds of Undertaking,10 binding themselves to jointly and severally pay TIDCORP for whatever damages or liabilities it may incur under the aforementioned letters. In the same light, ASPAC, as principal debtor, entered into surety agreements (Surety Bonds) with Paramount, Phoenix, Mega Pacific and Fortune (bonding companies), as sureties, also holding themselves solidarily liable to TIDCORP, as creditor, for whatever damages or liabilities the latter may incur under the Letters of Guarantee.11 The details of said bonds, including their respective coverage amounts and expiration dates, among others, are as follows:

SURETY BOND LETTER OF
GUARANTEE COVERED COVERAGE
AMOUNT12 BONDING
COMPANY/
SURETY FINAL
EXPIRATION
DATE
Surety Bond No. G(16)0194313 LG No. 82-446 F ₱2,752,000.00 Paramount March 5, 198614
Surety Bond No. G(16)0190615 LG No. 82-498 F ₱1,845,000.00 Paramount June 4, 198616
Surety Bond No.
G(16)1549517 ₱1,849,000.00 Fortune November 21, 198518
Surety Bond No.
G(16)0190319 LG No. 82-548 F ₱11,970,000.00 Phoenix September 28, 198520
Surety Bond No.
G(16)0149721 ₱5,030,000.00 Mega
Pacific September 28, 198522

ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital, prompting them to demand payment from TIDCORP under the Letters of Guarantee. The demand letter of Banque Indosuez was sent to TIDCORP on March 5, 1984,23 while that of PCI Capital was sent on February 21, 1985.24 In turn, TIDCORP demanded payment from Paramount,25 Phoenix,26 Mega Pacific,27 and Fortune28 under the Surety Bonds. TIDCORP’s demand letters to the bonding companies were sent on May 28, 1985, or before the final expiration dates of all the Surety Bonds, but to no avail.29

Taking into account the moratorium request30 issued by the Minister of Finance of the Republic of the Philippines (whereby members of the international banking community were requested to grant government financial institutions,31 such as TIDCORP, among others, a 90-day roll over from their foreign debts beginning October 17, 1983), TIDCORP and its various creditor banks, such as Banque Indosuez and PCI Capital, forged a Restructuring Agreement32 on April 16, 1986, extending the maturity dates of the Letters of Guarantee.33 The bonding companies were not privy to the Restructuring Agreement and, hence, did not give their consent to the payment extensions granted by Banque Indosuez and PCI Capital, among others, in favor of TIDCORP. Nevertheless, following new payment schedules,34 TIDCORP fully settled its obligations under the Letters of Guarantee to both Banque Indosuez and PCI Capital on December 1, 1992, and April 19 and June 4, 1991, respectively.35 Seeking payment for the damages and liabilities it had incurred under the Letters of Guarantee and with its previous demands therefor left unheeded, TIIDCORP filed a collection case36 against: (a) ASPAC, PICO, and Balderrama on account of their obligations under the deeds of undertaking; and (b) the bonding companies on account of their obligations under the Surety Bonds.

The RTC Ruling

In a Decision37 dated April 29, 2005, the RTC partially granted TIDCORP’s complaint and thereby found ASPAC, PICO, and Balderrama jointly and severally liable to TIDCORP in the sum of ₱277,891,359.66 pursuant to the terms of the Deeds of Undertaking, but absolved the bonding companies from liability on the ground that the moratorium request and the consequent payment extensions granted by Banque Indosuez and PCI Capital in TIDCORP’s favor without their consent extinguished their obligations under the Surety Bonds. As basis, the RTC cited Article 2079 of the Civil Code which provides that an extension granted to the debtor by the creditor without the consent of the guarantor/surety extinguishes the guaranty/suretyship, and, in this relation, added that the bonding companies "should not be held liable as sureties for the extended period."38

Dissatisfied, TIDCORP and Balderrama filed separate appeals before the CA.39 For its part, TIDCORP averred, among others, that Article 2079 of the Civil Code is only limited to contracts of guaranty, and, hence, should not apply to contracts of suretyship. Meanwhile, Balderrama theorized that the main contractor’s (i.e., ELPCO) failure to pay ASPAC due to the war/political upheaval in Libya which further resulted in the latter’s inability to pay Banque Indosuez and PCI Capital had the effect of releasing him from his obligations under the Deeds of Undertaking.

The CA Ruling

In a Decision40 dated April 30, 2008, the CA upheld the RTC’s ruling that the moratorium request "had the effect of an extension granted to a debtor, which extension was without the consent of the guarantor, and thus released the surety companies from their respective liabilities under the issued surety bonds" pursuant to Article 2079 of the Civil Code.41 To this end, it noted that "the maturity of the foreign loans was extended to December 31, 1989 or up to December 31, 1994 as provided under Section 4.01 of the Restructuring Agreement," and that "said extension is beyond the expiry date[s] of the surety bonds x x x and the maturity date of the principal obligations it purportedly secured, which extension was without [the bonding companies’] consent,"42 It further discredited TIDCORP’s contention that Article 2079 of the Civil Code is only limited to contracts of guaranty by citing the Court’s pronouncement on the provision’s applicability to suretyships in the case of Security Bank and Trust Co., Inc. v. Cuenca43 (Security Bank). As for Balderrama, the CA debunked his assignment of error, ratiocinating that "[h]is undertaking to pay is not dependent upon the payment to be made by ELPCO to ASPAC."44 The CA, however, modified the RTC decision to the extent of holding ASPAC, PICO, and Balderrama liable to TIDCORP for attorney’s fees in the reasonable amount of ₱2,000,000.00 since the payment of attorney’s fees was stipulated by the parties in the Deed of Undertaking dated April 2, 1982.45

Aggrieved, TIDCORP and Balderrama filed separate motions for reconsideration,46 which were, however, denied in a Resolution47 dated March 27, 2009. Only TIDCORP elevated the matter to the Court on appeal. Pending resolution thereof, or on October 6, 2010, TIDCORP filed a Motion for Partial Withdrawal48 of its claim against Paramount in view of their Compromise Agreement49 dated June 24, 2010 which was approved50 by the CA in CA-G.R. CV No. 92818, entitled "Trade & Investment Corporation of the Phils., et al. v. Roblet Industrial Construction Corp. and Paramount Insurance Corp., et al."51

The Issue Before the Court

The essential issue raised for the Court’s resolution is whether or not the CA erred in holding that the bonding companies’ liabilities to TIDCORP under the Surety Bonds have been extinguished by the payment extensions granted by Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement.

The Court’s Ruling

The petition is granted.

A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.52 The fundamental reason therefor is that a contract of suretyship effectively binds the surety as a solidary debtor. This is provided under Article 2047 of the Civil Code which states:

Article 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship. (Emphasis and underscoring supplied)

Thus, since the surety is a solidary debtor, it is not necessary that the original debtor first failed to pay before the surety could be made liable; it is enough that a demand for payment is made by the creditor for the surety’s liability to attach.53
Article 1216 of the Civil Code provides that:

Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Comparing a surety’s obligations with that of a guarantor, the Court, in the case of Palmares v. CA,54 illumined that a surety is responsible for the debt’s payment at once if the principal debtor makes default, whereas a guarantor pays only if the principal debtor is unable to pay, viz.:55

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor.1âwphi1 A suretyship is an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal’s 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. 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. 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.

(Emphases and underscoring supplied; citations omitted)

Despite these distinctions, the Court in Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc.,56 and later in the case of Security Bank, held that Article 2079 of the Civil Code, which pertinently provides that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty," equally applies to both contracts of guaranty and suretyship. The rationale therefor was explained by the Court as follows:57

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s 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. (Emphasis and underscoring supplied; citations omitted)

Applying these principles, the Court finds that the payment extensions granted by Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement did not have the effect of extinguishing the bonding companies’ obligations to TIDCORP under the Surety Bonds, notwithstanding the fact that said extensions were made without their consent. This is because Article 2079 of the Civil Code refers to a payment extension granted by the creditor to the principal debtor without the consent of the guarantor or surety. In this case, the Surety Bonds are suretyship contracts which secure the debt of ASPAC, the principal debtor, under the Deeds of Undertaking to pay TIDCORP, the creditor, the damages and liabilities it may incur under the Letters of Guarantee, within the bounds of the bonds’ respective coverage periods and amounts. No payment extension was, however, granted by TIDCORP in favor of ASPAC in this regard; hence, Article 2079 of the Civil Code should not be applied with respect to the bonding companies’ liabilities to TIDCORP under the Surety Bonds.

The payment extensions granted by Banque Indosuez and PCI Capital pertain to TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP) irrevocably and unconditionally guaranteed full payment of ASPAC’s loan obligations to the banks in the event of its (ASPAC) default. In other words, the Letters of Guarantee secured ASPAC’s loan agreements to the banks. Under this arrangement, TIDCORP therefore acted58 as a guarantor,59 with ASPAC as the principal debtor, and the banks as creditors.

Proceeding from the foregoing discussion, it is quite clear that there are two sets of transactions that should be treated separately and distinctly from one another following the civil law principle of relativity of contracts "which provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof."60 Verily, as the Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to the banks, the payments extensions (which conversely concern TIDCORP’s debt to the banks and not ASPAC’s debt to TIDCORP) would not deprive the bonding companies of their right to pay their creditor (TIDCORP) and to be immediately subrogated to the latter’s remedies against the principal debtor (ASPAC) upon the maturity date. It must be stressed that these payment extensions did not modify the terms of the Letters of Guarantee but only provided for a new payment scheme covering TIDCORP’s liability to the banks. In fine, considering the inoperability of Article 2079 of the Civil Code in this case, the bonding companies’ liabilities to TIDCORP under the Surety Bonds – except those issued by Paramount and covered by its Compromise Agreement with TIDCORP – have not been extinguished. Since these obligations arose and have been duly demanded within the coverage periods of all the Surety Bonds,61 TIDCORP’s claim is hereby granted and the CA’s ruling on this score consequently reversed. Nevertheless, given that no appeal has been filed on Balderrama’s adjudged liability or on the award of attorney's fees, the CA's dispositions on these matters are now deemed as final and executory.

WHEREFORE, the petition is GRANTED. The Decision dated April 30, 2008 and Resolution dated March 27, 2009 of the Court of Appeals in CA-G.R. CV No. 86558 are MODIFIED in that respondents Philippine Phoenix Surety and Insurance, Inc., Mega Pacific Insurance Corporation, Fortune Life and General Insurance Company are ORDERED to fulfill their respective obligations to petitioner Trade and Investment Development Corporation of the Philippines (TIDCORP) under the Surety Bonds subject of this case, discounting the obligations arising from the Surety Bonds issued by Paramount Insurance Corporation and covered by its Compromise Agreement with TIDCORP.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

ARTURO D. BRION
Associate Justice MARIANO C. DEL CASTILLO
Associate Justice

JOSE PORTUGAL PEREZ
Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes

* Dropped as respondent pursuant to the Court's Resolution dated December 1, 2010, granting petitioner's Motion for Partial Withdrawal in its favor; rollo, p. 696-B.

1 Id. at 39-87.

2 Id. at 92-111. Penned by Associate Justice Josefina Guevara-Salonga, with Associate Justices Magdangal M. De Leon and Normandie B. Pizarro, concurring.

3 Id. at 113-117.

4 Id. at 325-328. Penned by Judge Rommel O. Baybay.

5 Formerly known as "Siddcor Insurance Corp."

6 Rollo, pp. 94-95.

7 See Section 3 of Republic Act No. 8494, entitled "AN ACT FURTHER AMENDING PRESIDENTIAL DECREE NO. 1080, AS AMENDED, BY REORGANIZING AND RENAMING THE PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, EXPANDING ITS PRIMARY PURPOSES, AND FOR OTHER PURPOSES."

8 Rollo, pp. 95.

9 Id. at 94-95 and 49.

10 Id. at 118-127.

11 See id. at 95-96.

12 Id. at 95.

13 Id. at 131-134 and 140.

14 Id. at 53 and 230-231.

15 Id. at 128-130 and 139.

16 Id. at 53.

17 Id. at 137 and 143.

18 Id. at 54, 137, and 143.

19 Id. at 52 and 141.

20 Id. at 54, 133-134, and 141.

21 Id. at 135-136 and 142.

22 Id. at 54, 135-136, and 142.

23 Id. at 96 and 257.

24 Id.

25 Id. at 165-168. TIDCORP initially sent a demand letter on May 24, 1984 to Paramount, calling for the payment of Surety Bond No. G(16)01943.

26 Id. at 169-171.

27 Id. at 172-174.

28 Id. at 175-176.

29 Id. at 58-59 and 192-194. TIDCORP sent similar demand letters to the bonding companies on October 2, 1986 and May 19, 1994.

30 Id. at 144-145.

31 Id. at 96.

32 Id. at 104-105, 188, and 258.

33 Section 4.01 of the Restructuring Agreement reads:

Section 4.01. Scheduled Payments. The Obligor shall repay to each Bank the principal amount of each Credit of such Bank in eleven consecutive semi-annual installments, the first of which shall be on December 31, 1989 and the remaining ten of which shall be on the last day of each sixth Restructure Month thereafter (each such date being a "Principal Payment Date"). Each installment shall be in the amount of one-eleventh of the principal amount of such Credit: provided that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount of such Credit. The final Principal payment Date will be on December 31, 1994. (Emphases supplied; id. at 105.)

34 Id. at 154-157 and 158-164.

35 Id. at 97, 190 and 258.

36 Id. at 177-197.

37 Id. at 325-328.

38 Id. at 328.

39 Id. at 284-324 and 391-408.

40 Id. at 92-111.

41 Id. at 103-104.

42 Id. at 104-105.

43 396 Phil. 108 (2000); see also rollo, p. 105.

44 Rollo, pp. 107-108.

45 Id. at 110-111.

46 Id. at 440-451 and 464-473.

47 Id. at 113-117.

48 Id. at 662-667.

49 Id. at 668-678.

50 See Decision dated July 9, 2010 in CA-G.R. CV No. 92818; id. at 682-691.

51 The Court granted the Motion for Partial Withdrawal in a Resolution dated December 1, 2010 and, hence, "consider[ed] the case closed and terminated insofar as [Paramount] is concerned." (See id. at 696-B.)

52 Molino v. SDIC, 415 Phil. 587, 597 (2001).

53 See TIDCORP v. Roblett Industrial Construction Corp., 523 Phil. 360 (2006).

54 351 Phil. 664 (1998).

55 Id. at 680.

56 235 Phil. 332 (1987).

57 Security Bank and Trust Co., Inc. v. Cuenca, supra note 43, at 125, citing Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc., supra note 56, at 347-348.

58 Records show that TIDCORP fully settled its obligations under the Letters of Guarantee to both Banque Indosuez and PCI Capital on December 1, 1992, and April 19 and June 4, 1991, respectively (Id. at 16, 190 & 258).

59 Quoted hereunder for reference are the pertinent portions of the Court’s ruling in the case of Phil. Export & Foreign Loan Guarantee Corp. v. V.P. Eusebio Construction, Inc. (478 Phil. 269, 286-287 [2004]) which involved a similar Letter of Guarantee issued by TIDCORP’s predecessor, the Philippine Export and Foreign Loan Guarantee Corp, finding the same to be a contract of guaranty, viz.:

In determining petitioner’s status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental expenses….

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form he bound himself. In other words, an unconditional guarantee is still subject to the condition that the principal debtor should default in his obligation first before resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event, beyond the mere default of the principal, and generally upon notice of the principal’s default and reasonable diligence in exhausting proper remedies against the principal.

It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner’s guaranty is unconditional does not make it a surety. Besides, surety is never presumed. A party should not be considered a surety where the contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the contract becomes one of suretyship. (Emphases supplied; citations omitted)

60 Integrated Packaging Corp. v. CA, 388 Phil. 835, 845 (2000).

61 TIDCORP sent its preliminary demand letters to the bonding companies on May 28, 1985, or before the expiration dates of the Surety Bonds, which – as may be seen from the table above-presented – range from September 28, 1985 at the earliest to June 4, 1986 at the latest.

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