Diño vs. Court of Appeals

A continuing suretyship agreement covers all future obligations of the principal debtor within its contemplation until revoked by written notice to the bank, but the surety's liability cannot exceed the aggregate principal sum stipulated in the agreement, together with interest, expenses, attorney's fees, and costs expressly provided therein.

Uy Tiam Enterprises and Freight Services (UTEFS), a business entity represented by Uy Tiam, obtained credit accommodations from Metropolitan Bank and Trust Company (METROBANK). To secure these accommodations, Norberto Uy and Jacinto Uy Diño—former employees of Uy Tiam—executed separate Continuing Suretyship Agreements dated February 25, 1977, in favor of METROBANK. Under these agreements, Uy bound himself up to an aggregate principal sum of P300,000, while Diño bound himself up to P800,000. The Civil Code permits guaranties for future debts whose amount is not yet known at the time of execution, providing the statutory basis for continuing suretyship arrangements.

In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), through its representative Uy Tiam, applied for and obtained credit accommodations from Metropolitan Bank and Trust Company (METROBANK) in the sum of P700,000. To secure these accommodations, Norberto Uy and Jacinto Uy Diño executed separate Continuing Suretyship Agreements dated February 25, 1977. Under these agreements, Uy agreed to pay METROBANK any indebtedness of UTEFS up to P300,000, while Diño agreed to be bound up to P800,000. Both agreements expressly stated that they were continuing guaranties that would remain in full force and effect until the bank received written notice of revocation. The 1977 obligation was fully paid in the same year.

In 1978, UTEFS obtained another credit accommodation from METROBANK, which was fully settled before UTEFS applied for and obtained an irrevocable letter of credit in 1979. Irrevocable Letter of Credit No. SN-Loc-309, dated March 30, 1979, in the sum of P815,600, covered UTEFS' purchase of 8,000 bags of Planters Urea and 4,000 bags of Planters 21-0-0. This letter of credit was applied for and obtained by UTEFS without the participation of Uy and Diño; they did not sign the "Commercial Letter of Credit and Application," nor were they asked to execute any suretyship to guarantee its payment. Neither METROBANK nor UTEFS informed them that the 1979 letter of credit had been opened or that the 1977 Continuing Suretyships would guarantee its payment.

METROBANK paid Planters Products P815,600, covered by a Bill of Exchange dated June 4, 1979. Pursuant to the transaction, UTEFS executed and delivered to METROBANK a Trust Receipt dated June 4, 1979, acknowledging receipt in trust of the goods and agreeing to deliver the entrusted goods or the proceeds of their sale on or before September 2, 1979. UTEFS failed to comply with the trust receipt stipulations. METROBANK sent demand letters to UTEFS and to the sureties Uy and Diño. Diño, through counsel, denied liability, maintaining that the 1979 obligation was a new one contracted without his participation and that the 1977 obligation he had guaranteed had been fully paid. METROBANK replied that the source of his liability was the Continuing Suretyship executed on February 25, 1977.

After extrajudicial remedies proved futile, METROBANK filed a complaint for collection of P613,339.32 (as of January 31, 1982, inclusive of interest, commission, penalty, and bank charges) against Uy Tiam, Diño, and Uy. The sureties moved to dismiss on the ground of lack of cause of action, arguing that the 1977 obligation had been extinguished by payment and that they were not privies to the 1979 transaction. The motion was held in abeyance pending trial. After trial, the RTC dismissed the complaint against Diño and Uy, finding that the 1977 obligation had been paid, that the 1979 letter of credit was a distinct obligation, that METROBANK had not notified the sureties when it extended credit in 1979, and that there was no credible showing that Diño and Uy were fully informed of the import of the Continuing Suretyships when they signed blank forms at Uy Tiam's office. METROBANK appealed to the Court of Appeals, which reversed the RTC and held the sureties jointly and severally liable for P2,397,883.68, plus accruing interest and P20,000 in attorney's fees. The CA denied reconsideration, prompting the present petition.

• Automatic Extinguishment: Petitioners argued that the Continuing Suretyship Agreements were automatically extinguished upon payment of the principal obligation secured thereby, i.e., the 1977 letter of credit, pursuant to Article 2052 of the Civil Code which provides that a guaranty cannot exist without a valid obligation.
• Lack of Notice: Petitioners claimed they were not advised by either METROBANK or Uy Tiam that the Continuing Suretyship Agreements would stand as security for the 1979 obligation, and that they were not parties to the 1979 transaction.
• Limitation of Liability: Petitioners contended that even assuming the Continuing Suretyship Agreements still subsisted and covered the 1979 obligation, they could not be held liable for more than what they guaranteed to pay—P800,000 for Diño and P300,000 for Uy—because the obligations of a surety cannot extend beyond what is stipulated in the agreement.

• Continuing Nature of Suretyship: METROBANK argued that the sureties bound themselves as solidary obligors of Uy Tiam to both existing and future obligations under the terms of the Continuing Suretyship Agreements, relying on Article 2053 of the Civil Code which provides that a guaranty may be given as security for future debts.
• No Revocation: METROBANK asserted that the agreements were in full force and effect at the time the 1979 letter of credit was obtained because the sureties did not exercise their right to revoke by giving written notice to the bank.

• Validity and Coverage of Continuing Suretyship: Whether petitioners are liable as sureties for the 1979 obligations of Uy Tiam to METROBANK by virtue of the Continuing Suretyship Agreements they separately signed in 1977.
• Extent of Liability: On the assumption that petitioners are liable, what is the extent of their liabilities for the 1979 obligations.

• Validity and Coverage of Continuing Suretyship: Yes. The Continuing Suretyship Agreements were expressly continuing in nature, covered future obligations, and remained in full force and effect because petitioners never revoked them by written notice to the bank. Article 2052 of the Civil Code requires a valid—not necessarily existing—obligation, and Article 2053 expressly permits guaranties for future debts.
• Extent of Liability: The sureties' liability is limited to the aggregate principal sum stipulated in each agreement—P800,000 for Diño and P300,000 for Uy—together with interest at the legal rate from the date of filing of the complaint, attorney's fees, and costs. The CA's award of P2,397,883.68 exceeded these contractual ceilings and was modified accordingly.

• Validity and Coverage of Continuing Suretyship: The Court examined the text of the Continuing Suretyship Agreements and found that paragraph I of each agreement expressly covered not only existing indebtedness but also future loans, advances, credits, and obligations that the borrower "is or may become liable" for. Paragraph IV of both agreements expressly stated that the guaranty was continuing and would remain in full force and effect until the bank received written notice of revocation. Petitioners candidly admitted the continuing nature of the agreements and did not deny that they had never revoked them. The Court rejected petitioners' reliance on Article 2052, distinguishing between a "valid obligation" (as opposed to a "void obligation") and an "existing or current obligation." Article 2052's second paragraph further clarifies that a guaranty may guarantee even voidable, unenforceable, or natural obligations. Article 2053 expressly authorizes guaranties for future debts whose amount is not yet known. Since the 1979 letter of credit fell within the description and contemplation of the continuing suretyship agreements, and since the agreements had not been revoked, the sureties were liable for UTEFS' obligation thereunder.

• Extent of Liability: The Court applied the settled rule that the obligation of a surety cannot be extended by implication beyond its specified limits; to the extent and in the manner and under the circumstances pointed out in his obligation, the surety is bound and no farther. Both agreements fixed the aggregate principal liability at P800,000 for Diño and P300,000 for Uy. However, the agreements also expressly stipulated liability for interest, expenses, and attorney's fees pegged at not less than 10% of the amount due. Even without such stipulations, Article 2055 of the Civil Code provides that a guaranty comprises not only the principal obligation but all its accessories, including judicial costs and interest. Citing Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., the Court held that interest runs from the date of filing of the complaint, not from the date the obligation became due. The Court found that the outstanding principal obligation as of the filing date (May 18, 1982) was less than P613,339.32, which was fully covered by Diño's P800,000 ceiling and partly covered by Uy's P300,000 ceiling. The CA's award of P2,397,883.68—comprising principal, past due interest, and penalty charges as of July 17, 1987—was thus modified to conform to the contractual limits.

• Continuing Guaranty/Suretyship — A continuing guaranty is one not limited to a single transaction but which contemplates a future course of dealing, covering a series of transactions generally for an indefinite time or until revoked. It is prospective in operation and intended to provide security with respect to future transactions within certain limits, contemplating a succession of liabilities for which, as they accrue, the guarantor becomes liable. A guaranty is construed as continuing when by its terms it is evident that the object is to give a standing credit to the principal debtor to be used from time to time, especially if the right to recall the guaranty is expressly reserved. In this case, the agreements expressly stated they were continuing and would remain in full force and effect until written notice of revocation was received by the bank.

• Limitation on Surety's Liability — The law looks upon the contract of suretyship with a jealous eye; the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther. A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. The Court applied this doctrine by capping each surety's liability at the aggregate principal sum in his respective agreement.

• Accessories of a Guaranty (Article 2055, Civil Code) — A guaranty comprises not only the principal obligation but also all its accessories, including judicial costs, interest, and damages. Interest runs from the date of filing of the complaint, not from the date the obligation became due. Attorney's fees may be imposed pursuant to Article 2208 of the Civil Code when the court deems it just and equitable or when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just, and demandable claim.

• "A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable." — This passage provides the canonical definition of a continuing guaranty and is the ratio decidendi for the Court's conclusion that the 1977 agreements covered the 1979 obligation.

• "The law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond its specified limits. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther." — This articulates the controlling doctrine on the limitation of a surety's liability, which the Court applied to cap each surety's exposure at the aggregate principal sum stipulated in his agreement.

• "Article 2052 speaks about a valid obligation, as distinguished from a void obligation, and not an existing or current obligation." — This passage distinguishes the requirement of a "valid obligation" under Article 2052 from the existence of the obligation at the time the guaranty is executed, resolving the petitioners' argument that the guaranty could not cover a future debt.

• Rizal Commercial Banking Corp. vs. Arro, 115 SCRA 777 [1982] — Cited for the proposition that Article 2053 of the Civil Code authorizes guaranties for future debts, the statutory basis for continuing guaranties.
• La Insural vs. Lachuca Go-Tauco, 39 Phil. 567 [1919] — Cited for the settled rule that the obligation of the surety cannot be extended by implication beyond its specified limits; followed and applied to cap each surety's liability.
• Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., 100 Phil. 679 [1957] — Cited for the doctrine that a surety may be held liable for interest as part of damages even if the surety would thereby pay more than the amount stated in the bond, and that interest runs from the date of filing of the complaint.
• Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967 [1966] — Cited among cases supporting the rule that a surety's obligation cannot extend beyond stipulated limits.
• Philippine Commercial and Industrial Bank vs. Court of Appeals, 159 SCRA 24 [1988] — Cited among cases supporting the rule that a surety's obligation cannot extend beyond stipulated limits.

• Article 2052, Civil Code — Provides that a guaranty cannot exist without a valid obligation. The Court distinguished "valid" (as opposed to "void") from "existing or current," and noted the second paragraph allowing guaranties for voidable, unenforceable, or natural obligations.
• Article 2053, Civil Code — Provides that a guaranty may be given as security for future debts, the amount of which is not yet known. This is the statutory basis for continuing guaranty or suretyship arrangements.
• Article 2054, Civil Code — Provides that a guarantor may bind himself for less but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Applied to limit each surety's liability to the aggregate principal sum in his agreement.
• Article 2055, Civil Code — Provides that a guaranty is not presumed, must be express, and cannot extend to more than what is stipulated; if simple or indefinite, it comprises the principal obligation and all its accessories, including judicial costs. Applied to include interest and attorney's fees within the surety's liability.
• Article 2208, Civil Code — Enumerates instances where attorney's fees may be recovered, including when the court deems it just and equitable or when the defendant acted in gross and evident bad faith. Applied to justify the award of attorney's fees.
• Article 2209, Civil Code — Governs the award of interest as damages for delay in payment. Applied to set interest running from the date of filing of the complaint.

Gutierrez, Jr., Bidin, Romero, and Melo, JJ., concurred.