Fortune Motors (Phils.) Corporation vs. Court of Appeals

A continuing surety agreement is valid and binding even before the principal obligation intended to be secured thereby is born, and sureties are bound for all future obligations within the contemplation of the contract until its expiration or termination, provided the undertaking expressly covers obligations "now in force or hereafter made."

Car dealers typically acquire vehicles through wholesale automotive financing schemes involving trust receipts, drafts, and sureties: vehicles are delivered by the manufacturer or assembler on the strength of trust receipts executed by the dealer and backed by sureties; these instruments are then assigned or discounted by the manufacturer to a financing company, which pays for the vehicles but retains the right to collect from the dealer and the sureties. Fortune Motors (Phils.) Corporation was such a car dealer; Filinvest Credit Corporation was the financing company; and Canlubang Automotive Resources Corporation (CARCO) was the manufacturer or assembler. Edgar Rodrigueza and Joseph Chua—Chua being Fortune's corporate president—executed surety undertakings in favor of Filinvest to guarantee Fortune's obligations under this financing arrangement.

On or about August 4, 1981, Joseph Chua and Edgar Rodrigueza each executed an undated "Surety Undertaking" whereby they "absolutely, unconditionally and solidarily guarantee(d)" to Filinvest Credit Corporation and its affiliated and subsidiary companies the "full, faithful and prompt performance, payment and discharge of any and all obligations and agreements" of Fortune Motors "under or with respect to any and all such contracts and any and all other agreements (whether by way of guaranty or otherwise)" of the latter with Filinvest "now in force or hereafter made." According to the petition, Rodrigueza and Chua were required to sign blank surety agreements without being informed of the amount of their liability, but signed them because of their desire to have cars delivered to Fortune. Chua was Fortune's corporate president.

On April 5, 1982, Fortune, Filinvest, and CARCO entered into an "Automotive Wholesale Financing Agreement" under which CARCO would deliver motor vehicles to Fortune for resale in the latter's ordinary course of business. Fortune, in turn, would execute trust receipts over the vehicles and accept drafts drawn by CARCO, which would discount the trust receipts, drafts, and invoices and assign them to Filinvest, which would pay for the vehicles on Fortune's behalf. As trustee of the vehicles, Fortune was obligated to report and remit proceeds of any sale, whether for cash or on terms, to Filinvest immediately without necessity of demand.

Several motor vehicles were subsequently delivered by CARCO to Fortune, and trust receipts covered by demand drafts and deeds of assignment were executed in favor of Filinvest. When the demand drafts matured, however, not all proceeds of the vehicles that Fortune had sold were remitted to Filinvest. Fortune likewise failed to turn over several unsold motor vehicles covered by the trust receipts. Filinvest, through counsel, sent a demand letter dated December 12, 1983 to Fortune for payment of its unsettled account in the amount of P1,302,811.00, and sent similar demand letters separately to Chua and Rodrigueza as sureties. Despite these demands, the amount was not paid, prompting Filinvest to file a complaint for sum of money with preliminary attachment in the Regional Trial Court of Manila.

During pre-trial, the parties agreed that there was no factual issue to be resolved except the correct balance of defendants' account with Filinvest. After Filinvest presented its testimonial and documentary evidence, petitioners filed a motion for judgment on demurrer to evidence, anchored principally on the ground that the surety undertakings were null and void because no principal obligation existed at the time they were executed. The trial court denied the motion and scheduled the case for reception of defendants' evidence, but petitioners failed to present evidence on two scheduled dates and were deemed to have waived their right. The trial court found that the surety undertakings covered future obligations under Article 2053 of the Civil Code, that no novation occurred because the financing agreement was merely an assignment of credit and the trust receipts were collateral modifications, and that the account balance of P1,348,033.89 as of March 31, 1985 was uncontradicted and supported by evidence by silence. The Court of Appeals affirmed these findings in toto.

• Validity of Surety Undertakings: Petitioners argued that "future debts" under Article 2053 of the Civil Code refer only to debts existing at the time of the constitution of the guaranty but whose amount is unknown, and that a guaranty, being an accessory obligation, cannot exist without a principal obligation. They maintained that the surety undertakings could not cover the Financing Agreement because the latter was not yet in existence when the surety contracts were executed.
• Novation: Petitioners averred that the Financing Agreement effected a novation of the surety contracts because it changed the principal terms of the surety contracts and imposed additional and onerous obligations upon the sureties.
• Sufficiency of Evidence on Amount of Claim: Petitioners claimed that no accounting of the payments made by Fortune to Filinvest was done by the latter, making it impossible for the sureties to ascertain the correct amount of the balance, if any.

• Estoppel: Respondent Filinvest imputed estoppel by pleadings or by judicial admission upon petitioners, citing their admission in a "Motion to Discharge Attachment" where they acknowledged that they were "only sureties of defendant Fortune Motors" and were "not parties to the trust receipts agreements."

• Validity of Surety for Future Obligations: Whether a surety contract is valid and binding even if no principal obligation exists at the time of its execution, such that it covers obligations arising under a financing agreement entered into subsequent to the surety undertaking.
• Novation: Whether the subsequent execution of the Automotive Wholesale Financing Agreement constituted a novation of the surety undertakings.
• Sufficiency of Evidence: Whether the evidence presented was sufficient to prove the amount of the claim against petitioners.

• Validity of Surety for Future Obligations: Yes. A continuing surety agreement is valid and binding even before the principal obligation arises, the surety undertakings having expressly covered obligations "now in force or hereafter made."
• Novation: No. The Financing Agreement did not novate the surety undertakings, there being no incompatibility between the two contracts and no express or unequivocal intent to novate.
• Sufficiency of Evidence: Yes. The factual findings of the Court of Appeals affirming the trial court on the amount of liability are conclusive and supported by substantial evidence that petitioners failed to refute.

• Validity of Surety for Future Obligations: The case falls on all fours with Atok Finance Corporation vs. Court of Appeals, which reiterated NARIC vs. Court of Appeals and RCBC vs. Arro. The distinction that "future debts" under Article 2053 refer only to debts already existing but of unknown amount was rejected; the term encompasses debts not yet incurred at the time of the guaranty's constitution. A surety is not bound under any particular principal obligation until that obligation is born, but the suretyship agreement itself is valid and binding even before the principal obligation arises, analogous to obligations subject to a condition precedent. Comprehensive or continuing surety agreements are commonplace in modern financial and commercial practice, enabling a principal debtor to enter into a series of credit transactions without executing a separate surety contract for each accommodation. The surety undertakings here contained the words "absolutely, unconditionally and solidarily guarantee(d)" obligations "now in force or hereafter made," clearly indicating a continuing guaranty. Rodrigueza and Chua knew the purpose of the undertaking—Chua being Fortune's corporate president and a signatory to the Financing Agreement—and their undertaking was critical in enabling Fortune to obtain credit from Filinvest. Having benefited from the arrangement, petitioners were estopped from impugning the validity of the surety contracts. The surety undertakings did not provide for expiration, and the sureties could have terminated them by serving ten days' written notice but did not.

• Novation: Novation must be established either by express terms of the new agreement or by acts of the parties clearly demonstrating intent to dissolve the old obligation; it is never presumed. The test of incompatibility is whether the two obligations can stand together, each having its independent existence. The surety undertakings contained no qualifications, conditions, or reservations as to the extent of the suretyship, covering absolutely and unconditionally all obligations of Fortune with Filinvest "now in force or hereafter made." The Financing Agreement merely detailed Fortune's obligations to CARCO, succeeded by Filinvest as assignee. There was no incompatibility—the two contracts could stand together without conflict. No party performed any explicit and unequivocal act manifesting intent to novate. The sureties did not object to the Financing Agreement at the time of its execution, nor did they respond to demand letters urging payment of Fortune's liability under the agreement, despite having the opportunity to disclaim liability.

• Sufficiency of Evidence: The contest on the correct amount of liability is a purely factual issue. Under Rule 45, the Supreme Court's jurisdiction is limited to reviewing errors of law; it is not the function of the Court to analyze or weigh evidence anew unless the findings of the lower court are totally devoid of support or glaringly erroneous as to constitute grave abuse of discretion. Factual findings of the Court of Appeals are conclusive, carrying even more weight when they affirm the trial court's findings. The accounting showing a balance of P1,348,033.89 as of March 31, 1985 was uncontradicted, and petitioners' silence in response to demand letters stating the total obligation of P1,302,811.00 as of December 1983 constituted evidence by silence under Section 23, Rule 130 of the Revised Rules of Court. Petitioners failed to present contrary proof despite having the opportunity to do so.

• Continuing Suretyship/Guaranty — 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 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. The use of words such as "any debt," "any indebtedness," or obligations "now in force or hereafter made" indicates a continuing guaranty. The Court applied this doctrine to hold that the surety undertakings covered all future obligations of Fortune with Filinvest, as the undertakings expressly guaranteed obligations "now in force or hereafter made."

• Validity of Suretyship Before Principal Obligation Arises — A surety is not bound under any particular principal obligation until that principal obligation is born, but the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured is born, analogous to obligations subject to a condition precedent that are valid and binding before the occurrence of the condition. The Court relied on this principle, drawn from Atok Finance Corporation vs. Court of Appeals, NARIC vs. Court of Appeals, and RCBC vs. Arro, to uphold the validity of the surety undertakings executed in August 1981 before the Financing Agreement of April 1982.

• Novation; Requisites — Novation is never presumed and may be effected in only two ways: first, by explicit declaration in unequivocal terms; second, by incompatibility between the old and new obligations on every point. The test of incompatibility is whether the two obligations can stand together, each having its independent existence. If they cannot, they are incompatible and the latter novates the first. The will to novate, whether totally or partially, must appear by express agreement of the parties or by their acts which are too clear and unequivocal to be mistaken. The Court found no incompatibility between the surety undertakings and the Financing Agreement, and no express or unequivocal act demonstrating intent to novate.

• Estoppel by Deed — By executing the surety undertakings, petitioners led Filinvest to believe it could collect from the sureties in case of Fortune's default. Filinvest relied on the surety contracts when it demanded payment from the sureties. A refusal to enforce the contracts would virtually sanction the perpetration of fraud or injustice. The Court applied this doctrine to preclude petitioners from escaping liability after having benefited from the surety arrangements.

• "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 than 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." — This passage, quoted from Atok Finance Corporation vs. Court of Appeals, articulates the ratio decidendi on the validity of continuing surety agreements before the principal obligation arises and is the canonical formulation frequently cited in subsequent suretyship jurisprudence.

• "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 defines the doctrine of continuing guaranty/suretyship as formulated in Dino vs. Court of Appeals and adopted in this decision.

• "Novation is never presumed. ... The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first." — This states the controlling two-part test for novation, governing when a subsequent contract extinguishes a prior surety obligation.

• Atok Finance Corporation vs. Court of Appeals, 222 SCRA 232 (1993) — Controlling precedent directly on point. The Court held the instant case to fall "on all fours" with Atok Finance, which ruled that a continuing suretyship agreement is valid even before the principal obligation arises and rejected the narrow interpretation of Article 2053.

• National Rice and Corn Corporation (NARIC) vs. Court of Appeals, 103 Phil. 1131 (1958) — Foundational authority cited within Atok Finance and in the trial court's decision. Held that a bond posted to secure additional credit is not void merely because it was signed before the credit was extended.

• Rizal Commercial Banking Corporation vs. Arro, 115 SCRA 777 (1982) — Cited alongside NARIC as authority for the validity of surety agreements covering future obligations and for rejecting the distinction that "future debts" under Article 2053 refer only to existing debts of unknown amount.

• Dino vs. Court of Appeals, 216 SCRA 9 (1992) — Cited for the comprehensive definition and characteristics of a continuing guaranty/suretyship, including the principle that it contemplates a future course of dealing covering a series of transactions.

• Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637 (1991) — Cited for the rule on novation, particularly the two ways to effect it: explicit declaration or incompatibility of obligations.

• Article 2053, Civil Code — Provides that a guaranty may also be given as security for future debts, the amount of which is not known. The Court interpreted "future debts" to include debts not yet incurred at the time of the guaranty's constitution, rejecting the narrower interpretation that the term refers only to existing debts whose amount is unknown.

• Section 23, Rule 130, Revised Rules of Court — Provides for evidence by silence. Applied to hold that petitioners' failure to respond to demand letters or contest the statement of account constituted evidentiary silence supporting the correctness of the amount claimed.

Melo and Francisco, JJ., concur. Narvasa, C.J. and Davide, Jr., JJ., concur.