Manila Surety and Fidelity, Inc. vs. Batu Construction and Company

A surety may avail of the remedies under Article 2071 of the Civil Code, including the right to proceed against the principal debtor to demand security when sued for payment, because suretyship, though a solidary obligation, is not withdrawn from the applicable provisions governing guaranty, and a surety assumes a responsibility greater than that of a guarantor.

Manila Surety and Fidelity, Inc. is a domestic corporation engaged in the bonding business. Batu Construction and Company is a partnership whose members are Carlos N. Baquiran, Gonzalo P. Amboy, and Andres Tunac. On July 11, 1950, the partnership entered into a construction contract with the Government of the Philippines for the construction of the Bacarra Bridge, Project PR-72(3), in Ilocos Norte. On July 8, 1950, the partnership and the individual partners (except Andres Tunac) executed an indemnity agreement in favor of the surety company, stipulating that they would indemnify it for any damage, loss, costs, or expenses, including attorney's fees not less than fifteen percent of the total amount claimed, which it might sustain as a consequence of having become surety on the performance bond.

Manila Surety and Fidelity, Inc., a domestic bonding corporation, posted a surety bond for P8,812 on July 8, 1950, in favor of the Government of the Philippines to secure the faithful performance by Batu Construction and Company of its construction contract for the Bacarra Bridge, Project PR-72(3), in Ilocos Norte. On the same date, the partnership and its partners Carlos N. Baquiran and Gonzalo P. Amboy executed an indemnity agreement to protect the surety against any damage, loss, or expense it might sustain as a consequence of the bond, stipulating that indemnity would be paid as soon as the surety became liable, whether or not it had actually paid, and that attorney's fees would not be less than fifteen percent of the amount claimed in any action. Andres Tunac did not sign the indemnity agreement.

On May 30, 1951, the Director of Public Works, with the approval of the Secretary of Public Works and Communications, annulled the construction contract because of unsatisfactory progress and notified the surety that the Government would hold it liable for any amount spent to complete the bridge in excess of the contract price. On November 23, 1951, Ricardo Fernandez and 105 other laborers filed an action in the Justice of the Peace Court of Laoag, Ilocos Norte, against the partnership, the individual partners, and the surety company for collection of unpaid wages amounting to P5,960.10 earned in connection with the bridge construction.

Manila Surety thereupon filed a complaint in the Court of First Instance of Manila alleging that the defendants were in imminent danger of insolvency and were removing or disposing of their properties with intent to defraud creditors, and praying for a writ of attachment and an order requiring the defendants to deliver sufficient security to protect it from proceedings by creditors and from the danger of insolvency. A writ of attachment was issued and levied upon the properties of the defendants. After the plaintiff rested its case, defendant Amboy moved to dismiss on the ground that Article 2071 of the Civil Code is available only to a guarantor and not to a surety. The trial court agreed and dismissed the complaint. Subsequently, the court heard evidence on damages resulting from the attachment, awarded Amboy six percent interest per annum on P35 that had been garnished from the Provincial Treasurer of Ilocos Norte, denied all other claims for damages, and dissolved the writ of attachment. The plaintiff appealed both orders to the Supreme Court on questions of law.

• Applicability of Article 2071 to Sureties: The plaintiff argued that the last paragraph of Article 2071 of the Civil Code, derived from Article 1843 of the old Civil Code, is available not only to a guarantor but also to a surety, because a surety assumes an obligation at least as onerous as that of a guarantor.
• Cause of Action Under Paragraph 1: The plaintiff maintained that its cause of action fell under paragraph 1 of Article 2071, because it had been sued for payment in the laborers' case filed in the Justice of the Peace Court of Laoag, and was therefore entitled to demand security from the principal debtors.

• Article 2071 Inapplicable to Sureties: Defendant Amboy argued that the remedy provided in the last paragraph of Article 2071 of the Civil Code may be availed of by a guarantor only and not by a surety, warranting dismissal of the complaint.
• No Imminent Danger of Insolvency: The defendants denied being in imminent danger of insolvency or disposing of properties to defraud creditors, Amboy alleging he had no property at all.
• No Liquidation Yet: Defendants Baquiran and Amboy contended that no liquidation had been made between the partnership and the Bureau of Public Works to determine whether the total amount spent exceeded the contract price, and that their liability could not be fixed until after such liquidation and after the laborers' case was resolved.
• Indemnity Agreement Not Binding on Partnership or Tunac: Defendant Tunac alleged that Baquiran's signing of the indemnity agreement on behalf of the partnership did not bind the latter, and that as a member of the partnership he was likewise not bound; he also invoked the right of exhaustion of partnership property before the plaintiff could proceed against his personal property.
• Counterclaim for Damages: Defendant Tunac counterclaimed for P10,000 in damages, alleging that the plaintiff filed the action maliciously and in bad faith, made false representations to secure the writ of attachment, and thereby damaged his professional reputation as an engineer.

• Applicability of Article 2071 to Sureties: Whether the provisions of Article 2071 of the Civil Code, particularly the right to demand security from the principal debtor, may be availed of by a surety and not only by a guarantor.
• Sufficiency of Cause of Action: Whether the plaintiff's cause of action falls under any of the paragraphs of Article 2071 of the Civil Code, specifically paragraph 1.
• Validity of the Writ of Attachment: Whether the writ of attachment was properly issued given the allegations and proof of the defendants' insolvency.

• Applicability of Article 2071 to Sureties: Yes. The provisions of Article 2071 are available to a surety, because a surety assumes a responsibility greater than that of a guarantor, and the reference in Article 2047 to solidary obligations does not withdraw suretyship from the applicable provisions governing guaranty.
• Sufficiency of Cause of Action: Yes, under paragraph 1. The action filed by the laborers for unpaid wages in connection with the bridge construction constituted a suit for payment of an amount for which the surety bond was posted, satisfying the condition that the guarantor or surety be sued for payment.
• Validity of the Writ of Attachment: No. The writ was improvidently issued because the allegation of imminent insolvency was not proved, and the relief prayed for — security against the danger of insolvency — is itself inconsistent with the defendants' being already insolvent.

• Applicability of Article 2071 to Sureties: A guarantor insures the solvency of the debtor and binds himself to pay only if the principal is unable to pay, whereas a surety insures the debt itself and undertakes to pay if the principal does not pay, without the benefit of excussion. A surety may be sued independently and thus assumes a responsibility more onerous than that of a guarantor. The argument that Article 2071 is unavailable to sureties because guaranty is gratuitous fails, because guaranty may also be for a price or consideration under Article 2048, yet the provisions of Article 2071 remain available even to a paid guarantor. The cross-reference in Article 2047 to the provisions on solidary obligations does not exclude suretyship from the provisions governing guaranty; it merely incorporates the rules on solidary liability. Accordingly, the provisions of Article 2071 are applicable and available to a surety.

• Sufficiency of Cause of Action: The plaintiff's cause of action was examined against each paragraph of Article 2071. It does not fall under paragraph 2 because there is no proof of the defendants' insolvency; the annulment of the contract for lack of progress does not prove insolvency. It does not fall under paragraph 3 because the indemnity agreement stipulates a period of one year, extendible or renewable until cancellation, and thus no specified period has expired. It does not fall under paragraph 4 because the debt has not become demandable by expiration of a payment period. It does not fall under paragraph 5 because ten years have not yet elapsed. It does not fall under paragraph 6 because there is no proof of intent to abscond. It does not fall under paragraph 7 because there is no proof of imminent danger of insolvency. However, it falls under paragraph 1, which allows the guarantor, even before having paid, to proceed against the principal debtor to obtain release or demand security "when he is sued for payment." The laborers' case filed in the Justice of the Peace Court of Laoag is a suit for payment of unpaid wages earned in connection with the bridge construction — an amount for which the surety bond was posted to secure the principal's obligation to the Government. The surety was a party defendant in that suit. Paragraph 1 does not require that the guarantor be sued by the creditor directly for the debt; it suffices that the guarantor or surety be sued for payment of an amount covered by the bond.

• Validity of the Writ of Attachment: The writ was improvidently issued. Although the verified complaint alleged that the defendants were in imminent danger of insolvency and were disposing of properties to defraud creditors, such allegations were not proved. The filing of the laborers' complaint was insufficient to establish insolvency. Moreover, the relief prayed for — security to protect the plaintiff from the danger of the defendants becoming insolvent — is logically inconsistent with the defendants already being insolvent or in imminent danger thereof. The order awarding six percent interest on the P35 garnished from the Provincial Treasurer belonging to Amboy was affirmed, the defendants not having appealed therefrom.

• Surety vs. Guarantor — A guarantor is the insurer of the solvency of the debtor and binds himself to pay only if the principal is unable to pay; a surety is the insurer of the debt and undertakes to pay if the principal does not pay, without the benefit of excussion. A surety may be sued independently and assumes a responsibility more onerous than that of a guarantor. The Court relied on this distinction to hold that the remedies available to a guarantor under Article 2071 are equally available to a surety.
• Applicability of Guaranty Provisions to Suretyship — The reference in Article 2047 of the Civil Code to the provisions on solidary obligations does not withdraw suretyship from the applicable provisions governing guaranty. Suretyship, though solidary in nature, remains subject to the remedial provisions of Article 2071, because a surety's undertaking is at least as onerous as a guarantor's, and guaranty itself may be for consideration under Article 2048.
• Grounds for a Guarantor or Surety to Demand Security (Article 2071) — The Court enumerated the seven paragraphs of Article 2071 and tested the plaintiff's cause of action against each: (1) when the guarantor is sued for payment; (2) proof of insolvency; (3) failure to relieve the guarantor within a specified expired period; (4) debt becoming demandable by expiration of the payment period; (5) lapse of ten years when the obligation has no maturity period; (6) reasonable grounds to fear the principal debtor intends to abscond; (7) imminent danger of insolvency. Only paragraph 1 was satisfied, because the surety was sued for payment in the laborers' case.

• "A guarantor is the insurer of the solvency of the debtor; a surety is an insurer of the debt. A guarantor binds himself to pay if the principal is unable to pay; a surety undertakes to pay if the principal does not pay." — This passage states the canonical distinction between guaranty and suretyship that the Court used as the foundation for extending Article 2071 remedies to sureties.
• "Such being the case, the provisions of article 2071, under guaranty, are applicable and available to a surety. The reference in article 2047 to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the new Civil Code, on solidary or several obligations, does not mean that suretyship which is a solidary obligation is withdrawn from the applicable provisions governing guaranty." — This is the ratio decidendi on the core issue: the Civil Code's incorporation of solidary obligations into suretyship does not exclude the guaranty provisions from applying to sureties.
• "It does not provide that the guarantor be sued by the creditor for the payment of the debt. It simply provides that the guarantor or surety be sued for the payment of an amount for which the surety bond was put up to secure the fulfillment of the obligation undertaken by the principal debtor." — This passage defines the scope of "sued for payment" under paragraph 1 of Article 2071, clarifying that the suit need not be by the creditor directly but may be any action seeking payment of an amount covered by the bond.

• Macchetti vs. Hospicio de San Jose, 43 Phil. 297 — Cited as authority for the distinction between a guarantor and a surety: a guarantor insures the solvency of the debtor, while a surety insures the debt itself.

• Article 2071, Civil Code of the Philippines — Governs the right of a guarantor to proceed against the principal debtor even before payment, to obtain release from the guaranty or demand security. The Court held this article applicable to sureties and found that the plaintiff's cause of action satisfied paragraph 1 (sued for payment) but none of the other six paragraphs.
• Article 2047, Civil Code of the Philippines — Provides that suretyship is a solidary obligation and refers to the provisions on solidary obligations. The Court held that this cross-reference does not withdraw suretyship from the applicable provisions governing guaranty.
• Article 2048, Civil Code of the Philippines — Provides that guaranty may also be for a price or consideration. The Court cited this to refute the argument that Article 2071 is unavailable to sureties because guaranty is gratuitous, since even a paid guarantor retains Article 2071 remedies.
• Article 1933, Civil Code of the Philippines — Cited in a footnote comparing guaranty to commodatum as a gratuitous contract, to highlight that guaranty may nonetheless be for consideration under Article 2048.

Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Felix, JJ., concurred.