Pacific Banking Corporation vs. Intermediate Appellate Court

A contract denominated as a "Guarantor's Undertaking" is in substance a contract of suretyship if the signatory binds himself jointly and severally with the principal debtor, and such surety is liable for the full extent of the principal debtor's indebtedness when the contract expressly provides for a continuing undertaking and waives release due to changes or novations in the terms.

Pacific Banking Corporation issued a Pacificard credit card to Celia Regala. As a condition for issuance, her spouse, Roberto Regala, Jr., executed a "Guarantor's Undertaking" in favor of the bank. Celia subsequently incurred purchases on credit totaling P92,803.98, which remained unpaid, prompting the bank to file a collection suit against both spouses.

On October 24, 1975, Celia Regala applied for and obtained a Pacificard credit card from Pacific Banking Corporation. As a condition for the card's issuance, her spouse, Roberto Regala, Jr., executed a "Guarantor's Undertaking" in favor of the bank. In this document, Roberto agreed jointly and severally with Celia to pay the bank upon demand any and all indebtedness incurred by her through the use of the Pacificard. The undertaking further stipulated that any changes or novations in the terms and conditions of the card, or any extension of time to pay, would not release him from responsibility, characterizing the undertaking as continuing and binding until all of Celia's liabilities were fully satisfied. The credit limit granted to Celia was P2,000.00 per month, and the card was originally effective for one year from October 29, 1975 to October 29, 1976.

Celia used the Pacificard to purchase goods and services on credit, with the bank advancing the costs. She was able to use the card beyond its original period of effectivity. Eventually, her total outstanding account reached P92,803.98. Because Celia failed to settle her account, the bank sent a written demand to her and to Roberto under his Guarantor's Undertaking. The bank subsequently filed a complaint for sum of money. Celia was declared in default, while Roberto filed an answer admitting the execution of the undertaking but asserting that his liability was limited to P2,000.00 per month. After a fire destroyed the court records, they were reconstituted, and Roberto was declared in default for failing to appear at a pre-trial conference. The trial court rendered judgment holding both spouses solidarily liable for the full amount of P92,803.98, plus interest and attorney's fees. On appeal, the Intermediate Appellate Court modified the decision, limiting Roberto's liability to the monthly credit limit of P2,000.00 and only for purchases made during the original one-year effectivity of the card.

• Scope of Liability: Petitioner argued that the appellate court erred in limiting private respondent Roberto Regala, Jr.'s liability only to purchases made within the first year of the card's effectivity up to P2,000.00 per month, contending that the Guarantor's Undertaking bound him to the full extent of the debtor's indebtedness.

• Limited Liability: Respondent maintained that his liability should be limited to P2,000.00 per month, as this was the credit limit granted to Celia Regala, and that Article 2054 of the Civil Code restricts a guarantor's liability to less, but not more, than the principal debtor.

• Nature of the Contract: Whether the "Guarantor's Undertaking" executed by Roberto Regala, Jr. constitutes a contract of guaranty or a contract of suretyship.
• Extent of Liability: Whether Roberto Regala, Jr.'s liability as a surety is limited to the original credit limit and period of effectivity of the credit card, or extends to the full amount of the principal debtor's indebtedness.

• Nature of the Contract: The "Guarantor's Undertaking" is a contract of suretyship, as Roberto Regala, Jr. bound himself jointly and severally with the principal debtor under Article 2047 of the Civil Code.
• Extent of Liability: No. The liability of the surety is not limited to the original credit limit and period of effectivity. The surety is liable for the full extent of the principal debtor's indebtedness because the contract expressly provided for a continuing undertaking and waived release due to changes or novations.

• Nature of the Contract: The undertaking signed by Roberto Regala, Jr., although denominated "Guarantor's Undertaking," was in substance a contract of surety. Under Article 2047 of the Civil Code, in a contract of suretyship, the surety binds himself solidarily with the principal debtor. Roberto expressly agreed to be bound jointly and severally with Celia Regala to pay any and all indebtedness incurred with the use of the Pacificard. The Terms and Conditions of the Pacificard also stipulated that the cardholder and guarantor assume joint and several liabilities for amounts arising from its use.
• Extent of Liability: The appellate court erred in applying Article 2054 of the Civil Code to limit the surety's liability. While a guarantor may bind himself for less but not more than the principal debtor, Roberto expressly bound himself up to the extent of the debtor's indebtedness and waived any discharge in case of changes or novations in the terms and conditions of the credit card. He made his commitment a continuing one, binding upon himself until all liabilities were fully paid. As in guaranty, a surety may secure additional and future debts of the principal debtor under Article 2053. The application of the ruling in Government of the Philippines vs. Tizon was misplaced, as that case merely established that a surety does not incur liability unless the principal debtor is held liable; it does not mean the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of a surety's liability is determined by the clauses in the contract of suretyship.

• Contract of Suretyship vs. Contract of Guaranty — In a contract of guaranty, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only if the latter fails to do so. In a contract of suretyship, the surety binds himself solidarily with the principal debtor (Article 2047, Civil Code). The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship.
• Continuing Suretyship — A surety may secure additional and future debts of the principal debtor the amount of which is not yet known (Article 2053, Civil Code). If the contract of suretyship expressly provides for a continuing undertaking and waives release from liability due to changes or novations in the terms, the surety remains bound until all liabilities of the principal debtor are fully paid.

• "The undertaking signed by Roberto Regala, Jr. although denominated 'Guarantor's Undertaking,' was in substance a contract of surety. As distinguished from a contract of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines)." — This passage defines the distinction between guaranty and suretyship and classifies the private respondent's undertaking as the latter.
• "It does not mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of suretyship." — This clarifies that while a surety's liability is dependent on the principal debtor's liability, its extent is governed by the contractual stipulations, overriding the appellate court's reliance on Article 2054.

• Government of the Philippines vs. Tizon, G.R. No. L-22108, August 30, 1967, 20 SCRA 1182 — The appellate court relied on this case to limit the surety's liability, but the Supreme Court distinguished it, clarifying that the case only held a surety does not incur liability unless the principal debtor is held liable, not that the surety cannot be liable to the same extent.
• PCIB vs. CA, L-34959, March 18, 1988, 159 SCRA 24 — Cited to support the rule that the nature and extent of a surety's liabilities are determined by the clauses in the contract of suretyship.
• Hospicio de San Jose vs. Fidelity and Surety, Co., G.R. No. 30427, March 11, 1929 — Cited in a footnote to show that Article 2054 of the Civil Code was applied to a contract of surety.

• Article 2047, Civil Code of the Philippines — Defines a contract of suretyship where the surety binds himself solidarily with the principal debtor. Applied to classify the "Guarantor's Undertaking" as a contract of suretyship.
• Article 2053, Civil Code of the Philippines — Provides that a guarantor may secure additional and future debts of the principal debtor. Applied to support the continuing nature of Roberto Regala, Jr.'s undertaking.
• Article 2054, Civil Code of the Philippines — States that a guarantor may bind himself for less, but not for more than the principal debtor. The appellate court applied this to limit liability, but the Supreme Court ruled it was overridden by the express stipulations in the surety contract.

Narvasa, C.J., Cruz, Feliciano, and Griño-Aquino, JJ.