Willex Plastic Industries vs. Court of Appeals

A continuing guaranty may validly secure pre-existing obligations and payments made by the creditor to a third party on behalf of the principal debtor when the terms of the instrument and the attendant circumstances evince the parties’ intention to afford such coverage. Moreover, a guarantor who expressly renounces excussion and binds herself solidarily with the debtor cannot invoke the benefit of excussion.

Inter-Resin Industrial Corporation obtained a letter of credit from Manila Banking Corporation in 1978. To secure the credit accommodation, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines executed two Continuing Surety Agreements on December 1, 1978, solidarily guaranteeing Inter-Resin Industrial’s obligations to Manilabank up to an aggregate of approximately US$667,917. The following year, on April 2, 1979, Inter-Resin Industrial and Willex Plastic Industries Corporation jointly executed a Continuing Guaranty in favor of IUCP, covering up to P5,000,000.00. Subsequent demands, payments, and corporate successions led to a collection suit and the central dispute over the scope of that guaranty.

The Guarantee Structure:

• Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with Manila Banking Corporation.
• To secure that credit, Inter-Resin Industrial and the Investment and Underwriting Corporation of the Philippines executed two Continuing Surety Agreements dated December 1, 1978. Under each, Inter-Resin Industrial and IUCP bound themselves solidarily to pay Manilabank all obligations of Inter-Resin Industrial up to US$333,830.00 and US$334,087.00, respectively.
• On April 2, 1979, Inter-Resin Industrial and Willex Plastic Industries Corporation jointly executed a Continuing Guaranty in favor of IUCP. The instrument provided that “for and in consideration of the sums obtained and/or to be obtained by Inter-Resin Industrial Corporation … from you and/or your principal/s,” the signatories jointly and severally guaranteed payment of notes issued by Inter-Resin Industrial up to an aggregate principal sum of P5,000,000.00, together with interest, charges, and penalties.

Payment and Demand:

• On January 7, 1981, IUCP paid Manilabank P4,334,280.61 upon demand, representing Inter-Resin Industrial’s outstanding obligation.
• IUCP’s successor, Atrium Capital Corp., demanded payment from Inter-Resin Industrial and Willex Plastic on February 23 and 24, 1981. Neither paid, prompting Atrium to file a collection suit.
• On August 11, 1982, Inter-Resin Industrial paid Interbank (which had succeeded Atrium) P687,600.00 from the proceeds of a fire insurance policy on its destroyed properties.

Trial Court Findings:

• Inter-Resin Industrial admitted in its answer that the Continuing Guaranty was intended to secure Atrium’s payment to Manilabank, although it claimed full payment.
• Willex Plastic denied the material allegations and raised special affirmative defenses, including that it was merely a guarantor with secondary liability, that the creditor failed to exhaust remedies against the principal debtor, and that the complaint stated no cause of action.
• At trial, Inter-Resin Industrial repeatedly failed to appear for its scheduled presentation of evidence and was eventually declared to have waived the right to present evidence. Willex Plastic announced it was resting its case without presenting any evidence.
• The trial court found that the Continuing Guaranty was executed “to secure the guarantee made by plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by Manilabank” and ordered Inter-Resin Industrial and Willex Plastic to pay jointly and severally: (a) P3,646,780.61 with 17% interest per annum from August 11, 1982; (b) liquidated damages equivalent to 1% of the amount due; and (c) attorney’s fees and litigation expenses of 20% of the total amount due.

• Scope of Guaranty: Petitioner argued that under the plain terms of the Continuing Guaranty, its liability covered only “sums obtained” by Inter-Resin Industrial directly from Interbank, not amounts Interbank paid to a third party (Manilabank) on Inter-Resin Industrial’s behalf.
• Absence of a Valid Principal Obligation: Petitioner contended that as an accessory contract, the Continuing Guaranty could not legally exist without a principal obligation to which petitioner was a party, and petitioner was not privy to the Continuing Surety Agreements or the loan agreement between Manilabank and Inter-Resin Industrial.
• Retroactive Application: Petitioner maintained that the Continuing Guaranty could not be applied retroactively to secure payments made under the December 1978 Continuing Surety Agreements, invoking the rule that a contract of suretyship operates prospectively unless a contrary intent is clearly indicated.
• Benefit of Excussion: Petitioner asserted it could not be proceeded against without first exhausting the property of the principal debtor, Inter-Resin Industrial, invoking the benefit of excussion.
• Proof of Payment: Petitioner claimed Inter-Resin Industrial had already fully paid its obligation to Interbank and that the Court of Appeals erred in denying petitioner the opportunity to adduce evidence of such payment.

• Scope of Guaranty: Interbank argued that the Continuing Guaranty was executed precisely to secure the amounts Interbank had paid to Manilabank under the Continuing Surety Agreements, as Inter-Resin Industrial admitted in its answer and as parol evidence conclusively established.
• Validity of Principal Obligation: Interbank maintained that a surety need not receive any part of the consideration; the consideration moving to the principal debtor supports the surety’s obligation. The principal obligation — Inter-Resin Industrial’s liability under the Continuing Surety Agreements — was valid and subsisting.
• Retroactive Application: Interbank emphasized that the contract language covered “sums obtained and/or to be obtained,” thereby expressly including obligations already existing at the time of execution, and that the controlling factor was the parties’ intention as revealed by the evidence.
• No Excussion: Interbank pointed to the Continuing Guaranty’s express waiver of excussion and its solidarity clause, which deprived petitioner of the benefit of excussion under Article 2059 of the Civil Code.
• Procedural Waiver: Interbank countered that Inter-Resin Industrial had been given generous opportunity to present its evidence of payment but repeatedly defaulted, and petitioner itself voluntarily rested its case without presenting any proof; the belated request to present evidence on appeal was therefore without basis.

• Scope of Guaranty: Whether the Continuing Guaranty executed by Willex Plastic covers amounts paid by Interbank to Manilabank under the Continuing Surety Agreements, rather than only sums directly loaned by Interbank to Inter-Resin Industrial.
• Existence of Principal Obligation: Whether the Continuing Guaranty is void for lack of a valid principal obligation, considering Willex Plastic was not a party to the principal loan or surety agreements.
• Retroactive Application: Whether the Continuing Guaranty may be applied to obligations that existed prior to its execution.
• Excussion: Whether Willex Plastic is entitled to the benefit of excussion.
• Procedural Opportunity: Whether the Court of Appeals erred in denying Willex Plastic’s request to present evidence that the principal debtor’s obligation had been fully paid.

• Scope of Guaranty: The Continuing Guaranty covered the amounts Interbank paid to Manilabank. Evidence aliunde — including Inter-Resin Industrial’s admission in its answer, the plaintiff’s complaint allegations, and the testimony of Interbank’s witness — established that the guaranty was intended to secure Interbank’s exposure under the Continuing Surety Agreements. Willex Plastic’s failure to object to the parol evidence constituted a waiver of the parol evidence rule. The factual findings of the trial court and the Court of Appeals on this point were binding on review, and the record contained no other transaction that could constitute the sum “obtained” by Inter-Resin Industrial from Interbank.

• Existence of Principal Obligation: A valid principal obligation existed. The consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the principal debtor alone suffices. The Continuing Guaranty was an accessory obligation dependent on Inter-Resin Industrial’s principal obligation under the Continuing Surety Agreements, which were valid and operative.

• Retroactive Application: The guaranty applied to pre-existing obligations. The instrument explicitly covered “sums obtained and/or to be obtained,” manifesting the parties’ intent to include past indebtedness. The cases cited by petitioner were distinguishable: El Vencedor v. Canlas involved no such retroactive clause, and Diño v. Court of Appeals did not foreclose retrospective application where the contract demonstrated contrary intent. The rule that the parties’ intention, as revealed by the evidence, controls in interpreting surety agreements prevailed.

• Excussion: The benefit of excussion was unavailable. The Continuing Guaranty contained an express waiver: “you … may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties.” Moreover, Willex Plastic bound itself “jointly and severally” with Inter-Resin Industrial. Under Article 2059 of the Civil Code, excussion does not lie when the guarantor has expressly renounced it or has bound itself solidarily with the debtor.

• Procedural Opportunity: The denial of the belated request to present evidence was proper. The trial court gave Inter-Resin Industrial numerous scheduled hearings over a prolonged period, but it repeatedly failed to appear or present evidence, resulting in a valid declaration of waiver. Willex Plastic itself voluntarily rested its case without presenting any evidence on payment. No basis existed to allow it to introduce such evidence for the first time on appeal.

• Continuing Guaranty — Covered Obligations — A continuing guaranty may cover obligations already existing at the time of its execution if the contract language and the surrounding circumstances show the parties intended such coverage. The phrase “sums obtained and/or to be obtained” sufficiently evinces intent to include pre-existing debts.

• Parol Evidence and Waiver — Explanatory evidence may be received to show the circumstances under which a document was made and to what debt it relates. A party who fails to object to parol evidence at trial waives the protection of the parol evidence rule.

• Consideration in Suretyship — “A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. … It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.” The consideration moving to the principal debtor alone is sufficient to support the surety’s obligation.

• Retroactivity of Suretyship — Controlling Intention — A contract of suretyship is ordinarily not construed as retrospective, but that rule yields to the intention of the contracting parties as revealed by the evidence, without interference from technical rules of interpretation.

• Excussion — Article 2059, Civil Code — The benefit of excussion is lost when (1) the guarantor has expressly renounced it, or (2) the guarantor has bound itself solidarily with the debtor. Both circumstances obtained because the Continuing Guaranty contained an express waiver and a joint and several undertaking.

• Binding Effect of Lower Courts’ Factual Findings — Factual findings of the trial court, affirmed by the Court of Appeals, are entitled to great weight and respect and are binding on the Supreme Court, absent exceptional circumstances.

• “For a guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto. … It is never necessary that a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal.” — Articulates the principle that separate consideration to the guarantor is not required.

• “It is very true that bonds or other contracts of suretyship are ordinarily not to be construed as retrospective, but that rule must yield to the intention of the contracting parties as revealed by the evidence, and does not interfere with the use of the ordinary tests and canons of interpretation which apply in regard to other contracts.” — The controlling standard for determining the temporal reach of a suretyship agreement.

• “If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties in the same manner as if all such liabilities constituted My/Our direct and primary obligations.” — The stipulation held to constitute an express renunciation of excussion.

• PNB v. Barretto, 53 Phil. 955 (1928) — Followed; explanatory evidence may be received to show circumstances under which a document was made and to what debt it relates.
• Severino v. Severino, 56 Phil. 185 (1931) — Applied; a surety is bound by the same consideration that supports the principal obligation, without need for separate consideration.
• Rizal Commercial Banking Corp. v. Arro, 115 SCRA 777 (1982) — Applied; a surety is liable under a comprehensive surety agreement even if not a signatory to the promissory note evidencing the principal indebtedness.
• El Vencedor v. Canlas, 44 Phil. 699 (1923) — Distinguished; suretyship is not retrospective absent evidence of intent to cover past defaults. Here, the contract language supplied such intent.
• Diño v. Court of Appeals, 216 SCRA 9 (1992) — Distinguished; while a continuing suretyship is generally prospective, it may cover pre-existing obligations if the parties’ intention so indicates.
• Bank of the Philippine Islands v. Foerster, 49 Phil. 843 (1926) — Applied; the rule against retrospective construction of surety contracts yields to the parties’ intention as revealed by the evidence.
• Talosig v. Vda. de Nieba, 43 SCRA 472 (1972) — Cited for the rule that failure to object to parol evidence constitutes waiver of the parol evidence rule.

• Article 2052, Civil Code — “A guaranty cannot exist without a valid obligation.” Cited by petitioner. The principal obligation was found valid.
• Article 2059, Civil Code — Excussion shall not take place if the guarantor has expressly renounced it or has bound himself solidarily with the debtor. Applied to preclude excussion.

Regalado, Romero, Puno, and Torres, Jr., JJ., concurred.