G. R. No. L-9353. May 21, 1957

In a  complaint filed in the Court of First Instance  of Manila, the plaintiff, a domestic corporation engaged  in the bonding  business, hereafter  called the  company, alleges that the Batu Construction & Company, a partnership the members  of which  are  the  other three defendants, requested it to post,  as  it did, a surety bond for P8,812 in favor of the Government of the Philippines to secure the faithful performance of the construction of the Eacarra Bridge, Project PR-72(3), in Ilocos Norte, undertaken by the partnership, as stipulated in a construction on contract entered into on 11 July 1950 by and between the partnership and the Government of the  Philippines, on condition that the defendants would “indemnify  the COMPANY for any damage, loss, costs, charges,  or expenses of whatever. kind and nature, including counsel or attorney’s fees, which the COMPANY may, at any time,  sustain or incur,  as a consequence  of having  become  surety  upon the  above-mentioned bond; said attorney’s fees shall not be less  than fifteen  (15%) per cent of the total  amount claimed in any action  which  the  COMPANY may institute against the undersigned  (the  defendants  except  Andres  Tunac)  in Court,”  and  that  “Said indemnity shall be paid  to the COMPANY as soon as it has become liable for the payment of any  amount, under the  above-mentioned bond, whether or not  it .shall have paid such sum or sums  of  money,  or any part thereof,” as stipulated in a contract  executed on 8 July 1950 (Exhibit  B);  that on  30 May 1951 because of the unsatisfactory  progress of the work on the  bridge, the Director of Public Works, with the approval of the Secretary of Public Works and Communications, annulled  the construction contract referred to  and  notified  the plaintiff Company that the Government would hold it (the Company)  liable for any amount incurred by the  Government  for  the  completion  of  the  bridge, in excess of  the contract  price  (Exhibit D); that  on 19  December 1951 (should be 23  November 1951), Ricardo  Fernandez and 105 other  persons  brought  an action in  the Justice  of the Peace Court of Laoag, Ilocos Norte, against the partnership, the individual  partners and  the  herein  plaintiff Company  for  the collection  of unpaid wages amounting to P5,960.10,  lawful interests thereon and costs  (Exhibit E); that the defendants  are in  imminent danger of be- coming insolvent, and are removing and disposing, or about to remove and dispose, of  their properties  with intent to defraud their creditors, particularly the plaintiff Company; and  that the latter has  no other sufficient  security to protect its rights against  the  defendants.  Upon these allegations, the plaintiff prays  that,  upon the approval of a bond and  on  the  strength  of the  allegations  of  the verified complaint,  a writ of  attachment be issued and levied upon the properties  of  the defendants; and that after  hearing,  judgment  be  rendered “ordering  the  defendants  to deliver  to the plaintiff such sufficient  security as  shall  protect plaintiff from  any  proceedings  by  the creditors on the Surety Bond aforementioned and from the danger of insolvency of  the defendants;  and to allow costs to the herein plaintiff,”  and “for  such other measures of  relief as may be proper and just in the premises.” Attached to the complaint are  a verification and  affidavit of attachment; and copies  of the  surety bond  marked Annex A; of the indemnity contract marked Annex B; and of  the letter  of the Acting Director of Public Works to the plaintiff  dated 30 May 1851, marked Annex C. Andres Tunae admits in his answer the allegations in paragraphs 1,  2, 3 and  4  of  the complaint, but denies the allegations  in paragraphs 5, 6, 7, 8 and 9 of the com- plaint, because he has  never promised to put up an indemnity  bond in favor of the plaintiff  nor has he ever entered into any indemnity  agreement  with it; because the partnership  or the Batu Construction &  Company was fulfilling its  obligations in accordance with the terms  of the construction contract;  because  the  Republic of the Philippines,  through the  Director of Public Works, had no  authority to annul the contract  at its own initiative; because the  Justice  of  the Peace court  of  Laoag,  Ilocos Norte had no jurisdiction to hear and decide  a case for collection of P5,960.10; and because the defendants were not in imminent  danger  of insolvency, neither did they remove or dispose of their properties with intent to defraud their creditors.  By  way  of  affirmative  defenses, he alleges that the  signing by  Carlos N. Baquiran  of  the indemnity agreement for  and  in behalf  of the partnership  Batu Construction &  Company  did not bind the latter to the plaintiff and as  the  partnership is not bound, he (Andres Tunac), as a member thereof, is  also not bound; that he not being  a party  to  the  said agreement,  the plaintiff has no cause of action against him; that in the  event the partnership  is bound by  the indemnity  agreement he invokes his  right of exhaustion  of  the  property of the partnership before the plaintiff may proceed against his property.   And  as a counterclaim he alleges that the plaintiff brought  the action against him maliciously and  in bad faith for the purpose of  annoying him and  damaging his professional  reputation,  he having a nourishing and successful practice as engineer  in  Ilocos Norte, thereby compelling him  to defend  himself; that  to  secure the issuance of a  writ of attachment the plaintiff made  false representations;  and that  the issuance of the writ  upon such false representations of  the  plaintiff caused  him damages in  the sum of P10,000 including expenses  of litigation  and  attorney’s  fees.  Upon the  foregoing  he prays that the  complaint  be dismissed as to him and the defendant  Batu Construction  &  Company,  with   costs against the plaintiff; ;that the latter be ordered to pay him the  sum  of  P10,000;  and that  he be  granted such other remedies as  may be just, equitable and  proper.

Gonzalo P. Amboy  denies in  his answer the allegations of the complaint,  except  those  that may  be deemed  admitted in the  special defenses,  and  alleges that  he is not in imminent danger  of insolvency and is not removing and  disposing or about to remove and  dispose of his  properties,  because he has no  property;  that there has been no liquidation of the  expenses incurred  in  the construction of the Bacarra Bridge,  Project PR-72(3), to determine whether there would  be a  balance  of  the contract price which may be applied to pay the claim for unpaid wages  of Ricardo  Fernandez et al sought  to  be collected  in civil case  No. 198 of the Justice of  the  Peace Court of Laoag,  Ilocos Norte, and not until after such liquidation shall have been made could his liability and that  of  his  co-defendants  be determined and fixed; that if after proper liquidations there  be a deficit of the contract  price the defendants  are  willing to pay  the  claim for  unpaid  wages  of Ricardo  Fernandez et  al.   Upon these  allegations he prays that the issuance  of the writ of attachment prayed  for  by the plaintiff be held in abeyance until after civil  case No.  198 of the  Justice  of  the Peace Court of Laoag, Ilocos Norte, shall have been disposed of.

Carlos  N.  Baquiran  admits in his answer the allegations, in paragraphs  1, 2, 3, 4, 5, 6  and 11  of the  complaint but alleges that he has no sufficient knowledge to form a belief as to  the truth of the claim of  Ricardo Fernandez et al.  set forth in paragraph 7 of the complaint, for there has never been a liquidation between  the defendants and the Bureau of Public  Works.  He further  denies specifically paragraphs 8,  9  and  10 of the complaint.   By way of special defenses he alleges  that  there has  been   no liquidation by and  between the defendants and the Bureau of Public Works on Project PR-72(S) to determine whether  the  total amount spent for the construction  of  the bridge exceeded the contract  price; that after the  determination: of the respective liabilities of the parties in civil case No. 198  of the Justice of the  Peace Court  of Laoag, IIocos Norte, if any there be against the defendants herein, and such liability could  not be paid out of the balance  of the  contract  price  of Project PR-72(3), the defendants are  ready and willing to assume their  respective responsibilities.  Upon these allegations he prays that  the complaint of the  plaintiff be dismissed; that  the issuance  of the  writ of  attachment  prayed  for be  denied;  and that he  be  granted  such  other relief  as may  be   just  and equitable,  with  costs against  the  plaintiff.

At  the  hearing,  the  plaintiff  presented  its   evidence. After the plaintiff  had rested its case,  defendant Gonzalo P. Amboy moved for  the dismissal of  the  complaint,  on the ground that the remedy provided for in  the  last paragraph of article 2071 of the new Civil Code may be availed of by the  guarantor only and not by a surety.

Acting upon this motion to  dismiss the trial court made the  following findings:

* * * That on July 8, 1950, the defendant Batu  Construction & Company, as principal, and the  plaintiff  Manila Surety & Fidelity  Co. Inc., as surety,  executed a surety bond for the sum of P8,812,00 to insure faithful performance  of the  former’s obligation as contractor for the construction of the Eacarra Bridge, Project PR-72 (No.  3) IIocos Norte Province,  On the same  date, July  8, 1950, the Eatu Construction &  Company  and the  defendants  Carlos N. Baquiran and Gonzales P. Amboy executed an indemnity agreement to  protect the Manila Surety  &  Fidelity Co. Inc.,  against damage, loss  or expenses which  it  may  sustain ag a consequence of the surety bond executed by it jointly with Batu Construction &  Company.

On or about  May 30, 1951, the  plaintiff received a notice from the  Director of Public Works  (Exhibit  B) annulling its contract with the Government for the construction  of the Bacarra  Bridge  because of its failure to make  satisfactory progress in the execution of the works,  with the warning  that any  amount  spent by  the Government in the continuation, of the work, in excess of the contract price, will be charged against the surety bond  furnished by  the plaintiff.  It also appears that a complaint by the laborers in said project of the  Batu Construction &  Company  was filed  against it in Manila Surety & Fidelity Co., Inc. vs. Batu Construction and Co., et al. and the  Manila Surety  and Fidelity Co., Inc., for unpaid wages amounting to P5,960.10.

and, being  of the  opinion that the  provisions of article 2071 of the new Civil Code may be availed of by a guarantor only and not by a surety, dismissed the  complaint, with costs against  the plaintiff.

From this order the plaintiff  Company  has appealed to this Court, because it proposes  to  raise only  a question of law. After the order dismissing  the  complaint  had  been entered, on  16 and 20 July 1953,  the defendants  Gonzalo P. Amboy  and Andres Tunac moved for leave to  prove damages they allegedly suffered as a result of the attachment  levied upon  their properties.   On  15  August  195S the Court heard the  evidence on damages.   On 23  September 1953 the Court found  and  held that the defendant Gonzalo P. Amboy is  entitled to recover from the plaintiff damages equivalent to 6 per cent  interest per annum on the sum  of P35  in possession of the Provincial Treasurer of Ilocos Norte, which was garnished pursuant to the writ of attachment, from the date of  garnishment until its discharge; but that the claims  for damages  of Andres Tunac and Gonzalo P. Amboy allegedly suffered by them in their business, moral damages and attorney’s fees were without basis in law  and in  fact.   Hence their recovery was  denied.  The  Court  dissolved  the writ  of  attachment.   From this  last order  only  the plaintiff Company has appealed.

The  main question  to, determine is  whether the last paragraph of article  2071  of the new Civil Code taken from article 184S of  the  old  Civil Code  may be  availed of by  a surety. 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.¹   The reason which could  be invoked for the non-availability to a surety of the provisions of the last paragraph of article 2071 of the new Civil Code would be the fact that guaranty like commodatum² is gratuitous.  But guaranty could also be for a price or consideration as provided for in article 2048.  So, even if  there should be a consideration or price paid to a guarantor for him to insure the performance of an obligation by the principal debtor, the provisions of article  2071 would still be available to the guarantor.   In suretyship  the  surety  becomes  liable  to  the creditor without the benefit of the principal debtor’s excussion of his properties, for he  (the surety) may  be  sued independently.  So,  he is an insurer of the debt and as such he has assumed or undertaken a responsibility or obligation greater or more onerous  than that  of guarantor.  Such being1  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 I,  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.

The plaintiff’s  cause of action does not fall under paragraph  2 of article  2071 of  the new Civil Code,  because there is no proof of the defendants’ insolvency.  The  fact that the contract was annulled  because of lack  of progress in the construction  of the bridge  is no proof  of  such insolvency.   It  does not  fall  under paragraph  3,  because the defendants have not bound themselves  to  relieve the plaintiff from the guaranty within a specified period which already has  expired,  because  the  surety  bond  does  not fix any period of time and the indemnity agreement stipulates  one  year  extendible  or  renewable until the bond be completely cancelled by the person or entity in whose behalf the bond was executed or by a Court  of competent  jurisdiction.  It does not come under paragraph 4, because the debt has  not  become  demandable  by reason  of  the expiration of the period for payment.  It does not come under paragraph 5 because of the lapse of  10  years, when the principal  obligation has no  period for its maturity, etc., for  10  years  have not yet elapsed.  It does  not  fall under paragraph 6, because there is no proof that “there are reasonable grounds to fear that the principal debtor intends to abscond   It does not come under paragraph 7,  because the defendants,  as  principal debtors,  are  not in imminent danger of becoming insolvent, there being no proof to  that  effect.

But the plaintiff’s  cause of action  comes under paragraph 1  of  article  2071 of the new Civil Code,  because the action brought by Ricardo Fernandez and 105 persons in the Justice  of the  Peace Court of  Laoag, province of Ilocos Norte, for the collection  of  unpaid  wages amounting to P5,960.10, is in connection with the  construction of  the Bacarra Bridge,  Project PR-72(3),  undertaken by  the Batu  Construction  & Company, and one  of  the defendants  therein  is  the herein plaintiff,  the  Manila Surety and  Fidelity Co., Inc., and  paragraph 1 of article 2071 of the  new Civil Code provides that the guarantor, even before having paid, may proceed against the principal debtor “to obtain release  from the  guaranty, or to demand  a security  that  shall protect him from any proceedings  by  the creditor or from the danger of  insolvency of  the debtor,” when he  (the  guarantor)   is  sued  for payment. It does not provide that the guarantor be sued by  the creditor for the  payment  of the debt.  It simply provides  that  the guarantor  of 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.  So, the suit  filed by Ricardo Fernandez and  105 persons in the Justice of  the Peace Court of Laoag, province of Ilocos Norte, for  the collection of unpaid wages  earned  in connection with the work done by them in  the  construction of the Bacarra Bridge, Project PR-72(3),  is a  suit for the payment of an amount for which the surety bond “was put up or posted to secure the faithful performance of the obligation undertaken by the principal debtors (the defendants) in favor of the creditor, the Government of the Philippines.

The order appealed from dismissing the complaint is reversed and  set  aside,  and the case remanded  to  the court below for determination of the  amount  of security that would protect the plaintiff  Company from any proceedings by the creditor  or from the danger of insolvency of  the  defendants, the  principal debtors,  and direction to the defendants to  put up  such amount  of  security as may be  established by competent evidence,  without pronouncement as to costs.

The writ of attachment having been issued improvidently because,  although there is an allegation in the verified complaint  that the defendants were in imminent  danger of insolvency  and that they  were removing or disposing, or  about to remove or dispose,  of their  properties,  with intent to defraud their creditors, particularly the plaintiff Company,  still such allegation was not proved, the fact that a  complaint  had been  filed against  the  defendants and the plaintiff  Company  in  the  Justice  of the  Peace Court  of Laoag,  Ilocos  Norte, for the collection of  an amount for unpaid wages  of the plaintiffs therein who claimed to have worked  in the construction of the  bridge, being insufficient to prove it, and because the relief prayed for  in  the complaint for security  that shall protect  it from any proceedings by the creditor and from the danger of the defendants becoming insolvent  is inconsistent with the  state of insolvency  of the defendants or  their being in imminent danger of  insolvency, the order  awarding 6 per  cent on the sum of P35 in possession of  the Provincial Treasurer owned by the defendant Gonzalo P.  Amboy garnished  by  virtue of the writ of attachment, from the date of the garnishment until its discharge, and denying recovery of the amounts of  damages claimed to have been suffered  by  the defendants,  is  affirmed,  the  defendants not having appealed therefrom.
 
 Bengzon, Montemayor, Reyes, A., Bautista Angela, Labrador, Conception,  Reyes, J.  B. L.,  Endencia  and Felix, JJ., concur.

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¹Machetti vs. Hospicio
²Article 1933, new Civil Code.