National Marketing Corporation vs. Marquez

A simple or indefinite contract of suretyship extends liability not only to the principal obligation but also to all its accessories, including interest for default and judicial costs incurred after the surety has been judicially required to pay. A compensated surety is not entitled to a strictissimi juris construction of its bond. Furthermore, written extrajudicial demands by the creditor, when furnished to a solidarily liable surety who has waived notice of non-payment, effectively interrupt the prescriptive period.

On 24 June 1950, defendant Gabino Marquez acquired one tractor and one rice thresher valued at P20,000.00 from the Philippine Relief and Trade Rehabilitation Administration (PRATRA). He made a down payment of P8,000.00, leaving a balance of P12,000.00. Marquez executed a promissory note for the balance, payable in installments from June 1951 to June 1952, with 7% interest per annum and a stipulation for 10% attorney's fees upon default. Plaridel Surety & Insurance Company issued a guaranty bond to secure full compliance with the obligation. PRATRA's assets and obligations later devolved to PRISCO under Executive Order No. 350, series of 1950, and subsequently to NAMARCO by virtue of Republic Act No. 1345, as amended. Marquez made partial payments in 1951 and 1952 but thereafter defaulted.

Nature of the transaction: On 24 June 1950, Gabino Marquez purchased from PRATRA one tractor and one rice thresher with a total value of P20,000.00. Marquez paid P8,000.00 as down payment, leaving a balance of P12,000.00, as evidenced by an invoice (Exhibit A). On the same date, Marquez executed a promissory note for P12,000.00 (Exhibit B), payable in installments from 24 June 1951 to 25 June 1952, with interest at 7% per annum from 24 June 1950 until fully paid. The note stipulated that upon default, an additional sum equivalent to 10% of the total amount due would be paid as attorney's fees.

The surety bond: To guarantee full compliance, Marquez, as principal, and Plaridel Surety & Insurance Company, as surety, executed Guaranty Bond P. S. & I. No. 4220 in favor of PRATRA (Exhibit C). They bound themselves jointly and severally to pay the sum of P12,000.00. The surety expressly waived its right to demand payment and notice of non-payment and agreed that its liability would be direct and immediate, not contingent upon exhaustion of remedies against the principal, and would remain valid and continuous until the obligation was fully paid. A copy of the promissory note was annexed to the bond.

Succession of entities: Under Executive Order No. 350, series of 1950, all properties, rights, obligations, and contracts of PRATRA were transferred to the Price Stabilization Corporation (PRISCO). By virtue of Republic Act No. 1345, as amended, all rights and contracts of PRISCO involving real estate, fixed assets, and stock in trade were assumed by NAMARCO, the plaintiff-appellee.

Default and demands: Marquez made partial payments of P2,870.19 on 7 July 1951 and P326.77 on 23 February 1952, after which he defaulted on the remaining installments. As of 31 October 1964, the total amount due to NAMARCO was P19,990.91, representing principal and accrued interest (Exhibit D). NAMARCO made written demands for payment upon both defendants on 22 March 1956, 16 February 1963, 10 June 1964, 18 September 1964, and 13 October 1964 (Exhibits E to E-13). The surety's claim of not having received any demand was contradicted by registry return receipts showing receipt by the addressee.

Filing of the complaint: As the amount remained unpaid despite demands, the present action was instituted on 16 December 1964.

• Lack of jurisdiction: The surety argued that since the balance of the principal was only P10,000.00, jurisdiction lay with the municipal court, not the Court of First Instance, under Section 44(c) of the Judiciary Act, as amended by Republic Act No. 3828, which vested original jurisdiction in the CFI only where the demand exceeded P10,000.00.

• Prescription of action: The surety contended that NAMARCO's cause of action was barred by the statute of limitations because the promissory note fell due on 25 June 1952, and the complaint was filed only in December 1964. It further maintained that written demands upon the principal debtor did not constitute demands upon the surety and therefore did not interrupt prescription against the surety.

• Liability in excess of P12,000.00: The surety asserted that its liability could not exceed the face value of the guaranty bond, which was P12,000.00, and objected to being held liable for interest, attorney's fees, and costs beyond that amount.

• Jurisdiction: Whether the Court of First Instance had original jurisdiction over the suit given that the principal balance was P10,000.00.

• Prescription: Whether NAMARCO's cause of action against the surety was barred by prescription.

• Extent of Surety's Liability: Whether the surety's liability could exceed the face amount of the bond (P12,000.00) to include accrued interest, attorney's fees, and costs.

• Jurisdiction: The Court of First Instance properly exercised jurisdiction. The promissory note, which was attached to and formed part of the guaranty bond, entitled the creditor to an additional 10% of the total amount due for attorney's fees upon default. Even disregarding overdue interest, the amount demandable at the time the complaint was filed was P10,000.00 on the principal plus P1,000.00 attorney's fees, totaling P11,000.00. Under Republic Act No. 3828, the original jurisdiction of the CFI covered all cases in which the demand, exclusive of interest, exceeded P10,000.00. The P11,000.00 demand exceeded that jurisdictional threshold.

• Prescription: The action was not barred. The extinctive prescription of actions was interrupted by the written extrajudicial demands for payment made upon the principal debtor on 22 March 1956, 16 February 1963, and June, September, and October of 1964, copies of which were furnished the surety. Article 1115 of the Civil Code expressly provides that prescription is interrupted by a written extrajudicial demand by the creditor. The surety's argument that a demand upon the debtor was not a demand upon the surety was rejected on two grounds: first, the surety's liability was expressly made joint and several; second, the surety had waived its right to demand payment and notice of non-payment in the bond itself, rendering demands made directly upon the principal debtor sufficient to interrupt prescription as against the surety.

• Extent of Surety's Liability: The judgment did not violate the surety's rights. The award on the principal was only P10,000.00, exactly the balance due on the note; the remaining P9,990.91 represented moratory interest accruing because of the principal debtor's default. The surety was fully aware that the obligation bore interest, as the promissory note was annexed to the bond. The contract of guaranty did not exclude this interest. Article 2055, paragraph 2, of the Civil Code provides that a simple or indefinite guaranty comprises not only the principal obligation but also all its accessories, including judicial costs, provided the guarantor is liable only for those costs incurred after he has been judicially required to pay. Moreover, as a compensated surety, the appellant was not entitled to have its contract interpreted strictissimi juris in its favor.

• Scope of a Simple or Indefinite Guaranty (Article 2055, Civil Code) — A guaranty that is simple or indefinite comprises not only the principal obligation but also all its accessories, including judicial costs. The guarantor shall be liable for costs incurred only after being judicially required to pay. The surety is also liable for moratory interest as an accessory of the principal obligation when the bond does not exclude it. The surety, having the power to limit its liability at the time of contracting but failing to do so, is presumed to have bound itself in the broad manner established by law.

• Interruption of Prescription by Written Extrajudicial Demand (Article 1115, Civil Code) — The prescription of actions is interrupted when there is a written extrajudicial demand by the creditor. Where the surety is solidarily liable and has waived notice of non-payment, written demands upon the principal debtor, copies of which are furnished the surety, interrupt the prescriptive period against the surety.

• Construction of Compensated Surety Contracts — Compensated sureties are not entitled to have their contracts interpreted strictissimi juris in their favor. Their bonds are construed more liberally than those of gratuitous guarantors.

• Delay of Creditor Not a Discharge of Guarantor — Mere delay of the creditor in proceeding against the principal debtor does not release the guarantor, and much less a surety who is solidarily liable with the main debtor.

• "The contract of guaranty executed by the appellant Company nowhere excludes this interest, and Article 2055, paragraph 2, of the Civil Code of the Philippines is clearly applicable. 'If it (the guaranty) be simple or indefinite, it shall comprise not only the principal obligation but also all its accessories, including judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.'" — Articulated the controlling statutory provision on the scope of a surety's liability.

• "Compensated sureties are not entitled to have their contracts interrupted strictissimi juris in their favor." — Stated the rule distinguishing corporate sureties from gratuitous guarantors.

• Leyson vs. Rizal Surety, 16 SCRA 555 (1966) — Cited as authority that compensated sureties are not entitled to a strictissimi juris interpretation of their contracts.

• Pacific Tobacco Corp. vs. Lorenzana, 102 Phil. 234, 241-242 — Likewise cited for the rule on interpreting bonds of compensated sureties.

• Lavides vs. Eleazar, 106 Phil. 576, 579 — Cited for the established rule that mere delay of the creditor in proceeding against the principal debtor does not release the guarantor.

• Article 2055, paragraph 2, Civil Code of the Philippines — Provides that a simple or indefinite guaranty shall comprise not only the principal obligation but also all its accessories, including judicial costs. Applied to hold the surety liable for moratory interest and costs in addition to the principal amount, since the bond did not expressly exclude such accessories.

• Article 1115, Civil Code of the Philippines — States that the prescription of actions is interrupted by a written extrajudicial demand by the creditor. Applied to hold that the letters of demand sent to the principal debtor, copies of which were furnished the surety, interrupted the prescriptive period.

• Republic Act No. 3828 (amending Section 44(c) of the Judiciary Act) — Prescribed the original jurisdiction of Courts of First Instance over cases where the demand, exclusive of interest, exceeded P10,000.00. Applied to uphold CFI jurisdiction because the principal of P10,000.00 plus attorney's fees of P1,000.00 amounted to a demand of P11,000.00.

Chief Justice Concepcion, Justices Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano, Teehankee, and Barredo concurred.

N/A — The decision was unanimous.