G.R. No. L-16666 - Machetti vs. Hospicio de San Jose

Case Summary (G.R. No. L-16666)

Factual Background

The parties entered into a written contract for construction of a building on Calle Rosario in Manila for Hospicio de San Jose, the contract price being P64,000. The contract contained a requirement that the contractor obtain the “guarantee” of Fidelity & Surety Company of the Philippine Islands to the amount of P12,800, and the following English endorsement appeared: “For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract. Fidelity & Surety Company of the Philippine Islands. (Sgd.) OTTO VORSTER, Vice-President.”

Performance and Dispute over Work

Romulo Machetti performed the construction under architects who represented Hospicio de San Jose and received periodic payments upon the architects’ recommendations. Payments ultimately exhausted all but P4,978.08 of the contract price. Subsequent inspection disclosed that the work did not comply with the contract specifications and the workmanship fell short of the required standard. Hospicio de San Jose refused to pay the remaining balance and asserted damages for partial noncompliance.

Original Proceedings and Insolvency

Romulo Machetti filed suit May 28, 1917, to recover the unpaid balance. Hospicio de San Jose filed an answer and a counterclaim on January 28, 1918, seeking damages totalling P71,350. On petition of his creditors, Machetti was declared insolvent February 27, 1918, and, pursuant to section 60 of the Insolvency Law, Act No. 1956, the court entered an order suspending the proceedings as to him on March 4, 1918.

Substitution of Parties and Cross-Complaint

After the suspension, Hospicio de San Jose moved January 29, 1919, that Fidelity & Surety Company of the Philippine Islands be made cross-defendant in place of Machetti, and that proceedings continue against the company while remaining suspended as to Machetti. The motion was granted. Thereafter Hospicio de San Jose filed, on February 7, 1920, a complaint against Fidelity & Surety Company of the Philippine Islands seeking judgment for P12,800 upon the guaranty endorsement.

Trial Court Judgment

Following trial, the Court of First Instance rendered judgment against Fidelity & Surety Company of the Philippine Islands for P12,800 in accordance with Hospicio de San Jose’s complaint. The Fidelity company appealed from that judgment to the Supreme Court.

Issue on Appeal

The central issue on appeal was whether the court below erred in proceeding to judgment against the guarantor while proceedings remained suspended as to the principal debtor, Romulo Machetti, and whether the guaranty endorsement obligated the surety to pay notwithstanding the principal’s unsatisfied liability.

Nature of the Guaranty Versus Suretyship

The Court examined the language and placement of the endorsement and the contract as written in English and concluded that the undertaking was a separate guaranty rather than an ordinary fianza or suretyship. The Court observed that in English usage “guarantor” denotes an obligation distinct from suretyship, and that circumstances in the present case—namely that the undertaking was a separate writing, rested on separate consideration, and did not join the principal—were characteristic of contracts of guaranty rather than of fianza. The Court relied on authorities distinguishing guaranty from suretyship, including Saint v. Wheeler & Wilson Mfg. Co., 95 Ala. 362; Campbell v. Sherman, 151 Pa. St. 70; Castellvi de Higgins and Higgins v. Sellner, 41 Phil. 142; and U. S. v. Varadero de la Quinta, 40 Phil. 48.

Legal Effect of the Guaranty and Insolvency Proceedings

The Court held that a guarantor, as distinct from a surety, bound himself to pay only if the principal could not pay; the guarantor was an insurer of the principal’s solvency rather than an insurer of the debt. Consequently, Fidelity & Surety Company of the Philippine Islands could not be compelled to pay until Hospicio de San Jose established that Machetti was unable to pay. The Court explained that such inability must be demonstrated by proper means, for example by a return of execution unsatisfied or other conclusive proof, and that the mere declaration of insolvency under the statutory insolvency proceedings did not suffice because the extent of inability to pay was not determined until final liquidation of the insolvent’s estate. The Court further noted that even under Civil Code, art. 1825, a surety could not be held until the debt was liquidated, and that the guarantor’s position was at least as strong.

R

Case Syllabus (G.R. No. L-16666)

Parties and Procedural Posture

Romulo Machetti, Plaintiff and Appellee, sued for the unpaid balance of a construction contract.
Hospicio de San Jose, Defendant and Appellee, defended the action and filed a counterclaim for damages.
Fidelity & Surety Company of the Philippine Islands, Defendant and Appellant, executed a written guaranty appearing on the construction contract.
The judgment appealed is the judgment of the Court of First Instance against Fidelity & Surety Company of the Philippine Islands for P12,800.

Key Facts

Romulo Machetti entered into a written contract dated July 17, 1916, to construct a building for Hospicio de San Jose for a contract price of P64,000.
An endorsement in English dated July 15, 1916, by Fidelity & Surety Company of the Philippine Islands stated, "For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract."
Payments were made on the architects' recommendations until a balance of P4,978.08 remained unpaid.
The Hospicio de San Jose later found defects and partial noncompliance with specifications and refused to pay the remaining balance.
Romulo Machetti filed suit on May 28, 1917, and Hospicio de San Jose filed an answer and a counterclaim on January 28, 1918, demanding P71,350 in damages.

Contract Terms

The guaranty endorsement was written in English and expressly used the term "guarantee" or "guaranty."
The guaranty covered an amount of P12,800 and was signed by Fidelity & Surety Company of the Philippine Islands and Otto Vorster as Vice-President.
The guaranty was executed as a separate, collateral undertaking appended to the construction contract.
The Court treated the instrument as a guaranty distinct from a fianza or ordinary suretyship.

Procedural History

After issue was joined, Machetti was declared insolvent on February 27, 1918.
Proceedings in the action were suspended on March 4, 1918, under section 60 of the Insolvency Law, Act No. 1956.
Hospicio de San Jose moved on January 29, 1919, to make Fidelity & Surety Company a cross-defendant and to proceed against it while suspending proceedings as to Machetti.
The motion was granted and Hospicio de San Jose filed a complaint against Fidelity & Surety Company on February 7, 1920, seeking judgment for P12,800.
The Court of First Instance entered judgment against Fidelity & Surety Company for P12,800, and the company appealed.

Issues

Whether the trial court could