Case Summary (G.R. No. L-9353)
Petitioner
Manila Surety and Fidelity Company, Inc., which posted a surety bond of P8,812 in favor of the Government to guarantee the partnership’s faithful performance and which executed an indemnity agreement with the partnership and certain individual partners.
Respondents
Batu Construction & Company (principal debtor/contractor) and individual partners Carlos N. Baquiran, Gonzalo P. Amboy and Andres Tunac, who either signed or disputed the applicability of the indemnity agreement and opposed issuance of ancillary relief sought by the surety.
Key Transactional Dates (as pleaded)
Indemnity agreement executed July 8, 1950; construction contract dated July 11, 1950; notice of annulment by the Director of Public Works dated May 30, 1951; suit by laborers filed November/December 1951. (Decision date is not included here per instruction; the applicable constitutional framework is specified below.)
Applicable Law and Constitutional Framework
Primary legal provisions invoked and construed include the New Civil Code provisions on guaranty and suretyship, particularly articles cited by the court (article 2047 and article 2071, and related provisions such as article 2048 and article 1933 as referenced). The applicable constitutional context is the pre-1987 constitutional regime (the 1935 Constitution), consistent with the time of the decision.
Procedural Posture and Relief Sought
The surety instituted a verified complaint in the Court of First Instance seeking issuance of a writ of attachment against defendants’ properties, and asking, on the merits, that defendants be ordered to furnish sufficient security to protect the surety against any proceedings by the creditor (the Government) and against danger of insolvency of the principal debtors. The complaint asserted imminent insolvency and threatened disposition of assets by defendants. Defendants filed answers with denials, special defenses and, in the case of Tunac, a counterclaim alleging malice and damages.
Facts Material to Relief
Manila Surety furnished the surety bond for the contractor partnership and obtained an indemnity agreement from the partnership and certain partners obligating them to indemnify the surety for losses, costs and attorney’s fees; the Government annulled the construction contract because of unsatisfactory progress and warned the surety it would hold the latter liable for the excess cost to complete the bridge; laborers filed a separate suit against the partnership and the surety to collect unpaid wages; the surety alleged imminent insolvency and sought prejudgment attachment and, alternatively, security to protect it from the laborers’ proceedings and from potential insolvency of the principals.
Trial Court Rulings
At trial, after plaintiff rested, the court dismissed the complaint on the ground that the remedy under the last paragraph of article 2071 of the New Civil Code could be invoked by a guarantor but not by a surety. The trial court therefore denied the surety’s prayer for security and dissolved the writ of attachment. Subsequent proceedings on motions for damages led to an award to defendant Amboy of interest on P35 garnished by the writ; other damage claims by defendants were denied. The surety appealed the dismissal; the surety also appealed the later order dissolving the writ and damages ruling.
Legal Issue Presented
Whether the last paragraph of article 2071 of the New Civil Code — which permits a guarantor, when sued by the creditor, to proceed against the principal debtor to obtain release from the guaranty or to demand security to protect him from proceedings by the creditor or danger of insolvency — is available to a surety, and whether the plaintiff’s claimed grounds for attachment or demand for security were established.
Parties’ Contentions (as presented)
- Plaintiff argued it was entitled under article 2071 to demand security or relief from the principal debtors when faced with proceedings connected to the obligation for which it became surety, and that the laborers’ suit and the Government’s annulment notice exposed it to liability.
- Defendants contended (among other defenses) that Tunac did not sign the indemnity agreement and thus was not bound; that the guaranty remedy in article 2071 applies only to guarantors and not to sureties; that insolvency was not shown; that liquidation between contractor and Bureau of Public Works had not yet taken place; and that the attachment was improvidently issued and caused damages.
Court’s Interpretation of Guarantor Versus Surety
The court analyzed the conceptual distinction: a guarantor insures the solvency of the debtor and answers only if the principal is unable to pay, while a surety insures the debt and may be sued independently without prior exhaustion of the principal’s assets. The court rejected a categorical rule excluding sureties from the protective remedy of article 2071. Noting that guaranty may be gratuitous or may be for consideration, and that suretyship is a more onerous commitment, the court held that the protective provisions authorizing a guarantor to seek release or security when sued must likewise be available to a surety. The statutory cross-references to solidarity or several obligations (article 2047’s reference to Section 4, Chapter 3, Title I, Book IV) do not remove suretyship from the remedial scope of article 2071.
Application of Article 2071’s Paragraphs to the Case
The court examined the enumerated paragraphs of article 2071 to determine whether any ground for the surety’s invocation existed:
- Paragraphs 2–7 (relating to proven insolvency, lapse of specified periods, demandability, ten-year lapse, reasonable grounds to fear absconding, imminent danger of insolvency, etc.) were found inapplicable because the pleaded facts did not establish those conditions.
- Paragraph 1 was applicable: article 2071(1) authorizes the guarantor (and, by the court’s holding, the surety) who is sued in connection with the obligation to 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.” The court construed the laborers’ suit for unpaid wages — a suit directly connected with the construction project for which the surety had posted bond — as a suit “for the collection of an amount for which the surety bond was put up” and therefore within the protection of article 2071(1).
Conclusions on Relief Sought and Attachment
Because article 2071(1) applies to sureties, the surety had a cause of action to demand that the principal debtors furnish security to protect it against proceedings arising from the obligation guaranteed by the bond. The trial court’s dismissal of the complaint on the
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Facts
- The plaintiff is Manila Surety and Fidelity Company, Inc., a domestic corporation engaged in the bonding business (hereafter "the Company").
- Batu Construction & Company is a partnership whose members include defendants Carlos N. Baquiran, Gonzalo P. Amboy, and Andres Tunac.
- On 11 July 1950 the partnership and the Government of the Philippines entered into a construction contract for the construction of the Bacarra (Eacarra/Bacarra—source alternates spelling) Bridge, Project PR-72(3), in Ilocos Norte.
- The Company posted a surety bond for P8,812 in favor of the Government to secure faithful performance of that construction contract.
- On 8 July 1950 the partnership and the individual defendants Carlos N. Baquiran and Gonzalo P. Amboy executed an indemnity contract in favor of the Company (Exhibit B) under which the defendants agreed to 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"; attorney's fees were stipulated at not less than fifteen percent of the total amount claimed in any action which the Company might institute (language as quoted in the complaint).
- The indemnity agreement stipulated that 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."
- On 30 May 1951 the Director of Public Works, with approval of the Secretary of Public Works and Communications, annulled the construction contract because of unsatisfactory progress and notified the Company that the Government would hold it liable for any amount incurred by the Government for completion of the bridge in excess of the contract price (Exhibit D/C — the complaint contains Annex C, and the trial court references Exhibit B and Exhibit C inconsistently in the source).
- A suit was filed by Ricardo Fernandez and 105 others in the Justice of the Peace Court of Laoag, Ilocos Norte, on (source dates vary: complaint states 19 December 1951, parenthetical notes "should be 23 November 1951") against the partnership, the individual partners and the Company for unpaid wages amounting to P5,960.10, lawful interests and costs (Exhibit E / civil case No. 198 of the Justice of the Peace Court of Laoag).
- The plaintiff alleged that the defendants were in imminent danger of becoming insolvent and were removing or disposing, or were about to remove or dispose, of properties with intent to defraud creditors, particularly the Company, and that the Company had no other sufficient security.
Plaintiff's Claims and Relief Sought
- The Company filed a verified complaint in the Court of First Instance of Manila seeking issuance and levy of a writ of attachment upon the properties of the defendants upon approval of a bond and on the strength of its verified allegations.
- The Company prayed that, after hearing, judgment be rendered ordering the defendants to deliver to the Company such sufficient security as shall protect the plaintiff from any proceedings by the creditors on the surety bond and from the danger of insolvency of the defendants, and for costs and other proper relief.
- Attached to the complaint were: a verification and affidavit of attachment; copy of the surety bond (Annex A); the indemnity contract (Annex B); and the letter of the Acting Director of Public Works dated 30 May 1951 (Annex C) notifying potential liability.
Defendants' Answers, Special Defenses and Counterclaims
- Andres Tunac:
- Admitted paragraphs 1–4 of the complaint, denied paragraphs 5–9.
- Alleged he never promised nor entered into any indemnity agreement with the Company and was not bound thereby.
- Asserted the partnership was fulfilling obligations, the Director had no authority to annul the contract on its own, the Justice of the Peace court lacked jurisdiction over the P5,960.10 claim, and defendants were not in imminent danger of insolvency nor disposing of property to defraud creditors.
- Affirmative defenses: signing of the indemnity agreement by Carlos N. Baquiran for and on behalf of the partnership did not bind the partnership and therefore did not bind Tunac; plaintiff has no cause of action against him; if partnership bound, he pleaded exhaustion of partnership property before proceeding against his property.
- Counterclaim: alleged malicious, bad-faith prosecution by plaintiff to annoy and damage his professional reputation and causing expenses; alleged false representations to secure writ of attachment; prayed for dismissal as to him and Batu Construction & Company, costs against plaintiff, P10,000 damages, and other relief.
- Gonzalo P. Amboy:
- Denied the allegations of the complaint except those deemed admitted in his special defenses.
- Alleged he had no property and was not in imminent danger of insolvency nor disposing of property.
- Stated no liquidation of expenses incurred in construction had been made to determine whether a balance of contract price existed to apply against unpaid wages; until liquidation his liability could not be fixed.
- Offered to pay unpaid wages if after proper liquidation a deficit existed.
- Moved at trial for dismissal on the ground that the remedy under the last paragraph of article 2071 (new Civil Code) may be availed of by a guarantor only and not by a surety.
- Carlos N. Baquiran:
- Admitted paragraphs 1–6 and 11; lacked knowledge to form belief as to paragraph 7 (the unpaid wages claim) because there had never been a liquidation between the defendants and the Bureau of Public Works; specifically denied paragraphs 8–10.
- Special defenses mirrored Amboy’s: no liquidation done; readiness to assume responsibility after determination and if balance of contract price insufficient.
- Prayed for dismissal, denial of writ of attachment, costs, and other equitable relief.
- Batu Construction & Company (partnership):
- Named defendant and described as principal on the surety bond; defenses were primarily presented by the individual partners.
Procedural History and Trial Court Proceedings
- Plaintiff presented evidence at the hearing; after plaintiff rested, defendant Gonzalo P. Amboy moved to dismiss arguing article 2071's last paragraph is available only to guarantors and not sureties.
- The trial court, acting on that motion, made factual findings:
- Confirmed execution on July 8, 1950 of a surety bond by Batu Construction & Company (principal) and the Company (surety) for P8,812 to insure faithful performance on Project PR-72(3).
- Confirmed execution on same date (July 8, 1950) of an indemnity agreement by Batu Construction & Company and defendants Carlos N. Baquiran and Gonzalo P. Amboy to protect the Company against loss as a consequence of the surety bond.
- Noted notice from Director of Public Works annulling the contract on or about May 30, 1951 and warning of charging to the surety any excess spent by government in continuation of work.
- Noted the complaint by laborers in project for unpaid wages filed against the partnership and the Company.
- The trial court dismissed the complaint, dismissing plaintiff’s action, on the basis that article 2071 (last paragraph) could be availed of by a guarantor only and not by a surety; costs were awarded against the plaintiff.
- The Company appealed to the Supreme Court raising only a question of law.
- After dismi