Romulo Machetti plaintiff – appelle

Vs.

Hospicio de San Jose, defendant – appelle and

Fidelity & Surety Company of the Philippine Islands, defendant – appellant

Facts:

July 17, 1916 - Machetti under took to construct a building on

Calle Rosario in the city of Manila for the Hospicio de San Jose, the

contract price being P64,000.

This was guaranteed by Fidelity and Surety Company of the

Philippine Islands to the amount of P128,800

Machetti constructed the building and, as the work progressed,

payments were made to him from time to time upon the

recommendation of the architects, until the entire contract price,

with the exception of the sum of the P4,978.08, was paid.

Subsequently it was found that the work had not been carried out in

accordance with the specifications and standards required.

Payments were stopped. Hospicio refused to pay the balance of the

contract.

March 28, 1917 - Machetti demanded payment and brought this

action.

Febuary 27,1918 – Machetti was declared insolvent.

January 29, 1919, Hospicio de San Jose on filed a motion asking that

the Fidelity and Surety Company be made cross-defendant to the

exclusion of Machetti and that the proceedings be continued as to

said company, but still remain suspended as to Machetti. This motion

was granted.

February 7, 1920, the Hospicio filed a complaint against the Fidelity

and Surety Company asking for a judgment for P12,800 against the

company upon its guaranty.

After trial, the Court of First Instance rendered judgment against the

Fidelity and Surety Company for P12,800 in accordance with the

complaint.

CFI ruled against Fidelity and Surety Company.

Issue: WON case is an guaranty or a suretyship? -- GUARANTY WON Fidelity should pay on Machetti’s behalf? -- NO

Supreme Court Decisions

Escaño, Et Al. V. Ortigas, Jr., G.R. No. 151953, June 29, 2007

As provided in Article 2047, in a surety agreement the surety undertakes to be bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a principal contract. The argument rests solely on the solidary nature of the obligation of the surety under Article 2047.

Article 2047 of the Civil Code provides the statutory definition of a surety agreement, that “ By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.”

TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES  vs.ASIA PACES CORPORATION

A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.52 The fundamental reason therefor is that a contract of suretyship effectively binds the surety as a solidary debtor. This is provided under Article 2047 of the Civil Code which states:

E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS,A contract of surety is an  accessory promise by which a person

binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.[7] A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does not pay the debt.[8]

Strictly speaking, guaranty and surety are nearly  related, and many of the principles are common to both. However, under our civil law,  they  may be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal, or

by want of notice of the default of the principal, no matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from that supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its non-performance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the default of the principal.[9]

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of the debt, and he obligates himself to pay if the principal does not pay

Held:It is very true that notwithstanding the use of the words "guarantee" or "guaranty" circumstances may be shown which convert the contract into one of suretyship but such circumstances do not exist in the present case; On the contrary it appears that the distinguishing features of a contract of guaranty are present:(1) the contract is the guarantor's separate undertaking in which the principal does not join,(2) that its rests on a separate consideration moving from the principal and

(3) that although it is written in continuation of the contract for the construction of the building, it is a collateral undertaking separate and distinct from the latter

Now, while a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. Fidelity is therefore only bound to pay only in the event that its principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final liquidation of his estate.

CFI’s ruling is reversed.