Philippine Export and Foreign Loan Guarantee Corporation v V.P. Eusebio Construction Inc.

Facts:

1. The State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq
awarded the construction of the Institute of Physical Therapy-Medical Rehabilitation Center in Iraq to
Ayjal Trading and Contracting Company for a total contract price of about $18M.

2. Spouses Santos, in behalf of 3-Plex International, Inc., a local contractor engaged in construction
business, entered into a joint venture agreement with Ayjal wherein the former undertook the
execution of the entire a project, while the latter would be entitled to a commission of 4%.

3. 3-Plex not accredited by the Philippine Overseas Construction Board (POCB) assigned and transferred
all its rights and interests to VPECI.

4. The SOB required the contractors to submit a performance bond representing 5% of the total contract
price, an advance payment bond representing 10% of the advance payment to be released upon signing
of the contract. To comply with these requirements 3-Plex and VPECI applied for a guarantee with
Philguarantee, a government financial institution empowered to issue guarantees for qualified Filipino
contractors.

5. But what SOB required was a guarantee from the Rafidain Bank of Baghdad so Rafidain Bank issued a
performance bond in favor of SOB on the condition that another foreign bank (not Phil Guarantee)
would issue the counter-guarantee. Hence, Al Ahli Bank of Kuwait was chosen to provide the counter
guarantee.

6.Afterwards, SOB and the joint venture of VPECI and Ayjal executed the service contract. Under the
contract, the joint venture would supply manpower and materials, SOB would refund 25% of the project
cost in Iraqi Dinar and 75% in US dollars at an exchange rate of 1 Dinar to $3.37.

7.The project was not completed. Upon seeing the impossibility of meeting the deadline, the joint
venture worked for the renewal or extension (12x) of the performance bond up to December 1986.
8. In October 1986, Al Ahli Bank sent a telex call demanding full payment of its performance bond
counter-guarantee. Upon receipt, VPECI requested Iraq Trade and Economic Development Minister
Fadhi Hussein to recall the telex for being in contravention of its mutual agreement that the penalty will
be held in abeyance until completion of the project. It also wrote SOB protesting the telex since the Iraqi
government lacks foreign exchange to pay VPECI and the non-compliance with the 75% billings in US
dollars.

9. Philguarantee received another telex from Al Ahli stating that it already paid to Rafidain Bank. The
Central Bank authorized the remittance to Al Ahli Bank representing the full payment of the
performance counter-guarantee for VPECI's project in Iraq.

10. Philguarantee sent letters to respondents demanding the full payment of the surety bond.
Respondents failed to pay so petitioner filed a civil case for collection of sum of money.

11. Trial Court ruling: Dismissed. Philguarantee had no valid cause of action against the respondents.
The joint venture incurred no delay in the execution of the project considering that SOB's violations of
the contract rendered impossible the performance of its undertaking.

12. CA: Affirmed.

Issue:

What law should be applied in determining whether or not contractor (joint venture) has defaulted?

Held:

The question of whether there is a breach of the agreement which includes default pertains to the
INTRINSIC validity of the contract.

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule followed
by most legal systems is that the intrinsic validity of a contract must be governed by lex contractus
(proper law of the contract). This may be the law voluntarily agreed upon by the parties (lex loci
voluntatis) or the law intended by them either expressly or implicitly (lex loci intentionis). The law
selected may be implied from factors such as substantial connection with the transaction, or the
nationality or domicile of the parties. Philippine courts adopt this: to allow the parties to select the law
applicable to their contract, SUBJECT to the limitation that it is not against the law, morals, public policy
of the forum and that the chosen law must bear a substantive relationship to the transaction.

In the case, the service contract between SOB and VPECI contains no express choice of law. The laws of
Iraq bear substantial connection to the transaction and one of the parties is the Iraqi government. The
place of performance is also in Iraq. Hence, the issue of whether VPECI defaulted may be determined by
the laws of Iraq.

BUT! Since foreign law was not properly pleaded or proved, processual presumption will apply.

According to Art 1169 of the Civil Code: In reciprocal obligations, neither party incurs in delay if the
other party does not comply or is not ready to comply in a proper manner what is incumbent upon him.

As found by the lower courts: the delay or non-completion of the project was caused by factors not
imputable to the Joint Venture, it was rather due to the persistent violations of SOB, particularly it's
failure to pay 75% of the accomplished work in US dollars. Hence, the joint venture does not incur in
delay if the other party(SOB) fails to perform the obligation incumbent upon him.

Escao v. Ortigas, Jr.

526 SCRA 26 (June 29, 2007)

Facts:

On April 28, 1980, Private Development Corporation of the Philippines (PDCP) entered into a loan
agreement with Falcon Minerals, Inc. (Falcon) amounting to $320,000.00 subject to terms and
conditions. [Nagpautang ang PDCP sa Falcon ng $320K]

On the same day, 3 stockholders-officers of Falcon: Ortigas Jr., George A. Scholey, and George T. Scholey
executed an Assumption of Solidary Liability to assume in [their] individual capacity, solidary liability
with [Falcon] for due and punctual payment of the loan contracted by Falcon with PDCP.
Two (2) separate guaranties were executed to guarantee payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and individual capacities. One guaranty was
executed by Escao, Silos, Silverio, Inductivo and Rodriguez.

Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Matti. Contracts
were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased
George T. Scholey assigned their shares of stock in Falcon to Escao, Silos and Matti. An Undertaking
dated June 11, 1982 was executed by the concerned parties, namely: with Escao, Silos and Matti as
SURETIES and Ortigas, Inductivo and Scholeys as OBLIGORS

Falcon eventually availed of the sum of $178,655.59 from the credit line extended by PDCP. It would
also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan.
However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel
mortgage, there remained a subsisting deficiency of Php 5,031,004.07 which falcon did not satisfy
despite demand.

Issue: Whether the obligation to repay is solidary, as contended by respondent and the lower courts, or
merely joint as argued by petitioners.

Held/Ruling:

In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among them, [t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity. Article 1210 supplies further caution against the broad interpretation of solidarity by
providing: The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility. These Civil Code provisions establish that in case of concurrence of
two or more creditors or of two or more debtors in one and the same obligation, and in the absence of
express and indubitable terms characterizing the obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is indeed
solidary in character to prove such fact with a preponderance of evidence.

Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one
who paid (i.e., the surety).[However, a significant distinction still lies between a joint and several debtor,
on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the
joint and several debtors or the surety alone to answer for the entirety of the principal debt. The
difference lies in the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor. In the case of joint and several debtors,
Article 1217 makes plain that the solidary debtor who effected the payment to the creditor may claim
from his co-debtors only the share which corresponds to each, with the interest for the payment already
made. Such solidary debtor will not be able to recover from the co-debtors the full amount already
paid to the creditor, because the right to recovery extends only to the proportional share of the other
co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In
contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who
does pay the creditor has the right to recover the full amount paid, and not just any proportional share,
from the principal debtor or debtors. Such right to full reimbursement falls within the other rights,
actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the
surety.

*Petitioners and Matti are jointly liable to Ortigas, Jr. in the amt. of P1.3M; Legal interest of 12% per
annum on P 1.3M computed from March 14, 1994. Assailed rulings are affirmed. Costs against
petitioners

Ong vs PCIB
Date: January 15, 2005
Petitioners: Spouses Alfredo and Susana Ong
Respondent: Philippine Commercial International Bank

Ponente: Puno

Facts: - In 1991, Baliwag Mahogany Corp needed additional capital for its business and applied
for various loans, amounting to a total of five million pesos, with the respondent bank. Alfredo
(President) and Susana Ong (Treasurer) acted as sureties for these loans and issued 3 promissory
notes for the purpose. It was stipulated in the notes that the bank may consider BMC in default
and demand payment of the remaining balance of the loan upon the levy, attachment or
garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a
state of suspension of payments. Thereafter, BMC filed a petition for rehabilitation and
suspension of payments with SEC after the creditors attached its properties. The bank then
sought the collection of the payment of the debt from the petitioners as sureties.
- On April 20, 1992, PCIB filed a case for collection of a sum of money against
petitioners-spouses. On October 13, 1992, a MOA was executed by BMC, the petitioners, and
the consortium of creditor banks of BMC (including PBIC). Petitioners then moved to dismiss
the complaint arguing that the MOA suspended any pending civil action against BMC. Hence,
the benefits of the MOA should also be extended to the petitioners as sureties. The trial court
denied the motion to dismiss. The CA affirmed the trial courts ruling that a creditor can proceed
against petitioners as surety independently of its right to proceed against BMC.

Issue: WON the suit against the spouses should be dismissed

Held: No

Ratio: - Reliance of petitioners on Articles 2063 and 2081 CC is misplaced as these provisions
refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners are not
guarantors but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of
a guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an
insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part
of the guarantor. It is only after the creditor has proceeded against the properties of the principal
debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any
unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit
of excussion is not available to the surety as he is principally liable for the payment of the debt.
As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor
will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation.
Thus, a creditor can go directly against the surety although the principal debtor is solvent and is
able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and
absolutely bound with the principal debtor for the payment of the debt and is deemed as an
original promissor and debtor from the beginning.
- Under the suretyship contract entered into by petitioners with the bank, the former
obligated themselves to be solidarily bound with BMC for the payment of its debts to the bank.
Under Article 1216 CC, the bank as creditor may proceed against petitioners as sureties despite
the execution of the MOA which provided for the suspension of payment and filing of collection
suits against BMC. The banks right to collect payment from the surety exists independently of
its right to proceed directly against the principal debtor. In fact, the bank may go against the
surety alone without prior demand for payment on the principal debtor.
- The provisions of the MOA regarding the suspension of payments by BMC and the
non-filing of collection suits by the creditor banks pertain only to the property of BMC. Firstly,
in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in
the petition with the SEC. Secondly, there is nothing in the MOA that involves the liabilities of
the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it
bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved
by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no
jurisdiction over the properties of BMCs officers or sureties.