G.R. No. 167962

September 19, 2008


FACTS: The Commissioner of Internal Revenue (CIR) issued against Antam a pre-assessment notice for deficiency VAT, Documentary Stamp Tax (DST), and minimum corporate income tax (MCIT) for taxable year 1998.

The respondent issued Assessment Notices with corresponding Demand Letters for petitioner’s (a) deficiency VAT (b) deficiency MCIT (c) deficiency DST and (d) compromise penalties, all for the taxable year 1998.

Prior to the issuance of the above Assessment Notices, petitioner partially paid for the MCIT due.

Petitioner filed its written protest with the BIR. Due to the inaction of the BIR, Antam went up, on petition for review, to the CTA.

The CTA held that Antam is liable for VAT, deficiency interest for MCIT, the compromise penalties are cancelled, but Antam is not liable for DST, saying that pursuant to Section 3 of P.D. 114,a pawn ticket is neither security nor a printed evidence of indebtedness. Consequently, it cannot be considered as a document subject to DST under Section 195 of the NIRC. However, for failure to present proof of payment of tax, Antam was held liable for DST on subscribed capital stock.

Both parties filed their respective MRs which were subsequently denied by the CTA.

The CIR filed with the CA a petition for partial review to assail the cancellation by the CTA of deficiency DST on pawn tickets. (Antam filed as well)

In its Decision, the CA ruled that pawn tickets are subject to DST. It contended that a pawn ticket is an evidence of the contract of pledge and thus subject to DST pursuant to Section 195 of the NIRC. Antam, on the other hand, argued that for a document to be taxable under Section 195 of the NIRC, the document must show on its face the existence of a debt.

The CA agreed with the dissenting opinion of a CTA Justice that the pawn ticket is the logical document evidencing a contract of pledge and thus subject to DST. The CA explained that the DST provided under Section 173 of the NIRC is levied on the documents but in respect to the transaction so had or accomplished. In general, documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments. Examples of such privileges include entering into a contract of pledge.

The CA ratiocinated that although P.D. No. 114 defines a pawn ticket as neither a security nor printed evidence of indebtedness, the law also acknowledged that pawnshops enter into a contract of pledge.

Dissatisfied with the decision of the CA, Antam is now before Us with a petition under Rule 45.

ISSUE: ARE pawn tickets subject to documentary stamp tax?


HELD: the appealed decision is affirmed with modifications


YES; Section 195 of the NIRC imposes, among others, a DST on pledge of personal property made as a security for the payment of a sum of money.
A pledge may be defined as an accessory, real, and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or third person movable property as security for the performance of the principal obligation, upon fulfillment of which the thing pledged with all its accessions and accessories shall be returned to the debtor or third person.


A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. In general, documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments




At the time of every loan or pledge, the pawnbroker or the pawnshop is required to deliver to each person pawning or pledging a ticket signed by the pawnbroker containing, among others: (1) the amount of the loan; (2) the date the loan was granted; (3) rate of interest; and (4) the name and residence of the pawnee. Considering that the pawn ticket issued by the pawnshop should contain the foregoing, the pawn ticket is evidently a proof of a contract of pledge. We agree with petitioner that the law does not consider the pawn ticket as a security nor a printed evidence of indebtedness. However, what is subject to DST is not the ticket itself but the privilege of entering into a contract of pledge. For purposes of Section 195, pawnshop tickets need not be an evidence of indebtedness nor a debt instrument because it taxes the same as a pledge instrument

For purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshop’s obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioner’s assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket.

Also. Section 199 of the NIRC enumerated certain documents which are not subject to stamp tax; but a pawnshop ticket is not one of them.



G.R. No. 174134

July 30, 2008

FACTS: In a Pre-assessment Notice, petitioner was informed by the BIR that it has an existing tax deficiency on its VAT and Documentary Stamp Tax (DST) liabilities for the year 2000. Petitioner protested the assessment for lack of legal and factual bases.

Petitioner subsequently received a Formal Assessment Notice, directing payment of VAT deficiency and DST deficiency, inclusive of surcharge and interest.  Petitioner filed a protest, which was denied by the Acting Regional Director.

Petitioner then filed a petition for review with the CTA, which upheld the deficiency assessment.  Petitioner filed an MR which was denied.

Petitioner appealed to the CTA En Banc which denied the Petition for Review. Petitioner sought reconsideration but this was denied by the CTA.. Hence, the present petition for review under Rule 45 of the ROC.

The core of petitioner’s argument is that it is not a lending investor within the purview of Section 108(A) of the NIRC, as amended, and therefore not subject to VAT.  Petitioner also contends that a pawn ticket is not subject to DST because it is not proof of the pledge transaction, and even assuming that it is so, still, it is not subject to tax since a DST is levied on the document issued and not on the transaction.

ISSUE: is petitioner in this case liable for:

  1. VAT
  2. DST


1. NO

The determination of petitioner’s tax liability depends on the tax treatment of a pawnshop business. It was the CTA’s view that the services rendered by pawnshops fall under the general definition of “sale or exchange of services” under Section 108(A) of the Tax Code of 1997.

The Court finds that pawnshops should have been treated as non-bank financial intermediaries from the very beginning, subject to the appropriate taxes provided by law.

At the time of the disputed assessment, that is, for the year 2000, pawnshops were not subject to 10% VAT under the general provision on “sale or exchange of services” as defined under Section 108(A) of the Tax Code of 1997. Instead, due to the specific nature of its business, pawnshops were then subject to 10% VAT under the category of non-bank financial intermediaries, as provided in the same Section 108(A), which reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.

(A) xx

The phrase “sale or exchange of services” means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including x x x services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies..xx

Coming now to the issue at hand – Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law, then petitioner is not liable for VAT during these tax years.  But with the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year.  And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the case may be.

  1. YES

Applying jurisprudence, it was ruled that the subject of DST is not limited to the document alone.  Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident thereto, is also subject to DST, thus –

xx..  the subject of a DST is not limited to the document embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto… xx

Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person

True, the law does not consider said ticket as an evidence of security or indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshop’s obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioner’s assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket.

Also,  Section 195 of the NIRC unqualifiedly subjects all pledges to DST. It states that “[o]n every x x x pledge x x x there shall be collected a documentary stamp tax x x x.” It is clear, categorical, and needs no further interpretation or construction.

In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioner’s nebulous claim that it is not subject to DST is without merit.



G.R. No. 172041

DECEMBER 18, 2008

FACTS:  Petitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the semi-conductor business. During the period material, petitioner Geronimo delos Reyes was its president and one Andrew delos Reyes its executive vice-president. On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for Gateway in favor of respondent Asianbank for Domestic Bills Purchased Line and the Omnibus Credit Line.

Later developments saw Asianbank extending to Gateway several export packing loans .This loan package was later consolidated with A Dollar Promissory Note (and secured by a chattel mortgage over Gateway’s equipment.

Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateway’s request, Asianbank extended the maturity dates of the loan several times. These extensions bore the conformity of three of Gateway’s officers, among them Andrew.

Gateway issued two Philippine Commercial International Bank checks as payment for its arrearages and but both checks were dishonored for insufficiency of funds. Asianbank’s demands for payment made upon Gateway and its sureties went unheeded. As of November 23, 1999, Gateway’s obligation to Asianbank, inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.

Thus Asianbank filed with the RTC in Makati City a complaint for a sum of money against Gateway, Geronimo, and Andrew.

In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described the steps it had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts toward recovery.

Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering the Domestic Bills Purchased Line and the Omnibus Credit Line did NOT include the Dollar Promissory Note, the payment of which was extended several times without his consent.

Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his signature on it, was signed without his wife’s consent and should, thus, be considered as a mere continuing offer. Like Andrew, Geronimo argued that he ought to be relieved of his liability under the surety agreement inasmuch as he too never consented to the repeated loan maturity date extensions given by Asianbank to Gateway.

After due hearing, the RTC rendered judgment holding Gateway, Geronimo and Andrew jointly and severally liable to pay Asianbank.


Petitioners herein appealed to the CA. Following the filing of its and Geronimo’s joint appellants’ brief, Gateway filed on a petition for voluntary insolvency6 with the RTC in Imus, Cavite,  which was granted. CA affirmed the decision of the lower court. MR denied, hence this petition for review under Rule 45.


ISSUE: is Geronimo discharged from liability because of the insolvency of Gateway, the principal

HELD:  petition denied


Asianbank argues that the stay of the collection suit against Gateway (because its case is transferred to an insolvency court)  is without bearing on the liability of Geronimo as a surety. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway as a defense to evade liability.

Geronimo counters with the argument that his liability as a surety cannot be separated from Gateway’s liability. As surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency, suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should also be so relieved.

Geronimo’s above contention is untenable.

Suretyship is covered by Article 2047 of the Civil Code, which states:

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.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

The Court’s disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay the principal’s debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. x x xIn other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default x x x.

x x x x

A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal.Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone.

A Suretyship contract refers to an agreement whereunder one person, the surety, engages to be answerable for the debt, default, or miscarriage of another known as the principal. Geronimo’s position that a surety cannot be made to pay when the principal is unable to pay is clearly specious and must be rejected.

Bitanga vs. Pyramid

Bitanga vs. Pyramid Const.

G.R. No. 173526

August 28, 2008

FACTS: Pyramid filed with the RTC a Complaint for specific performance and damages with application for the issuance of a writ of preliminary attachment against the petitioner and wife Marilyn.

Respondent alleged in its Complaint that, it entered into an agreement with Macrogen Realty, of which Bitanga is the President, to construct for the latter the Shoppers Gold Building located in Parañaque City. Respondent commenced civil, structural, and architectural works on the construction project. However, Macrogen failed to settle respondent’s progress billings. Petitioner, through his representatives and agents, assured respondent that the outstanding account of Macrogen would be paid and relying on the assurances made by petitioner, respondent continued the construction project.

Later, respondent suspended work on the construction project since the conditions that it imposed for the continuation thereof, including payment of unsettled accounts, had not been complied with by Macrogen. Respondent instituted with the Construction Industry Arbitration Commission (CIAC) a case for arbitration against Macrogen Realty seeking payment by the latter of its unpaid billings and project costs. Before the arbitration case could be set for trial, Pyramid and Macrogen entered into a Compromise Agreement, with petitioner acting as signatory for and in behalf of Macrogen Realty.

Under the Compromise Agreement, Macrogen Realty agreed to pay respondent the total amount of P6,000,000.00 by installments. Petitioner guaranteed the obligations of Macrogen Realty under the Compromise Agreement by executing a Contract of Guaranty in favor of respondent, by virtue of which he irrevocably and unconditionally guaranteed the full and complete payment of the principal amount of liability of Macrogen. Upon joint motion of respondent and Macrogen Realty, the CIAC approved the Compromise Agreement.

Macrogen Realty failed and refused to pay all the monthly installments agreed upon in the Compromise Agreement. Hence respondent moved for the issuance of a writ of execution against Macrogen, which CIAC granted.

The sheriff filed a return stating that he was unable to locate any property of Macrogen Realty, except its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch.

Respondent then made, a written demand on petitioner, as guarantor of Macrogen to pay the liability or to point out available properties of the Macrogen within the Philippines sufficient to cover the obligation guaranteed. It also made verbal demands on petitioner. Yet, respondent’s demands were left unheeded.

Petitioner filed with the RTC his Answer to respondent’s Complaint. As a special and affirmative defense, petitioner argued that the benefit of excussion was still available to him as a guarantor since he had set it up prior to any judgment against him. According to petitioner, respondent failed to exhaust all legal remedies to collect from Macrogen the amount due under the Compromise Agreement, considering that Macrogen Realty still had uncollected credits which were more than enough to pay for the same. Given these premise, petitioner could not be held liable as guarantor.

ISSUE: WON petitioner cam avail of the benefit of excussion


HELD: petition denied for lack of merit; CA affirmed;  Bitanga (alone; not including his wife who is not a party to the compromise agreement)  is liable as per Compromise Agreement or the contract of guaranty.




Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor. This is what is otherwise known as the benefit of excussion

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latter’s demand for payment from him, and point out to the creditor available property of the debtor within Philippine territory, sufficient to cover the amount of the debt


It must be stressed that despite having been served a demand letter at his office, petitioner still failed to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as required under Article 2060 of the Civil Code. Such failure on petitioner’s part forecloses his right to set up the defense of excussion.

Worthy of note as well is the Sheriff’s return stating that the only property of Macrogen Realty which he found was its deposit of P20,242.23 with the Planters Bank.

Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the defense of excussion. We quote:

Art. 2059. This excussion shall not take place:

x x x x

(5) If it may be presumed that an execution on the property of the principal debtor would not result in the satisfaction of the obligation.

As the Court of Appeals correctly ruled:

We find untenable the claim that the Bitanga cannot be compelled to pay Pyramid because the Macrogen Realty has allegedly sufficient assets. Reason: The said [petitioner] had not genuinely controverted the return made by Sheriff Bisnar, who affirmed that, after exerting diligent efforts, he was not able to locate any property belonging to the Macrogen Realty, except for a bank deposit with the Planter’s Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the guarantor arises when the insolvency or inability of the debtor to pay the amount of debt is proven by the return of the writ of execution that had not been unsatisfied

Delos Santos vs. Vibar

Delos Santos vs. Vibar

G.R. No. 150931

July 16, 2008


FACTS: De Leon borrowed P100k from Vibar. De Leon issued a promissory note and bound himself to pay the loan three months from date with a monthly interest rate. Delos Santos signed as a guarantor of de Leon’s loan.


Later, de Leon asked Vibar for another loan. Together with Delos Santos and Conte, de Leon went to Vibar’s house. After some discussion, they all agreed that the outstanding P100k loan together with the accrued interest would be deducted from the new loan of P500,000


de Leon signed a typewritten promissory note acknowledging the debt of P500k payable within 12 months. Then, Delos Santos signed as a witness under the phrase “signed in the presence of.” However, de Leon, in his own handwriting, inserted the word “guarantor” besides Delos Santos’s name, as Delos Santos nodded her head to what de Leon was doing. De Leon also added the phrase, “as security for this loan this TCT No. T-47375, Registry of Baguio City, is being submitted by way of mortgage.”


On maturity date, de Leon failed to pay any of the monthly installments. Vibar made several verbal and written demands on de Leon for payment but to no avail asDe Leon failed to respond. Vibar’s counsel again sent a demand letter not only to de Leon as principal debtor, but also to delos Santos.delos Santos was being made to answer for de Leon’s debt as the latter’s guarantor. delos Santos then remitted to Vibar P15k to pay one month’s interest on the loan. However, this was the only payment Delos Santos made to Vibar as Delos Santos claimed she had no money to pay the full amount of the loan


Vibar filed an action for recovery of money with the RTC, which although ruled that De Leon is liable, Delos Santos is not a guarantor. The trial court ruled that there was no express consent given by Delos Santos binding her as guarantor.


However, Ca ruled that Delos santos is guarantor of De Leon’s loan. Delos Santos filed an MR which was denied. Hence this petition for review on certiorari.


ISSUE: WON Delos Santos is liable as guarantor of de Leon’s loan from Vibar

HELD: petition denied




We are convinced that the insertion was made with the express consent of Delos Santos. Delos Santos’s act of nodding her head showed her consent to be a guarantor. Also, Vibar would not have extended a loan to de Leon without the representations of Delos Santos. Also, Delos Santos acknowledged her liability as guarantor but simply claimed that she had no money to pay Vibar. In fact, Delos Santos made an initial payment of P15K as partial compliance of her obligation as guarantor. This only shows that Delos Santos never denied her liability to Vibar as guarantor until this case was filed in court. Lastly, Delos Santos wrote a letter to the RD of Baguio City inquiring on the status of the property mentioned in the promissory note as a mortgage security for de Leon’s loan. Here, Delos Santos clearly stated that she “appears to be a guarantor” in the promissory note. This serves as a written admission that Delos Santos knew she was a guarantor. During the trial, Delos Santos did not impugn the letter or its contents.

Further, It is axiomatic that the written word “guarantor” prevails over the typewritten word “witness.” In case of conflict, the written word prevails over the printed word. Section 15 of Rule 130 provides:


Sec. 15. Written words control printed. – When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent, the former controls the latter.


We agree with CA that estoppel in pais arose in this case. estoppel is a doctrine that prevents a person from adopting an inconsistent position, attitude, or action if it will result in injury to anotherOne who, by his acts, representations or admissions, or by his own silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, can no longer deny the existence of such fact as it will prejudice the latter


AUTOCORP and Rodriguez vs. ISAC and BOC

G.R. No. 166662

June 27, 2008

FACTS: Autocorp Group, represented by its President, Rodriguez, secured an ordinary re-export bond from private respondent Intra Strata Assurance Corporation (ISAC) in favor of public Bureau of Customs (BOC), to guarantee the re-export of 2 units of car (at 2 different dates) and/or to pay the taxes and duties thereon. Petitioners executed and signed two Indemnity Agreements with identical stipulations in favor of ISAC, agreeing to act as surety of the subject bonds

In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking with the BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties due thereon. In turn, petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur on the said bonds

Autocorp failed to re-export the items guaranteed by the bonds and/or liquidate the entries or cancel the bonds, and pay the taxes and duties pertaining to the said items, despite repeated demands made by the BOC, as well as by ISAC. By reason thereof, the BOC considered the two bonds forfeited.

Failing to secure from petitioners the payment of the face value of the two bonds, ISAC filed with the RTC an action against petitioners to recover a sum of money plus AF. ISAC impleaded the BOC “as a necessary party plaintiff in order that the reward of money or judgment shall be adjudged unto the said necessary plaintiff.”

Petitioners filed a MTD, which was denied. RTC ordered Autocorp to pay ISAC and/or BOC the face value of the subject bonds plus AF. Autocorp’s MR was denied. CA affirmed the trial court’s decision. MR was denied. Hence this Petition for Review on Certiorari

ISSUE: WON these bonds are now due and demandable, as there is yet no actual forfeiture of the bonds, but merely a recommendation of forfeiture, for no writ of execution has been issued against such bonds, therefore the case was prematurely filed by ISAC




The Indemnity Agreements give ISAC the right to recover from petitioners the face value of the subject bonds plus attorney’s fees at the time ISAC becomes liable on the said bonds to the BOC, (specifically to re-export the imported vehicles within the period of six months from their date of entry) regardless of whether the BOC had actually forfeited the bonds, demanded payment thereof and/or received such payment. It must be pointed out that the Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC “whether or not payment has actually been made by the [ISAC]” and ISAC may proceed against petitioners by court action or otherwise “even prior to making payment to the [BOC] which may hereafter be done by [ISAC].”

Article 2071 of the Civil Code provides:

Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor:

(1) When he is sued for the payment;

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired;

(4) When the debt has become demandable, by reason of the expiration of the period for payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years;

(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.


A demand is only necessary in order to put an obligor in a due and demandable obligation in delay, which in turn is for the purpose of making the obligor liable for interests or damages for the period of delay. Thus, unless stipulated otherwise, an extrajudicial demand is not required before a judicial demand, i.e., filing a civil case for collection, can be resorted to



G.R. No. 157309

March 28, 2008

FACTS:  The case arose out of a business transaction for the sale of dried sea cucumber for export to South Korea between Wilderness Trading (of Velasquez), as seller, and Goldwell Trading of Pusan, South Korea, as buyer. To facilitate payment of the products, Goldwell Trading opened a letter of credit in favor of Wilderness Trading with the Bank of Seoul, Pusan, Korea.

Petitioner applied for credit accommodation with Solidbank for pre-shipment financing. The credit accommodation was granted. Petitioner was successful in his first two export transactions both drawn on the letter of credit. The third export shipment, however, yielded a different result. Petitioner submitted to Solidbank the necessary documents for his third shipment. Wanting to be paid the value of the shipment in advance, petitioner negotiated for a documentary sight draft to be drawn on the letter of credit, chargeable to the account of Bank of Seoul. The sight draft represented the value of the shipment.

As a condition for the issuance of the sight draft, petitioner executed a letter of undertaking in favor of respondent. Under the terms of the letter of undertaking, petitioner promised that the draft will be accepted and paid by Bank of Seoul according to its tenor. Petitioner also held himself liable if the sight draft was not accepted.

Respondent failed to collect on the sight draft as it was dishonored by non-acceptance by the Bank of Seoul. The reasons given for the dishonor were late shipment, forged inspection certificate, and absence of countersignature of the negotiating bank on the inspection certificate.Goldwell Trading likewise issued a stop payment order on the sight draft because most of the bags of dried sea cucumber exported by petitioner contained soil.

Due to the dishonor of the sight draft and the stop payment order, respondent demanded restitution of the sum advanced. Petitioner failed to heed the demand.

Solidbank filed a complaint for recovery of sum of money with the RTC. In his answer, petitioner alleged that his liability under the sight draft was extinguished when respondent failed to protest its non-acceptance, as required under the Negotiable Instruments Law (NIL). He also alleged that the letter of undertaking is not binding because it is a superfluous document, and that he did not violate any of the provisions of the letter of credit.

RTC rendered judgment in favor of respondent. The CA affirmed with modification. hence this petition.

ISSUE: WON not petitioner should be held liable to respondent under the sight draft or the letter of undertaking.

Held: petition denied.

YES; letter of undertaking

Admittedly, petitioner was discharged from liability under the sight draft when respondent failed to protest it for non-acceptance by the Bank of Seoul. A sight draft made payable outside the Philippines is a foreign bill of exchange. When a foreign bill is dishonored by non-acceptance or non-payment, protest is necessary to hold the drawer and indorsers liable. Verily, respondent’s failure to protest the non-acceptance of the sight draft resulted in the discharge of petitioner from liability under the instrument.

Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that it is a separate contract from the sight draft. The liability of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment.

Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that he will reimburse the amount in case the sight draft is dishonored. The bank would certainly not have agreed to grant petitioner an advance export payment were it not for the letter of undertaking. The consideration for the letter of undertaking was petitioner’s promise to pay respondent the value of the sight draft if it was dishonored for any reason by the Bank of Seoul.


We cannot accept petitioner’s thesis that he is only a mere guarantor under the letter of credit. Petitioner cannot be both the primary debtor and the guarantor of his own debt. This is inconsistent with the very purpose of a guarantee which is for the creditor to proceed against a third person if the debtor defaults in his obligation. Certainly, to accept such an argument would make a mockery of commercial transactions.