The Unknowing Debtor:
A Discussion on the Liability of Co-makers

by Atty. Nelson I. Getigan

Co-makers beware. Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor?

This query was answered by the Supreme Court in the case of Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998.

Pursuant to a promissory note dated March 13, 1990, M.B. Lending Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with petitioner Estrella Palmares as co-maker, in the amount of P30,000.00 payable on or before May 12, 1990. On four occasions after the execution of the promissory note and even after the loan matured, the Azarraga spouses were able to pay a total of P16,300.00 only, thereby leaving a balance of P13,700.00.

Consequently, on the basis of petitioner's solidary liability under the promissory note, M.B. Lending Corporation filed a complaint against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency of the latter.

In her Answer, Palmares alleged, among others, that while she agrees to be liable on the note but only upon default of the principal debtor, and that respondent corporation acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the proceeds of the loan.

Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be submitted by them. The Regional Trial Court rendered judgment dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses Osmeña and Merlyn Azarraga who are primarily liable on the instrument.  This was based on the findings of the court, among others, that as co-maker, Palmares is only secondarily liable on the instrument.

The Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring petitioner Palmares liable to pay M.B. Lending Corporation the outstanding balance plus interests and penalty charges. The appellate court declared that Palmares is a surety since she bound herself to be jointly and severally or solidarily liable with the principal debtors, the Azarraga spouses, when she signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor corporation for the entire obligation.

Unsatisfied by the decision of the Court of Appeals, Palmares brought the case up to the Supreme Court.  The basis of Palmares' liability under the promissory note is expressed in this wise:

“ATTENTION TO CO-MAKERS: PLEASE READ WELL

I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the contents of this Promissory Note for Short-Term Loan:

That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the above principal maker of this note;

That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note subject to the same conditions above-contained.”

Palmares contended that the provisions of the second and third paragraph are conflicting in that while the second paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her liability as that of a guarantor.

In an attempt to reconcile the supposed conflict between the two provisions, Palmares averred that she could be held liable only as a guarantor for several reasons. First, the words "jointly and severally or solidarily liable" used in the second paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65-year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability. On the contrary, the wordings used in the third paragraph are easier to comprehend.

Second, the law looks upon the contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable despite the absence of any direct consideration received from either the principal obligor or the creditor.

Third, the promissory note is a contract of adhesion since it was prepared by M.B. Lending Corporation. The note was brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against M.B. Lending Corporation pursuant to Art. 1377 of the Civil Code. Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the promissory note to be that of a guarantor.

After a judicious evaluation of the arguments of the parties, the Supreme Court dismissed the petition for lack of merit. The Civil Code pertinently provides:

“Art. 2047. 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.”

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control.  In the case at bar, petitioner expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety.

Her pretension that the terms "jointly and severally or solidarily liable" contained in the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically opposed to her manifestation in the contract that she "fully understood the contents" of the promissory note and that she is "fully aware" of her solidary liability with the principal maker.

Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving allegations.

Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking.  The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of liability.

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; a guaranty, an undertaking that the debtor shall pay.  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. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so.  In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.

Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do not contain any other condition for the enforcement of the corporation's right against Palmares.

It has not been shown, either in the contract or the pleadings, that the corporation agreed to proceed against Palmares only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily responsible with him, and without reference to the solvency of the principal.

Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being incongruent with the judicial pronouncements adverted to above.

It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor, and his liability is immediate and direct.

Thus, it has been held that where a written agreement on the same sheet of paper with and immediately following the principal contract between the buyer and seller is executed simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were "sureties" jointly liable with the buyer.  A surety usually enters into the same obligation as that of his principal, and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation for both the principal and the surety.

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there having been no judicial or extrajudicial demand made by the corporation. Palmares has agreed that respondent corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same conditions expressed in the promissory note.

Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. As a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default.

Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.

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. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal.

Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound.

The moral of the story is that before you agree to become a co-maker, please think it over a hundred times. You might end up paying a loan whose proceeds did not in any way redound to your own benefit.