G.R. No. 39215 , September 1, 1989
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. UTILITY ASSURANCE & SURETY CO., INC., defendant-appellant.

FACTS

The Philippine National Bank (PNB) granted a loan of P25,000 to Procopio Caderao, doing business as Lanuza Lumber. The loan was secured by a promissory note and the proceeds of an assigned letter of credit. PNB additionally required a surety bond, which was executed by Utility Assurance & Surety Co., Inc. (Utassco). The bond’s text contained a recital stating it was to guarantee Lanuza Lumber’s compliance with the terms of the letter of credit. However, a crucial clause within the bond’s body stated: “It is a special provision of this undertaking to guarantee the full payment of a loan not to exceed TWENTY FIVE THOUSAND PESOS (P 25,000.00) that may be granted by the Philippine National Bank to Lanuza Lumber.” This bond was accompanied by an Endorsement (No. B-60-3) which reinforced the surety’s liability as joint and several and enforceable simultaneously with the principal’s.
Upon the loan’s maturity, Lanuza Lumber defaulted. PNB demanded payment from both the principal debtor and Utassco. After both failed to pay, PNB filed a collection suit against Utassco. In its defense, Utassco argued that its obligation under the surety bond was limited to securing Lanuza Lumber’s performance under the letter of credit, not the payment of the separate PNB loan. The trial court granted PNB’s motion for judgment on the pleadings, ruling in favor of the bank.

ISSUE

Whether the surety bond executed by Utassco guaranteed the payment of the P25,000 loan extended by PNB to Lanuza Lumber.

RULING

Yes, the Supreme Court affirmed the trial court’s decision, holding Utassco liable. The Court applied the fundamental rule in contract interpretation that the intention of the parties is to be gathered from the instrument as a whole. While the “Whereas” clauses in the bond described the context of the letter of credit, the operative or dispositive portion contained a clear and specific stipulation: “It is a special provision of this undertaking to guarantee the full payment of a loan not to exceed TWENTY FIVE THOUSAND PESOS (P 25,000.00) that may be granted by the Philippine National Bank to Lanuza Lumber.” This specific provision prevails over the general recitals. The bond, read in its entirety alongside the Endorsement which made the liability joint, several, and immediately enforceable, unequivocally showed the parties’ intent for the bond to secure the loan.
The Court rejected Utassco’s attempt to limit its liability to the letter of credit transaction, noting that such an interpretation would render the special loan guarantee clause meaningless. Furthermore, the Endorsement explicitly stated the surety’s liability was enforceable simultaneously with the principal’s, without need for exhaustion of the principal’s assets, and was limited to P25,000—the exact loan amount. The Court also upheld the award of interest from the date of judicial demand (filing of the complaint) and attorney’s fees, finding no abuse of discretion given Utassco’s refusal to honor its clear obligation under the bond. The appeal was dismissed for lack of merit.