This Supreme Court case clarifies that unless expressly stated, obligations involving multiple debtors are presumed to be joint, not solidary. This means each debtor is only responsible for their proportionate share of the debt. The court emphasized the importance of explicit language in contracts to establish solidary liability, protecting debtors from being held liable for the entire debt. This ruling provides a vital safeguard for individuals and businesses entering into agreements involving multiple parties, ensuring their obligations are clearly defined and limited to their agreed-upon share.

“Sureties” or Not? Decoding the Obligations in Falcon Minerals’ Loan Undertaking

This case revolves around a loan agreement between Private Development Corporation of the Philippines (PDCP) and Falcon Minerals, Inc. (Falcon). Several stockholders and officers of Falcon, including Rafael Ortigas, Jr., Salvador Escaño, and Mario M. Silos, executed various agreements related to this loan. Ortigas, along with two other officers, signed an Assumption of Solidary Liability, while Escaño and Silos executed separate guaranties. Years later, an Undertaking was created when Escaño, Silos, and another individual took control of Falcon, aiming to relieve Ortigas and others from their liabilities related to the PDCP loan. This Undertaking stipulated that Escaño and Silos would assume Ortigas’s guarantees to PDCP. The legal issue arose when Falcon defaulted on its loan payments, and PDCP sought to recover the deficiency from the guarantors, including Ortigas, Escaño, and Silos. Ortigas then sought reimbursement from Escaño and Silos based on the 1982 Undertaking.

The central question before the Supreme Court was whether Escaño and Silos were solidarily liable to Ortigas for the amount he paid to PDCP in a compromise agreement. The lower courts ruled that they were jointly and severally liable based on the 1982 Undertaking, which identified them as “SURETIES”. The Supreme Court, however, disagreed, clarifying the distinction between joint and solidary obligations under Philippine law. The Court emphasized that Article 1207 of the Civil Code states that there is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. In the absence of such express stipulation, the presumption is that the obligation is joint.

Article 1207 of the New Civil Code states in part that “[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.”

The Court noted that the 1982 Undertaking did not contain any express stipulation that Escaño and Silos agreed to bind themselves jointly and severally to Ortigas. Ortigas argued that the repeated use of the term “SURETIES” in the document indicated a solidary obligation. The Court acknowledged that under Article 2047 of the Civil Code, a surety binds themselves solidarily with the principal debtor. However, it clarified that for a suretyship to exist, there must be a principal debtor to whom the surety is bound.

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.

In this case, the Court found that the Undertaking did not establish such a relationship. There was no indication that Escaño and Silos were acting as sureties for a principal debtor in relation to Ortigas. The Court pointed out that there was no agreement among Escaño, Silos, and another individual indicating who would act as the principal debtor and who would act as surety. The use of the term “SURETIES” alone was insufficient to establish a solidary obligation in the absence of a clear principal-debtor relationship. Thus, the Supreme Court concluded that Escaño and Silos were only jointly liable to Ortigas.

The Court further addressed the issue of interest. The Regional Trial Court (RTC) had ordered that legal interest of 12% per annum be computed from February 28, 1994. The Supreme Court modified this, ruling that the interest should be computed from March 14, 1994, the date of judicial demand. This modification was based on the principle that interest accrues from the time of judicial or extrajudicial demand, according to the landmark ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.

Since what was constituted in the Undertaking consisted of a payment in a sum of money, the rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand.

The Court also upheld the award of attorney’s fees to Ortigas. It reasoned that the acts and omissions of Escaño and Silos compelled Ortigas to litigate with third persons and incur expenses to protect his interests, which falls under the exceptions provided in Article 2208 of the Civil Code.

FAQs

What was the key issue in this case?	The key issue was whether the petitioners were jointly or solidarily liable to the respondent based on a contract where they were referred to as “sureties.” The Court needed to determine if this designation automatically implied solidary liability.
What is the difference between joint and solidary liability?	In a joint obligation, each debtor is liable only for their proportionate share of the debt. In a solidary obligation, each debtor is liable for the entire debt, and the creditor can demand full payment from any one of them.
What does Article 1207 of the Civil Code say about solidary liability?	Article 1207 states that solidary liability exists only when the obligation expressly states it, or when the law or the nature of the obligation requires it. Otherwise, the obligation is presumed to be joint.
What is a surety agreement according to Article 2047 of the Civil Code?	A surety agreement is where a person binds themselves solidarily with the principal debtor to fulfill the obligation if the debtor fails. It requires a clear principal-debtor relationship.
Did the court find the petitioners to be sureties in this case?	No, the court found that despite being referred to as “sureties” in the Undertaking, there was no clear principal-debtor relationship established. Therefore, they were not considered sureties in the legal sense.
How did the court determine the type of liability in this case?	The court relied on Article 1207 of the Civil Code, which presumes joint liability unless the obligation expressly states solidarity or the law or nature of the obligation requires it.
Why was the interest computation modified by the Supreme Court?	The interest computation was modified to be reckoned from the date of judicial demand (when the Third-Party Complaint was filed), rather than the date the lower court had initially set.
What was the significance of the phrase “made to pay” in the Undertaking?	The court interpreted “made to pay” to include any extra-judicial settlement of an obligation, as the intent of the Undertaking was to relieve the obligors of their liabilities as soon as possible.

In summary, the Supreme Court clarified that the use of the term “sureties” in a contract does not automatically create a solidary obligation. The Court emphasized the importance of a clear principal-debtor relationship and the need for express stipulations to establish solidary liability. This ruling offers valuable guidance for interpreting contractual obligations and understanding the extent of liability among multiple debtors.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Escaño vs. Ortigas, G.R. No. 151953, June 29, 2007