November 17, 1958
REYES J.B.L., J.:
FACTS
1. 1948 – 1952, “Destilleria Lim Tuaco & Co., Inc.” had Dy Eng Giok as its provincial sales agent, with the duty of turning over the proceeds of his sales to the principal, the distillery company.
2. As of August 3, 1951, Dy Eng Giok had an outstanding running account in favor of his principal in the sum of P12,898.61.
3. On August 4, 1951, a surety bond was executed by Dy Eng Giok, as principal and Traders Insurance and Surety Co., as solidary guarantor, whereby they bound themselves, jointly and severally, in the sum of P10,000.00 in favor of the Destilleria Lim Tuaco & Co., Inc., under the following terms:
THE CONDITION OF THIS OBLIGATION Is SUCH THAT: Whereas, the above bounden principal has entered in to a contract with the aforementioned Company to act as their provincial sales agent and to receive goods or their products under the said Principal’s credit account. The proceeds of the sales are to be turned over to the Company.
WHEREAS, the contract requires the above bounden principal to give a good and sufficient bond in the above stated sum to secure the full and faithful fulfillment on its part of said contract; namely, to guarantee the full payment of the Principal’s obligation not to exceed the above stated sum.
NOW THEREFORE, if the above bounden principal shall in all respects duly and fully observe and perform all and singular the aforesaid covenants, conditions, and agreements to the true intent and meaning thereof, then this obligation shall be null and void; otherwise, to remain in full force and effect.
LIABILITY of surety on this bond will expire on August 4, 1952 and said bond will be cancelled TEN DAYS after its expiration, unless surety is notified in writing of any existing obligations thereunder or otherwise extended by the surety in writing.
4. On the same date, by Eng Giok, as principal, with Pedro Lopez Dee and Pedro Dy-Liacco, as counterbondsmen, subscribed an indemnity agreement in favor of Surety Company, whereby, in consideration of its surety bond, the three agreed to be obligated to the surety company —
INDEMNITY: — To indemnify the COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including counsel or attorney’s fees, which the Company may, at any time, sustain or incur, as a consequence of having executed the abovementioned bond, its renewals, extensions or substitutions, and said attorney’s fee shall not be less than (15%) per cent of the amount claimed by the Company in each action, the same to be due and payable, irrespective of whether the case is settled judicially or extrajudicially.
5. August 4, 1951 – August 3, 1951, Dy Eng Giok contracted obligations in favor of the Destilleria Lim Tuaco & Co., in the total amount of P41,449.93; and during the same period, he made remittances amounting to P41,864.49. The distillary company, however, applied said remittances first to Dy Eng Giok’s outstanding balance prior to August 4, 1951 (before the suretyship agreement was executed) in the sum of P12,898.61; and the balance of P28,965.88 to Dy’s obligations between August 4, 1951 and August 3, 1952. It then demanded payment of the remainder (P12,484.05) from the agent, and later, from the appellant Surety Company. The latter paid P10,000.00 (the maximum of its bond) on July 17, 1953,
6. Apparently, without questioning the demand; and then sought reimbursement from Dy Eng Giok and his counter guarantors, appellees herein. Upon their failure to pay, it began the present action to enforce collection.
7. After trial, the Court of First Instance of Manila absolved Pedro Lopez Dee and Pedro Dy-Liacco, on the theory that in so far as they are concerned, the payments made by Dy Eng Giok from August 4, 1951 to August 3, 1952, in the sum of P41,864.49, should have been applied to his obligations during that period, which were the ones covered by the surety bond and the counter-guaranty; and as these obligations only amounted to P41,449.93, so that the payments exceeded the obligations, the court concluded that the Surety Company incurred no liability and the counterbondsmen in turn had nothing to answer for.
8. Not satisfied with the decision, the Traders Insurance & Surety Company appealed to this Court on points of law.
ISSUE
Whether or not the remittances of Dy Eng Giok first be applied to the obligation first contracted by him and covered by the surety agreement.
HELD
Yes, the court ruled that in the absence of express stipulation, a guaranty or surety operates prospectively and not retroactively. It only secures the debts contracted after the guaranty takes effect. To apply the payment to the obligations contracted before the guaranty would make the surety answer for debts outside the guaranty. The surety agreement did not guarantee the payment of any outstanding balance due from the principal debtor but only he would turn out the sales proceeds to the Distileria and this he has done, since his remittances exceeded the value of the sales during the period of the guaranty.
Since Dy Eng Biok’s obligations prior to the guaranty were not covered, and absence of any express stipulation, any prior payment made should be applied to the debts that were guaranteed since they are to be regarded as the more onerous debts.
ART. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.
It is legally unimportant that the creditor should have applied the payment to the prior indebtedness. Where the debtor has not expressly elected any particular obligation to which the payment should be applied, the application by the creditor, in order to be valid and lawful, depends:
1. upon his expressing such application in the corresponding receipt; and
2. upon the debtor’s assent, shown by his acceptance of the receipt without protest. This is the import of paragraph 2 of Art. 1252 of the New Civil Code:
“If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract.”
Obligations and Contracts 