GR 16666; (April, 1922) (Digest)
G.R. No. L-16666; April 10, 1922
ROMULO MACHETTI, plaintiff-appellee, vs. HOSPICIO DE SAN JOSE, defendant-appellee, and FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant
FACTS
Romulo Machetti contracted to construct a building for Hospicio de San Jose. The contract required Machetti to obtain a “guarantee” from the Fidelity and Surety Company. The company endorsed the contract, stating: “For value received we hereby guarantee compliance with the terms and conditions as outlined in the above contract.” Machetti completed the building, but Hospicio de San Jose found defects and non-compliance with specifications. After Machetti was paid most of the contract price, Hospicio filed a counterclaim for damages. Machetti was later declared insolvent, and the proceedings against him were suspended. The trial court allowed Hospicio to proceed directly against the Fidelity and Surety Company, which was held liable for P12,800. The surety company appealed.
ISSUE
Whether the Fidelity and Surety Company, as a guarantor under its contract, can be held directly and immediately liable to Hospicio de San Jose without first exhausting all remedies against the principal debtor, Romulo Machetti.
RULING
No. The Supreme Court reversed the trial court’s judgment. The contract executed by the Fidelity and Surety Company was a contract of guaranty, not suretyship. A guarantor only binds himself to pay if the principal cannot pay (insurer of solvency), whereas a surety undertakes to pay if the principal does not pay (insurer of the debt). The company’s liability as a guarantor is conditional upon the principal debtor’s inability to pay. Machetti’s declaration of insolvency did not conclusively prove his inability to pay, as the final liquidation of his estate was pending. Therefore, the guarantor could not be compelled to pay until it was shown that Machetti was unable to pay, such as by the return of an unsatisfied execution. The case was dismissed without prejudice to Hospicio’s right to proceed after exhausting remedies against Machetti.
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