FACTS:

The petitioner, Allied Bank, Manila (ALLIED), purchased an export bill from G.G. Sportswear Manufacturing Corp. (GGS) in the amount of US $20,085. The bill was drawn under a letter of credit and covered a Men's Valvoline Training Suit in transit to West Germany. ALLIED credited GGS with the peso equivalent of the bill and demanded payment when the bill was dishonored. Respondents Nari Gidwani, Alcron International Ltd., and the spouses Leon and Leticia de Villa executed letters of guaranty and a continuing guaranty/comprehensive surety in favor of ALLIED. GGS and Gidwani claimed that they signed blank forms of the letters of guaranty and the surety, with the blanks being filled up by ALLIED after their signatures. The de Villa spouses claimed that they were not aware of the existence of the export bill. The trial court dismissed the complaint, but the Court of Appeals modified the ruling, holding GGS liable to reimburse ALLIED the peso equivalent of the export bill but exonerating the guarantors. The petitioner filed a motion for reconsideration, which was denied. The issue in this appeal revolves around whether the guarantors can be held liable under the letters of guaranty and the continuing guaranty/comprehensive surety, in the absence of protest on the dishonored bill.

ISSUES:

1. Whether respondents Nari Gidwani, Alcron International Ltd., and spouses Leon and Leticia de Villa can be held jointly and severally liable under the Letters of Guaranty and Continuing Guaranty/Comprehensive Surety, in the absence of protest on the bill in accordance with Section 152 of the Negotiable Instruments Law.

RULING:

1. The Court of Appeals held that respondent G.G. Sportswear Mfg. Corporation is obliged to reimburse petitioner Allied Bank the amount of P151,474.52, which was the equivalent of GGS's contracted obligation. However, the guarantors, respondents Nari Gidwani, Alcron International Ltd., and spouses Leon and Leticia de Villa, should be exonerated from their liabilities under the Letters of Guaranty. The Court ruled that a guaranty is an accessory contract, and the guarantors guaranteed the bill which had already been discharged.

PRINCIPLES:

• In a letter of credit transaction, once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents of title. The seller executes a draft and presents it together with the required documents to the issuing bank in order to get paid.

• A guaranty is an accessory contract, and the guarantor's liability is contingent upon the principal obligation being valid and enforceable. If the principal obligation has been discharged, the guarantor should also be released from liability.