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INTERNATIONAL FINANCE CORPORATION v. IMPERIAL TEXTILE MILLS

FACTS:

In December 1974, International Finance Corporation (IFC) and Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended a loan of US$7,000,000.00 to PPIC. Imperial Textile Mills, Inc. (ITM) and Grand Textile Manufacturing Corporation (Grandtex) also entered into a "Guarantee Agreement" with IFC, where ITM and Grandtex guaranteed PPIC's obligations under the loan agreement. PPIC made some payments but eventually defaulted on the loan. Despite demands for payment, PPIC failed to settle the outstanding balance. As a result, IFC applied for the extrajudicial foreclosure of PPIC's mortgaged properties but the proceeds were not enough to cover the outstanding loan. IFC then demanded ITM and Grandtex to pay the remaining balance as guarantors, but they also failed to pay. IFC filed a complaint in 1988 against PPIC and ITM to collect the outstanding balance, but the trial court relieved ITM of its obligation. On appeal, the Court of Appeals reversed the trial court's decision, holding that ITM remained liable as a guarantor if PPIC could not pay. The CA denied reconsideration, leading to this petition. The main issue is whether ITM is a surety and thus, jointly and severally liable with PPIC for the payment of the loan.

ISSUES:

  1. Whether ITM is liable as a surety or merely as a guarantor under the Guarantee Agreement.

  2. Whether there is any ambiguity in the provisions of the Guarantee Agreement.

  3. Whether or not Imperial Textile Mills, Inc. (ITM) is solidarily liable under the Guarantee Agreement.

  4. Whether or not there was a change in theory on appeal.

  5. Whether or not the Court can review factual findings in a Petition for Review.

RULING:

  1. ITM is liable as a surety under the Guarantee Agreement. The Agreement specifically stated that ITM was "jointly and severally" liable and a "primary obligor." These stipulations indicate that ITM's liability is that of a surety, not merely a guarantor.

  2. There is no ambiguity in the provisions of the Guarantee Agreement. The use of the word "guarantee" does not necessarily make the contract one of guaranty, as it can also describe the intention to be bound by a primary or independent obligation. The nature of the liability is determined by the specific language and terms of the contract.

  3. The Court held that ITM is surety under the Guarantee Agreement and is therefore solidarily liable with Philippine Polyamide Industrial Corporation (PPIC). The Court clarified that although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary, and absolute. ITM is considered on the same footing as the principal debtor and is therefore required to pay the amount adjudged in favor of International Finance Corporation (IFC).

  4. The Court ruled that there was no change in theory on appeal. ITM's arguments before the trial court and the Court of Appeals (CA) were related and intertwined, and both terms used (i.e., "primary obligor" and "surety") were premised on the same stipulations in the Agreement. There was no disparity between IFC's allegations in the trial court and those in the CA.

  5. The Court recognized an exception to the rule that only questions of law may be raised in a Petition for Review. The Court reviewed the factual findings because the assailed Decision was based on a misapprehension of facts, particularly relating to certain stipulations in the Guarantee Agreement which were undisputed by the parties.

PRINCIPLES:

  • A suretyship is created when a guarantor binds itself solidarily with the principal obligor.

  • The terms of a contract govern the obligations of the parties and the extent of the obligor's liability.

  • Contracts have the force of law between the parties, and their terms should be given their plain meaning unless there are circumstances or allegations that render such interpretation contrary to law, morals, good customs, public order, or public policy.

  • A surety contract is secondary to the principal obligation, but the liability of the surety is direct, primary, and absolute.

  • A surety is considered on the same footing as the principal debtor in relation to whatever is adjudged against the latter.

  • There is no change in theory on appeal if the arguments before the trial court and the appellate court are related and intertwined, and if the legal consequences of the terms used are the same.

  • Exceptions to the rule that only questions of law may be raised in a Petition for Review include cases where the assailed Decision is based on a misapprehension of facts.