THIRD DIVISION

[G.R. No. 74886. December 8, 1992.]

PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS INC. and
ANACLETO R. CHI, respondents.
SYLLABUS
1.
COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; LETTER OF CREDIT; CONSTRUED. A letter of credit is
defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor
drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter
of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in
return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment
fees mutually agreed upon.
2.
ID.; ID.; ID.; PRESENTMENT FOR ACCEPTANCE, NOT NECESSARY IN CASE AT BAR. The transaction in the
case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the
amount of $128,548.78 to cover the former's contract to purchase and import loom and textile machinery from
Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. The
drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment.
There was no need for acceptance as the issued drafts are sight drafts. They are, pursuant to Section 7 of the
Negotiable Instruments Law (NIL), payable on demand. Presentment for acceptance is defined as the production of
a bill of exchange to a drawee for acceptance. Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit
issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit
are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported
machinery and the petitioner had fully paid for it. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).
3.
ID.; ID.; ACCEPTANCE OF A BILL, EXPLAINED. The acceptance of a bill is the signification by the drawee
of his assent to the order of the drawer; this may be done in writing by the drawee in the bill itself, or in a separate
instrument.
4.
ID.; TRUST RECEIPTS LAW (P.D. 115), TRUST RECEIPT TRANSACTION, DEFINED. Under P.D. No. 115,
otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is
defined as "any transaction by and between a person referred to in this Decree as the entruster, and another
person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or
security interests over certain specified goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a signed document called the trust
receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for
the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the
trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any
one of the following: . . ."

5.
ID.; ID.; VIOLATIONS THEREOF; PENDENCY OF CRIMINAL ACTION, NOT A LEGAL OBSTACLE TO A SEPARATE
CIVIL ACTION. Although petitioner commenced a criminal action for the violation of the Trust Receipts Law, no
legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a separate civil action.
Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of the sale of
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or
as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed
of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article 315, paragraph 1(b) of the Revised Penal Code. Under Article 33 of the Civil Code, a civil action
for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases
of defamation, fraud and physical injuries. Estafa falls under fraud.
6.
ID.; ID.; ID.; PENALTY WHEN VIOLATION COMMITTED BY JURIDICAL ENTITIES. A close examination of
Sec. 13 of P.D. No. 115 reveals that the penalty referred to therein which shall be imposed upon the directors,
officers, employees or other officials or persons of the corporation, partnership, association or other judicial utility
is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of
the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical
entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from
the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the
criminal offense."
7.
CIVIL LAW; CONTRACTS; GUARANTY; VALIDITY THEREOF. The attestation by witnesses and the
acknowledgment before a notary public are not required by law to make a party liable on the instrument. The rule
is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential
requisites for their validity are present; however, when the law requires that a contract be in some form in order
that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and
indispensable. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law
merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified. While the acknowledgment of a surety before a notary public is required to make
the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear
in a public document.
8.
ID.; ID.; ID.; DEFENSE OF EXCUSSION; NOT A CONDITION SINE QUA NON FOR THE INSTITUTION OF ACTION
AGAINST GUARANTOR. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. However, excussion is not a condition sine
qua non for the institution of an action against the guarantor. In Southern Motors, Inc. vs. Barbosa (99 Phil. 263,
268 [1956]), this Court stated: "4. Although an ordinary personal guarantor not a mortgagor or pledgor may
demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after
the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case."
9.
ID.; ID.; CONTRACT OF ADHESION; CONSTRUCTION THEREOF. Any doubt as to the import or true intent
of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be
strictly construed against the party responsible for its preparation.

10.
REMEDIAL LAW; CIVIL PROCEDURE; PERMISSIVE JOINDER OF PARTIES; RATIONALE. There was then
nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q19312 before the trial court. Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows
it. This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the
joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties
unnecessary work, trouble and expense.
11.
CIVIL LAW; CONTRACTS; GUARANTY; GUARANTOR; LIABILITY IN CASE AT BAR. Chi's liability is limited to
the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to
the latter, he shall only be liable for those costs incurred after being judicially required to pay. Interest and
damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the
date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. In the instant case,
the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the
trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered, he
can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.
DECISION
DAVIDE, JR., J p:
Petitioner seeks to review and set aside the decision 1 of public respondent Intermediate Appellate Court (now
Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of
Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing
the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now
private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant
Anacleto R. Chi.
The facts which gave rise to the instant controversy are summarized by the public respondent as follows:
"On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd.
of Japan for the importation of textile machineries under a five-year deferred payment plan (Exhibit B, Plaintiff's
Folder of Exhibits, p. 2). To effect payment for said machineries, the defendant-appellant applied for a commercial
letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the
Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of
credit, drafts, were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid
by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two
of these drafts (Exhibits X and X-1, Ibid., pp. 65-66) were accepted by the defendant-appellant through its
president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76).

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendantappellant which accepted delivery of the same. To enable the defendant-appellant to take delivery of the
machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by
Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13).
At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and
conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant

fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take delivery of the textile machineries and installed the same at its factory site at
69 Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendantappellant's factory was leased by Yupangco Cotton Mills for an annual rental of P300,000.00 (Exhibit I, Ibid., p. 22).
The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in
the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p.
29)
The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid
and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said
trust receipt yielded no result. Hence, the present action for the collection of the principal amount of P956,384.95
was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of laches." 2
On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
"WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff
the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning
September 15, 1974 until fully paid. LLphil
Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by
defendant Philippine Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued, hence, the instant case is
premature.
Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant
Anacleto R. Chi the sum of P20,000.00 as attorney's fees.
With costs against defendant Philippine Rayon Mills, Inc.
SO ORDERED." 3
Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or
modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to
reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total
amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's
right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule
against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation,
liable under Section 13 of P.D. No 115 for the entire unpaid balance of the imported machines covered by the
bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a
guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of
the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles
2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability
had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay
the petitioner the amounts involved in the drafts (Exhibits "X", "X-1" to "X-11"); and (g) interpreting "sight" drafts
as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4

In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it
rules that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express
contract between the parties and there is a clear showing that the payment is justified. In the instant case, the
relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the
application for letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten
(10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon,
petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree
with the petitioner's claim that the drafts were sight drafts which did not require presentment for acceptance to
Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the
ten (10) drafts were not presented and accepted, no valid demand for payment can be made. LLphil
Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable
with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty
clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil
liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as
to whether Chi's signature on the trust receipt made the latter automatically liable thereon because the so-called
solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but
by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not
acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a
notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either
exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of
the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is
merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor
fails to comply with his obligation. 5
Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June
1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:
"I.
WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S
CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE
TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 OF THE NEW CIVIL CODE OF
THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT;
II.

WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C);

III.
WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE
THEREON AND TO WHAT EXTENT;
IV.
WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO, HAS HIS LIABILITY AS
SUCH ALREADY ATTACHED;
V.
WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON
RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115;
VI.
WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT
(EXH. C);

VII.
WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO
THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT;
VIII.
WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON
BEFORE THE LATTER BECOMES LIABLE TO PETITIONER." 7
In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment
thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also
required to submit their respective memoranda which they subsequently complied with.
As We see it, the issues may be reduced as follows:
1.
Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable
thereon;
2.

Whether Philippine Rayon is liable on the basis of the trust receipt;

3.
Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation
sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the
case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of
Philippine Rayon's properties. cdrep
Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2)
drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due
presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because
the same were not presented for acceptance. In short, both courts concluded that acceptance of the drafts by
Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this
proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial
letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and
import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan.
Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9
". . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under
obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically
drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine
Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of
the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial
charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of
Commercial Letter of Credit Annex "A"."
A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that
the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the
credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of
one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the
herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads:

"SECTION 143.
made:

When presentment for acceptance must be made. Presentment for acceptance must be

(a)
Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary
in order to fix the maturity of the instrument; or
(b)

Where the bill expressly stipulates that it shall be presented for acceptance; or

(c)

Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable."
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be
done in writing by the drawee in the bill itself, or in a separate instrument. 15
The parties herein agree, and the trial court explicitly ruled, that the subject drafts are sight drafts. Said the latter:
LLpr
". . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff
bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C &
D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been
paid forthwith. These two drafts were not paid and although Philippine Rayon Mills ought to have paid the same,
the fact remains that until now they are still unpaid." 16
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides:
"SECTION 7.

When payable on demand. An instrument is payable on demand

(a)

When so it is expressed to be payable on demand, or at sight, or on presentation; or

(b)

In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand." (Emphasis supplied)
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill
of exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the
public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however,
was not even necessary in the first place because the drafts which were eventually issued were sight drafts. And
even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not
Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance
is defined as the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public
respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for
Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit
issued by the petitioner. A different conclusion would violate the principle upon which commercial letter of credit
are founded because in such a case, both the beneficiary and the issuer. Nissho Company Ltd. and the petitioner,
respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported

machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described
in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus:
"Commercial letters of credit have come into general use in international sales transactions where much time
necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval
great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of
being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject
on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet
this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a
definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with
the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between
vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the
proper documents are presented."
The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that
Philippine Rayon was liable thereon. In People vs. Yu Chi Ho, 20 this Court explains the nature of a trust receipt by
quoting In re Dunlap Carpet Co., 21 thus:
"By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of
credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade
could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental
factor in the transaction, the banker's advance of money and credit, should receive the amplest protection.
Accordingly, in order to secure that the banker shall be repaid at the critical point that is, when the imported
goods finally reach the hands of the intended vendee the banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the
foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the
United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the
importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the
possession; but the security is the complete title vested originally in the bankers, and this characteristic of the
transaction has again and again been recognized and protected by the Courts. Of course, the title is at bottom a
security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only
after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract."
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts:
". . . [I]n a certain manner. . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law,
that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The
ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced
payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his representative or successor in interest."
Under P.D. No. 115, otherwise known as the Trust Receipts Law, which took effect on 29 January 1973, a trust
receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or
holds absolute title or security interests over certain specified goods, documents or instruments, releases the same
to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document
called the trust receipt wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with

the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any one of the following: . . . ."
It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use
and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank
that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as
trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants
have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or
for the proceeds of any lease; sale or other disposition of the same that they may have made, notwithstanding
demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized
from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery
to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt,
such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the
premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust
Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust receipt in a
separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the
proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they
were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa,
punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of
the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought
by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud. cdll
We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that
private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with
Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a
"solidary guaranty clause", reads:
"In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and
severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of
money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or
pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the
undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its
remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI" 26

Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and
severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary.
In holding otherwise, the public respondent ratiocinates as follows:
"With respect to the second argument, we have our misgivings as to whether the mere signature of defendantappellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted
that Exhibit "C-1" was prepared and printed by the plaintiff-appellant. A perusal of Exhibit "C-1" shows that it was
to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be
witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is
incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged
before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not
consummated.
But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still
defendant-appellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had
neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the
said defendant-appellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely
accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the
liability of the defendant-appellee arises only when the principal debtor fails to comply with his obligation." 27
Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of
Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion,
which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be
exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It,
however, described the guaranty as solidary between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of
the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the
undertaking between either one or both of them on the one hand and the petitioner on the other with respect to
the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it
can be enforced to its full extent against any one of them.
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be resolved against
the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and
prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is,
therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its
preparation. 29
Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was
effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged
before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it
was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless.
By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgment before a
notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be
obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity
are present; however, when the law requires that a contract be in some form in order that it may be valid or

enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect
to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it,
or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32
While the acknowledgment of a surety before a notary public is required to make the same a public document,
under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.
And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the
criminal proceedings against the latter for the violation of P.C. No. 115. Petitioner claims that because of the said
criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D.
No. 115. Public respondent rejected this claim because such civil liability presupposes prior conviction as can be
gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong.
The said section reads:
"SECTION 13.
Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred
and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense."
A close examination of the quoted provision reveals that it is the last sentence which provides for the correct
solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other
juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend
on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious:
corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these
entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause
"without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that
violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its
rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon.
The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent
Chi. The trial court based the dismissal, and the respondent Court its affirmance thereof, on the theory that Chi is
not liable on the trust receipt in any capacity either as surety or as guarantor because his signature at the
dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he
cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and
resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that
petitioner had done so. 33 Reliance is thus placed on Article 2058 of the Civil Code which provides:
"ARTICLE 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the debtor."
Simply stated, there is as yet no cause of action against Chi.

We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a
guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
"4.
Although an ordinary personal guarantor not a mortgagor or pledgor may demand the
aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall
be entitled, however, to a deferment of the execution of said judgment against him until after the properties of
the principal debtor shall have been exhausted to satisfy the obligation involved in the case."
There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil
Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive
joinder of parties explicitly allows it. It reads:
"SECTION 6.
Permissive joinder of parties. All persons in whom or against whom any right to relief in
respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly,
severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as
defendants in one complaint, where any gotten of law or fact common to all such plaintiffs or to all such
defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or
defendant from being embarrassed or put to expense in connection with any proceedings in which he may have no
interest."
This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the
joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties
unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof
including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being
judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be
paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be
allowed in appropriate cases. 37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon
since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All
things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent
Chi and condemning petitioner to pay him P20,000 00 as attorney's fees.
In the light of the foregoing, it would no longer be necessary to discuss the other issues raised by the petitioner.
WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March 1986 of the public
respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First
Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered:
1.
Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits
"X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C'), and ordering it to pay petitioner: (a) the
amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six
percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied
thereto by virtue of foreclosure of mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount
as attorney's fees; and (c) the costs.

2.
Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to
pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint
in Civil Case No Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of
P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is
returned unsatisfied.
Costs against private respondents.
SO ORDERED.
Gutierrez, Jr., Bidin, Romero and Melo, JJ ., concur.