In Aniceto G. Saludo, Jr. v. Security Bank Corporation, the Supreme Court affirmed the solidary liability of a surety for a renewed loan facility, despite the surety’s claim that the original suretyship had expired. The Court emphasized that a continuing suretyship covers renewals, extensions, and amendments of the principal debt, especially when the surety has expressly waived notice or consent to such changes. This decision reinforces the enforceability of comprehensive surety agreements in banking practices, ensuring that banks can rely on these agreements for ongoing credit accommodations. The ruling underscores the importance of understanding the full scope of a continuing suretyship before entering into such agreements, particularly regarding future obligations.

Renewed Credit, Unwavering Guarantee: When Does a Continuing Suretyship End?

This case revolves around a credit facility extended by Security Bank Corporation (SBC) to Booklight, Inc., and the extent of the surety’s, Aniceto G. Saludo, Jr., obligation under a Continuing Suretyship agreement. Booklight obtained an omnibus line credit facility from SBC, secured by a Continuing Suretyship with Saludo as the surety. After the initial credit facility expired and was renewed, Booklight defaulted on its payments. SBC then sought to hold Saludo jointly and severally liable for the outstanding debt under the renewed facility, leading to a legal battle over whether the Continuing Suretyship extended to the renewed credit line. The central legal question is whether the Continuing Suretyship agreement encompassed the renewed credit facility, thereby binding Saludo to the obligations arising from it.

The Regional Trial Court (RTC) ruled in favor of SBC, finding Saludo jointly and solidarily liable with Booklight. This decision was affirmed by the Court of Appeals (CA). The CA determined that the Continuing Suretyship agreement covered the renewed credit facility, and Saludo’s obligations persisted despite the renewal. Saludo then elevated the case to the Supreme Court, arguing that the initial credit facility’s expiration also terminated the Continuing Suretyship, and the renewal required his explicit consent. He further contended that the interest rate was unconscionable and the Continuing Suretyship was a contract of adhesion.

The Supreme Court, however, disagreed with Saludo’s arguments. The Court highlighted that the Continuing Suretyship explicitly covered renewals, extensions, and amendments of the credit accommodations. The agreement defined “Guaranteed Obligations” as encompassing all credit accommodations, including:

“Guaranteed Obligations” – the obligations of the Debtor arising from all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as defined herein below.

Building on this principle, the Court emphasized the nature of a continuing suretyship. It cited Totanes v. China Banking Corporation, noting that continuing surety agreements are commonplace in modern financial practice, allowing principal debtors to enter into a series of transactions without needing a separate surety contract for each accommodation. The Court also referenced Gateway Electronics Corporation v. Asianbank Corporation, affirming that a continuing suretyship covers current and future loans within the contract’s description.

Addressing Saludo’s argument that his consent was necessary for the renewal, the Court pointed to a waiver clause in the Continuing Suretyship:

The Surety hereby waives: x x x (v) notice or consent to any modification, amendment, renewal, extension or grace period granted by the Bank to the Debtor with respect to the Credit Instruments.

Because of this clause, Saludo had expressly waived his right to notice or consent to any renewals or extensions of the credit facility. He therefore remained bound by the agreement.

Saludo also argued that the renewal of the credit facility constituted a **novation** of the original agreement, thus extinguishing the suretyship. The Court dismissed this argument. A key point is that the principal contract was the Credit Agreement. This agreement covered all credit facilities extended by SBC to Booklight. The two loan facilities were merely availments under this overarching agreement. Therefore, the expiration and renewal of one facility did not novate the underlying Credit Agreement or the Continuing Suretyship designed to secure it.

The Court rejected Saludo’s claim that the Continuing Suretyship was a **contract of adhesion**, emphasizing that Saludo, as a lawyer, was presumed to understand the legal implications of the contract he signed. The Court stated that contracts of adhesion are not invalid per se. A party is free to reject such a contract entirely, and adhering to it implies consent.

Finally, Saludo challenged the imposed interest rate of 20.189% as unconscionable. The Court, however, found this rate permissible, citing cases such as Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd., where interest rates of 18% and 22% were upheld, and Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank, which validated a 24% interest rate. It is important to note that, generally, interest rates are subject to the agreement between the parties, unless proven unconscionable which the petitioner failed to do so in this case.

The Court therefore affirmed the Court of Appeals’ decision, holding Saludo solidarily liable for Booklight’s debt under the renewed credit facility.

FAQs

What is a continuing suretyship?	A continuing suretyship is an agreement where a surety guarantees obligations arising from a series of credit transactions between a debtor and a creditor, including renewals and extensions. This type of agreement eliminates the need for separate surety contracts for each transaction.
Can a surety be held liable for renewed loans under a continuing suretyship?	Yes, if the continuing suretyship agreement explicitly covers renewals, extensions, and amendments of the principal debt. The surety’s liability extends to these future obligations, especially if they have waived notice or consent to such changes.
What does it mean for a surety to waive notice or consent in a suretyship agreement?	When a surety waives notice or consent, they relinquish their right to be informed of or approve any modifications, renewals, or extensions of the credit facility. This waiver binds them to the altered terms without requiring their explicit agreement.
What is a contract of adhesion? Is it valid?	A contract of adhesion is a standard form contract prepared by one party and offered to the other on a “take it or leave it” basis. While not invalid per se, courts scrutinize these contracts for fairness, especially if the adhering party is in a weaker bargaining position.
What factors did the Supreme Court consider in determining the surety’s liability?	The Court considered the explicit terms of the Continuing Suretyship agreement, including provisions covering renewals and waivers of notice. It also considered the surety’s legal background, which implied a higher level of understanding of the contract’s implications.
Is a renewed credit facility considered a novation of the original agreement?	Not necessarily. If the renewal occurs under the same principal agreement (like a Credit Agreement), it does not constitute novation. The terms and conditions of the original agreement continue to apply, and the suretyship remains in effect.
What constitutes an unconscionable interest rate?	An unconscionable interest rate is one that is excessively high and shocks the conscience, often determined on a case-by-case basis considering prevailing market rates and the relative bargaining power of the parties. In this case, the Court did not find 20.189% to be unconscionable.
What is the effect of the waiver by the surety in the continuing suretyship agreement?	The waiver means that the bank does not need to notify the surety of any modifications or changes to the loan agreement.

The Supreme Court’s decision in Saludo v. Security Bank Corporation provides a clear framework for understanding the scope and enforceability of continuing suretyship agreements. It underscores the importance of carefully reviewing and understanding the terms of such agreements, especially clauses regarding renewals, extensions, and waivers. This case serves as a reminder that sureties can be held liable for future obligations if the agreement’s language is sufficiently broad and the surety has waived certain rights.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Aniceto G. Saludo, Jr. vs. Security Bank Corporation, G.R. No. 184041, October 13, 2010