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Republic of the Philippines December 1963 was executed by PAGRICO,

SUPREME COURT Pacific Copra Export Inc. (PACOCO), Jose K.


Manila Villanueva and Liu Tua Ben Mr. Villanueva
signed both as Manager of PAGRICO and in
FIRST DIVISION his personal and individual capacity; Mr. Liu
G.R. No. L-47369 June 30, 1987 signed both as President of PACOCO and in
his individual and personal capacity.
JOSEPH COCHINGYAN, JR. and JOSE K.
VILLANUEVA, petitioners, Under both indemnity agreements, the
vs. indemnitors bound themselves jointly and
R & B SURETY AND INSURANCE severally to R & B Surety to pay an annual
COMPANY, INC., respondent. premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set
forth in said SURETY BOND for a period
FELICIANO, J.: beginning ... until the same is CANCELLED
This case was certified to us by the Court of and/or DISCHARGED." The Indemnity
Appeals in its resolution dated 11 Agreements further provided:
November 1977 as one involving only (b) INDEMNITY: — TO indemnify the
questions of law and, therefore, falling SURETY COMPANY for any damage,
within the exclusive appellate jurisdiction of prejudice, loss, costs, payments,
this Court under Section 17, Republic Act advances and expenses of whatever
296, as amended. kind and nature, including [of]
In November 1963, Pacific Agricultural attorney's fees, which the
Suppliers, Inc. (PAGRICO) applied for and CORPORATION may, at any time,
was granted an increase in its line of credit become liable for, sustain or incur as
from P400,000.00 to P800,000.00 (the consequence of having executed the
"Principal Obligation"), with the Philippine above mentioned Bond, its renewals,
National Bank (PNB). To secure PNB's extensions or substitutions and said
approval, PAGRICO had to give a good and attorney's fees [shall] not be less
sufficient bond in the amount of than twenty [20%] per cent of the
P400,000.00, representing the increment in total amount claimed by the
its line of credit, to secure its faithful CORPORATION in each action, the
compliance with the terms and conditions same to be due, demandable and
under which its line of credit was increased. payable, irrespective of whether the
In compliance with this requirement, case is settled judicially or
PAGRICO submitted Surety Bond No. 4765, extrajudicially and whether the
issued by the respondent R & B Surety and amount has been actually paid or
Insurance Co., Inc. (R & B Surety") in the not;
specified amount in favor of the PNB. Under (c) MATURITY OF OUR OBLIGATIONS
the terms of the Surety Bond, PAGRICO and AS CONTRACTED HEREWITH: — The
R & B Surety bound themselves jointly and said indemnities will be paid to the
severally to comply with the "terms and CORPORATION as soon as demand is
conditions of the advance line [of credit] received from the Creditor or upon
established by the [PNB]." PNB had the receipt of Court order or as soon as it
right under the Surety Bond to proceed becomes liable to make payment of
directly against R & B Surety "without the any sum under the terms of the
necessity of first exhausting the assets" of above-mentioned Bond, its renewals,
the principal obligor, PAGRICO. The Surety extensions, modifications or
Bond also provided that R & B Surety's substitutions, whether the said sum
liability was not to be limited to the or sums or part thereof, have been
principal sum of P400,000.00, but would actually paid or not.
also include "accrued interest" on the said
We authorize the SURETY COMPANY,
amount "plus all expenses, charges or
to accept in any case and at its entire
other legal costs incident to collection of
discretion, from any of us, payments
the obligation [of R & B Surety]" under the
on account of the pending
Surety Bond.
obligations, and to grant extension to
In consideration of R & B Surety's issuance any of us, to liquidate said
of the Surety Bond, two Identical indemnity obligations, without necessity of
agreements were entered into with R & B previous knowledge of [or] consent
Surety: (a) one agreement dated 23 from the other obligors.
December 1963 was executed by the
xxx xxx xxx
Catholic Church Mart (CCM) and by
petitioner Joseph Cochingyan, Jr, the latter (e) INCONTESTABILITY OF PAYMENTS
signed not only as President of CCM but MADE BY THE COMPANY. — Any
also in his personal and individual capacity; payment or disbursement made by
and (b) another agreement dated 24 the SURETY COMPANY on account of
the above-mentioned Bonds, its Indemnity Agreement merely in order to
renewals, extensions or substitutions, make it appear that R & B Surety had
either in the belief that the SURETY complied with the requirements of the PNB
COMPANY was obligate[d] to make that credit lines be secured; (ii) was
such payment or in the belief that executed so that R & B Surety could show
said payment was necessary in order that it was complying with the regulations
to avoid greater losses or obligations of the Insurance Commission concerning
for which the SURETY COMPANY bonding companies; (iii) that R & B Surety
might be liable by virtue of the terms had assured him that the execution of the
of the above-mentioned Bond, its agreement was a mere formality and that
renewals, extensions or substitutions, he was to be considered a stranger to the
shall be final and will not be disputed transaction between the PNB and R & B
by the undersigned, who jointly and Surety; and (iv) that R & B Surety was
severally bind themselves to estopped from enforcing the Indemnity
indemnify the SURETY COMPANY of Agreement as against him.
any and all such payments as stated Petitioner Jose K. Villanueva claimed in his
in the preceding clauses. answer that. (i) he had executed the
xxx xxx xxx Indemnity Agreement in favor of R & B
When PAGRICO failed to comply with its Surety only "for accommodation purposes"
Principal Obligation to the PNB, the PNB and that it did not express their true
demanded payment from R & B Surety of intention; (ii) that the Principal Obligation of
the sum of P400,000.00, the full amount of PAGRICO to the PNB secured by the Surety
the Principal Obligation. R & B Surety made Bond had already been assumed by CCM
a series of payments to PNB by virtue of by virtue of a Trust Agreement entered into
that demand totalling P70,000.00 with the PNB, where CCM represented by
evidenced by detailed vouchers and Joseph Cochingyan, Jr. undertook to pay the
receipts. Principal Obligation of PAGRICO to the PNB;
(iii) that his obligation under the Indemnity
R & B Surety in turn sent formal demand Agreement was thereby extinguished by
letters to petitioners Joseph Cochingyan, Jr. novation arising from the change of debtor
and Jose K. Villanueva for reimbursement of under the Principal Obligation; and (iv) that
the payments made by it to the PNB and the filing of the complaint was premature,
for a discharge of its liability to the PNB considering that R & B Surety filed the case
under the Surety Bond. When petitioners against him as indemnitor although the
failed to heed its demands, R & B Surety PNB had not yet proceeded against R & B
brought suit against Joseph Cochingyan, Jr., Surety to enforce the latter's liability under
Jose K. Villanueva and Liu Tua Ben in the the Surety Bond.
Court of First Instance of Manila, praying
principally that judgment be rendered: Petitioner Cochingyan, however, did not
present any evidence at all to support his
b. Ordering defendants to pay jointly asserted defenses. Petitioner Villanueva did
and severally, unto the plaintiff, the not submit any evidence either on his
sum of P20,412.20 representing the "accommodation" defense. The trial court
unpaid premiums for Surety Bond No. was therefore constrained to decide the
4765 from 1965 up to 1968, and the case on the basis alone of the terms of the
additional amount of P5,103.05 Trust Agreement and other documents
yearly until the Surety Bond No. 4765 submitted in evidence.
is discharged, with interest thereon
at the rate of 12% per annum; [and] In due time, the Court of First Instance of
Manila, Branch 24 1 rendered a decision in
c. Ordering the defendants to pay favor of R & B Surety, the dispositive
jointly and severally, unto the plaintiff portion of which reads as follows;
the sum of P400,000.00 representing
the total amount of the Surety Bond Premises considered, judgment is
No. 4765 with interest thereon at the hereby rendered: (a) ordering the
rate of 12% per annum on the defendants Joseph Cochingyan, Jr.
amount of P70,000.00 which had and Jose K. Villanueva to pay, jointly
been paid to the Phil. National Bank and severally, unto the plaintiff the
already, the interest to begin from sum of 400,000,00, representing the
the month of September, 1966; total amount of their liability on
Surety Bond No. 4765, and interest at
xxx xxx xxx the rate of 6% per annum on the
Petitioner Joseph Cochingyan, Jr. in his following amounts:
answer maintained that the Indemnity On P14,000.00 from September 27,
Agreement he executed in favor of R & B 1966;
Surety: (i) did not express the true intent of
the parties thereto in that he had been On P4,000.00 from November 28,
asked by R & B Surety to execute the 1966;
On P4,000.00 from December 14, 1. The Trust Agreement referred to by both
1966; petitioners in their separate briefs, was
On P4,000.00 from January 19, 1967; executed on 28 December 1965 (two years
after the Surety Bond and the Indemnity
On P8,000.00 from February 13, Agreements were executed) between: (1)
1967; Jose and Susana Cochingyan, Sr., doing
On P4,000.00 from March 6, 1967; business under the name and style of the
Catholic Church Mart, represented by
On P8,000.00 from June 24, 1967;
Joseph Cochingyan, Jr., as Trustor[s]; (2)
On P8,000. 00 from September 14, Tomas Besa, a PNB official, as Trustee; and
1967; (3) the PNB as beneficiary. The Trust
On P8,000.00 from November 28, Agreement provided, in pertinent part, as
1967; and follows:
On P8,000. 00 from February 26, WHEREAS, the TRUSTOR has
1968 guaranteed a bond in the amount of
P400,000.00 issued by the R & B
until full payment; (b) ordering said
Surety and Insurance Co. (R & B) at
defendants to pay, jointly and
the instance of Pacific Agricultural
severally, unto the plaintiff the sum
Suppliers, Inc. (PAGRICO) on
of P20,412.00 as the unpaid
December 21, 1963, in favor of the
premiums for Surety Bond No. 4765,
BENEFICIARY in connection with the
with legal interest thereon from the
application of PAGRICO for an
filing of plaintiff's complaint on
advance line of P400,000.00 to
August 1, 1968 until fully paid, and
P800,000.00;
the further sum of P4,000.00 as and
for attorney's fees and expenses of WHEREAS, the TRUSTOR has also
litigation which this Court deems just guaranteed a bond issued by the
and equitable. Consolacion Insurance & Surety Co.,
Inc. (CONSOLACION) in the amount of
There being no showing the
P900,000.00 in favor of the
summons was duly served upon the
BENEFICIARY to secure certain credit
defendant Liu Tua Ben who has filed
facilities extended by the
no answer in this case, plaintiff's
BENEFICIARY to the Pacific Copra
complaint is hereby dismissed as
Export Co., Inc. (PACOCO);
against defendant Liu Tua Ben
without prejudice. WHEREAS, the PAGRICO and the
PACOCO have defaulted in the
Costs against the defendants Joseph
payment of their respective
Cochingyan, Jr. and Jose K.
obligations in favor of the
Villanueva.
BENEFICIARY guaranteed by the
Not satisfied with the decision of the trial bonds issued by the R & B and the
court, the petitioners took this appeal to CONSOLACION, respectively, and by
the Court of Appeals which, as already reason of said default, the
noted, certified the case to us as one BENEFICIARY has demanded
raising only questions of law. compliance by the R & B and the
The issues we must confront in this appeal CONSOLACION of their respective
are: obligations under the aforesaid
bonds;
1. whether or not the Trust Agreement had
extinguished, by novation, the obligation of WHEREAS, the TRUSTOR is,
R & B Surety to the PNB under the Surety therefore, bound to comply with his
Bond which, in turn, extinguished the obligation under the indemnity
obligations of the petitioners under the agreements aforementioned
Indemnity Agreements; executed by him in favor of R & B and
the CONSOLACION, respectively and
2. whether the Trust Agreement extended in order to forestall impending suits
the term of the Surety Bond so as to by the BENEFICIARY against said
release petitioners from their obligation as companies, he is willing as he hereby
indemnitors thereof as they did not give agrees to pay the obligations of said
their consent to the execution of the Trust companies in favor of the
Agreement; and BENEFICIARY in the total amount of
3. whether or not the filing of this P1,300,000 without interest from the
complaint was premature since the PNB net profits arising from the
had not yet filed a suit against R & B Surety procurement of reparations consumer
for the forfeiture of its Surety Bond. goods made thru the allocation of
We address these issues seriatim. WARVETS; . . .
l. TRUSTOR hereby constitutes and
appoints Atty. TOMAS BESA as
TRUSTEE for the purpose of paying to the change of either the person of the
the BENEFICIARY Philippine National debtor or of the creditor is described as
Bank in the manner stated subjective (or personal) novation. Novation
hereunder, the obligations of the R & may also be both objective and subjective
B under the R & B Bond No. G-4765 (mixed) at the same time. In both objective
for P400,000.00 dated December 23, and subjective novation, a dual purpose is
1963, and of the CONSOLACION achieved-an obligation is extinguished and
under The Consolacion Bond No. G- a new one is created in lieu thereof. 5
5938 of June 3, 1964 for P900,000.00 If objective novation is to take place, it is
or the total amount of P1,300,000.00 imperative that the new obligation
without interest from the net profitsexpressly declare that the old obligation is
arising from the procurement of thereby extinguished, or that the new
reparations consumer goods under obligation be on every point incompatible
the Memorandum of Settlement and with the old one. 6 Novation is never
Deeds of Assignment of February 2, presumed: it must be established either by
1959 through the allocation of the discharge of the old debt by the
WARVETS; express terms of the new agreement, or by
xxx xxx xxx the acts of the parties whose intention to
6. THE BENEFICIARY agrees to hold in dissolve the old obligation as a
abeyance any action to enforce its consideration of the emergence of the new
claims against R & B and one must be clearly discernible. 7
CONSOLACION, subject of the bond Again, if subjective novation by a change in
mentioned above. In the meantime the person of the debtor is to occur, it is
that this TRUST AGREEMENT is being not enough that the juridical relation
implemented, the BENEFICIARY between the parties to the original contract
hereby agrees to forthwith reinstate is extended to a third person. It is essential
the R & B and the CONSOLACION as that the old debtor be released from the
among the companies duly obligation, and the third person or new
accredited to do business with the debtor take his place in the new relation. If
BENEFICIARY and its branches, unless the old debtor is not released, no novation
said companies have been blacklisted occurs and the third person who has
for reasons other than those relating assumed the obligation of the debtor
to the obligations subject of the becomes merely a co-debtor or surety or a
herein TRUST AGREEMENT; co-surety. 8
xxx xxx xxx Applying the above principles to the instant
9. This agreement shall not in any case, it is at once evident that the Trust
manner release the R & B and Agreement does not expressly terminate
CONSOLACION from their respective the obligation of R & B Surety under the
liabilities under the bonds mentioned Surety Bond. On the contrary, the Trust
above. (emphasis supplied) Agreement expressly provides for the
continuing subsistence of that obligation by
There is no question that the Surety Bond stipulating that "[the Trust Agreement]
has not been cancelled or fully discharged 2
shall not in any manner release" R & B
by payment of the Principal Obligation. Surety from its obligation under the Surety
Unless, therefore, the Surety Bond has Bond.
been extinguished by another means, it
must still subsist. And so must the Neither can the petitioners anchor their
supporting Indemnity Agreements. 3 defense on implied novation. Absent an
unequivocal declaration of extinguishment
We are unable to sustain petitioners' claim of a pre-existing obligation, a showing of
that the Surety Bond and their respective complete incompatibility between the old
obligations under the Indemnity and the new obligation (and nothing else)
Agreements were extinguished by novation would sustain a finding of novation by
brought about by the subsequent execution implication. 9 But where, as in this case, the
of the Trust Agreement. parties to the new obligation expressly
Novation is the extinguishment of an recognize the continuing existence and
obligation by the substitution or change of validity of the old one, where, in other
the obligation by a subsequent one which words, the parties expressly negated the
terminates it, either by changing its object lapsing of the old obligation, there can be
or principal conditions, or by substituting a no novation. The issue of implied novation
new debtor in place of the old one, or by is not reached at all.
subrogating a third person to the rights of What the trust agreement did was, at most,
the creditor. 4 Novation through a change merely to bring in another person or
of the object or principal conditions of an persons-the Trustor[s]-to assume the same
existing obligation is referred to as obligation that R & B Surety was bound to
objective (or real) novation. Novation by perform under the Surety Bond. It is not
unusual in business for a stranger to a goes, remained simply indemnitors bound
contract to assume obligations thereunder; to R & B Surety but not to PNB, such that
a contract of suretyship or guarantee is the PNB could not have directly demanded
classical example. The precise legal effect payment of the Principal Obligation from
is the increase of the number of persons the petitioners. Thus, we do not see how
liable to the obligee, and not the Article 2079 of the Civil Code-which
extinguishment of the liability of the first provides in part that "[a]n extension
debtor. 10 Thus, in Magdalena Estates vs. granted to the debtor by the creditor
Rodriguez, 11 we held that: without the consent of the guarantor
[t]he mere fact that the creditor extinguishes the guaranty" could apply in
receives a guaranty or accepts the instant case.
payments from a third person who The petitioner-indemnitors are, as, it were,
has agreed to assume the obligation, second-tier parties so far as the PNB was
when there is no agreement that the concerned and any extension of time
first debtor shall be released from granted by PNB to any of the first-tier
responsibility, does not constitute a obligators (PAGRICO, R &B Surety and the
novation, and the creditor can still trustors[s]) could not prejudice the second-
enforce the obligation against the tier parties.
original debtor. There is no other reason why petitioner
In the present case, we note that the Villanueva's contention must fail. PNB's
Trustor under the Trust Agreement, the undertaking under the Trust Agreement "to
CCM, was already previously bound to R & hold in abeyance any action to enforce its
B Surety under its Indemnity Agreement. claims" against R & B Surety did not extend
Under the Trust Agreement, the Trustor the maturity of R & B Surety's obligation
also became directly liable to the PNB. So under the Surety Bond. The Principal
far as the PNB was concerned, the effect of Obligation had in fact already matured,
the Trust Agreement was that where there along with that of R &B Surety, by the time
had been only two, there would now be the Trust Agreement was entered into.
three obligors directly and solidarily bound Petitioner's Obligation had in fact already
in favor of the PNB: PAGRICO, R & B Surety matured, for those obligations were to
and the Trustor. And the PNB could proceed amture "as soon as [R & B Surety] became
against any of the three, in any order or liable to make payment of any sum under
sequence. Clearly, PNB never intended to the terms of the [Surety Bond] — whether
release, and never did release, R & B the said sum or sums or part thereof have
Surety. Thus, R & B Surety, which was not a been actually paid or not." Thus, the
party to the Trust Agreement, could not situation was that precisely envisaged in
have intended to release any of its own Article 2079:
indemnitors simply because one of those [t]he mere failure on the part of the
indemnitors, the Trustor under the Trust creditor to demand payment after
Agreement, became also directly liable to the debt has become due does not of
the PNB. itself constitute any extension of the
2. We turn to the contention of petitioner referred to herein.(emphasis
Jose K. Villanueva that his obligation as supplied)
indemnitor under the 24 December 1963 The theory behind Article 2079 is that an
Indemnity Agreement with R & B Surety extension of time given to the principal
was extinguished when the PNB agreed in debtor by the creditor without the surety of
the Trust Agreement "to hold in abeyance his right to pay the creditor and to be
any action to enforce its claims against R & immediately subrogated to the creditor's
B Surety . remedies against the principal debtor upon
The Indemnity Agreement speaks of the the original maturity date. The surety is
several indemnitors "apply[ing] jointly and said to be entitled to protect himself
severally (in solidum) to the R & B Surety] against the principal debtor upon the
— to become SURETY upon a SURETY orginal maturity date. The surety is said to
BOND demanded by and in favor of [PNB] be entitled to protect himself against the
in the sum of [P400,000.00] for the faithful contingency of the principal debtor or the
compliance of the terms and conditions set indemnitors becoming insolvent during the
forth in said SURETY BOND — ." This part of extended period. The underlying rationale
the Agreement suggests that the is not present in the instant case. As this
indemnitors (including the petitioners) Court has held,
would become co-sureties on the Security merely delay or negligence in
Bond in favor of PNB. The record, however, proceeding against the principal will
is bereft of any indication that the not discharge a surety unless there is
petitioners-indemnitors ever in fact became between the creditor and the
co-sureties of R & B Surety vis-a-vis the principal debtor a valid and binding
PNB. The petitioners, so far as the record agreement therefor, one which tends
to prejudice [the surety] or to deprive SO ORDERED.
it of the power of obtaining indemnity Yap (Chairman), Narvasa, Melencio-
by presenting a legal objection for Herrera, Cruz, Gancayco and Sarmiento, JJ.,
the time, to the prosecution of an concur.
action on the original security. 12
In the instant case, there was nothing to
prevent the petitioners from tendering Footnotes
payment, if they were so minded, to PNB of 1 With then Judge Ricardo C.
the matured obligation on behalf of R & B Puno presiding.
Surety and thereupon becoming 2 R & B Surety had earlier
subrogated to such remedies as R & B made partial payments thereon
Surety may have against PAGRICO. to PNB.
3. The last issue can be disposed of quicjly, 3 Manila Surety & Fidelity Co. v.
Clauses (b) and (c) of the Indemnity Villarama, 107 Phil. 891, 899
Agreements (quoted above) allow R & B (1960).
Surety to recover from petitioners even
before R & B Surety shall have paid the 4 De Cortes v. Venturanza, 79
PNB. We have previously held similar SCRA 709, 722-23 (1977).
indemnity clauses to be enforceable and 5 Id at 723.
not violative of any public policy. 13
6 Zapanta v. Rotaeche, 21 Phil.
The petitioners lose sight of the fact that 154, 159 (1912).
the Indemnity Agreements are contracts of
7 E.g., Tui Siuco v. Habana, 45
indemnification not only against actual loss
Phil. 707, 713 (1924); Martinez
but against liability as well. 14 While in a
v. Cavives, 25 Phil. 581 (1913).
contract of indemnity against loss as
indemnitor will not be liable until the 8 Dungo v. Lopena, 6 SCRA
person to be indemnified makes payment 1007,1015-16 (1962).
or sustains loss, in a contract of indemnity 9 Guerrero v. Court of Appeals,
against liability, as in this case, the 29 SCRA 791, 798 (1969).
indemnitor's liability arises as soon as the
10 Dungo v. Lopena, 6 SCRA
liability of the person to be indemnified has
arisen without regard to whether or not he 1007, at 1016 (1962).
has suffered actual loss. 15 Accordingly, R 11 18 SCRA 967, at 972 (1966).
& B Surety was entitled to proceed against 12 Bank of the Philippine
petitioners not only for the partial Islands v. Albaladejo y
payments already made but for the full Compania, 53 Phil. 141, at 145-
amount owed by PAGRICO to the PNB. 146 (1929); underscoring
Summarizing, we hold that : supplied.
(1) The Surety Bond was not novated by 13 Security Bank v. Globe
the Trust Agreement. Both agreements can Assurance, 58 Off. Gaz. 3708
co-exist. The Trust Agreement merely (30 April 1962); Cosmopolitan
furnished to PNB another party obligor to Insurance v. Reyes, 15 SCRA
the Principal Obligation in addition to 258, 261 (1965); Alto Surety v.
PAGRICO and R & B Surety. Aguilar, G.R. No. L-5625, March
16, 1954.
(2) The undertaking of the PNB to 'hold in
abeyance any action to enforce its claim" 14 Guerrero v. Court of
against R & B Surety did not amount to an Appeals, 29 SCRA 791, 797
"extension granted to the debtor" without [1969], this case involves an
petitioner's consent so as to release indemnification clause similar
petitioner's from their undertaking as to the INdemnity Agreements
indemnitors of R & B Surety under the under consideration. See also
INdemnity Agreements; and Alto Surety & Insurance Co. v.
Aguilar, L-5625, March 16,
(3) Petitioner's are indemnitors of R & B
1954.
Surety against both payments to and
liability for payments to the PNB. The 15 Guerrero v. Court of
present suit is therefore not premature Appeals, 29 SCRA 791 (1969);
despite the fact that the PNB has not Associated Insurance & Surety
instituted any action against R & B Surety Co. v. Chua, 7 SCRA 52, 54
for the collection of its matured obligation (1963); Alto Surety & Insurance
under the Surety Bond. Co. v. Andan, 100 Phil. 403, 406
(1956).
WHEREFORE, the petitioner's appeal is
DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in
toto. Costs against the petitioners.