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SEC. 2. Whenever used in this Code, the


following terms shall have the respective
meanings hereinafter set forth or indicated,
unless the context otherwise requires:
(a) A contract of insurance is an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event.
A contract of suretyship shall be deemed to be
an insurance contract, within the meaning of this
Code, only if made by a surety who or which, as
such, is doing an insurance business as
hereinafter provided.
(b) The term doing an insurance
business or transacting an insurance business,
within the meaning of this Code, shall include:
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) Making or proposing to make, as surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate
business or activity of the surety;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized as
constituting the doing of an insurance business
within the meaning of this Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing in a
manner designed to evade the provisions of this
Code.
In the application of the provisions of this Code,
the fact that no profit is derived from the making
of insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
thereof does not constitute the doing or
transacting of an insurance business.
(c) As used in this Code, the
term Commissioner means the Insurance
Commissioner.
SURETYSHIP

SEC. 177. A contract of suretyship is an


agreement whereby a party called the surety
guarantees the performance by another party
called the principal or obligor of an obligation or
undertaking in favor of a third party called the
obligee. It includes official recognizances,
stipulations, bonds or undertakings issued by any
company by virtue of and under the provisions of
Act No. 536, as amended by Act No. 2206.
SEC. 178. The liability of the surety or sureties
shall be joint and several with the obligor and
shall be limited to the amount of the bond. It is
determined strictly by the terms of the contract
of suretyship in relation to the principal contract
between the obligor and the obligee.
SEC. 179. The surety is entitled to payment of
the premium as soon as the contract of
suretyship or bond is perfected and delivered to
the obligor. No contract of suretyship or bonding
shall be valid and binding unless and until the
premium therefor has been paid, except where
the obligee has accepted the bond, in which case
the bond becomes valid and enforceable
irrespective of whether or not the premium has
been paid by the obligor to the surety: Provided,
That if the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety
shall collect only a reasonable amount, not
exceeding fifty percent (50%) of the premium due
thereon as service fee plus the cost of stamps or
other taxes imposed for the issuance of the
contract or bond:Provided, however, That if the
nonacceptance of the bond be due to the fault or
negligence of the surety, no such service fee,
stamps or taxes shall be collected.
In the case of a continuing bond, the obligor
shall pay the subsequent annual premium as it
falls due until the contract of suretyship is
cancelled by the obligee or by the Commissioner
or by a court of competent jurisdiction, as the
case may be.
SEC. 180. Pertinent provisions of the Civil Code
of the Philippines shall be applied in a suppletory
character whenever necessary in interpreting the
provisions of a contract of suretyship.
Contract Surety
Bonds that the government or an owner of a
construction project may require a contractor to

2
obtain. There are three types of contract surety

bonds:

Public official bonds: required by statute


for certain holders of public office, to protect the
public from malfeasance by an official or from an

Bid bond - Affords protection to a project owner


(obligee) in the event a successful bidder will not
enter a contract and will not provide the required

official's failure to faithfully perform duties.

Miscellaneous bonds: do not fit into any of


the other categories above.

surety bonds or other security


Performance bond - Provides protection to the
obligee if the contractor defaults on its

FIRST LEPANTO-TAISHO INSURANCE


CORPORATION (now known as FLT PRIME
INSURANCE CORPORATION),Petitioner,

- versus Payment bond - Guarantees that the contractor


will pay subcontractor, labor and material bills
Special Risk : Coverages for the securities
industry.
Commercial Surety

CHEVRON PHILIPPINES, INC.(formerly


Promulg
known as CALTEX [PHILIPPINES],
January
INC.), Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

Bonds required of individuals or businesses by

DECISION

the government, legislation or by other entities.


Travelers Bond & Specialty Insurance provides

VILLARAMA, JR., J.:

the following types of commercial surety bonds;


License and permit bonds: required by state,

Before this Court is a Rule 45 Petition assailing

municipal or federal ordinance or regulation.

the Decision[1] dated November 20, 2006 and

These bonds may be required as a condition for

Resolution[2] dated May 8, 2007 of the Court of

engaging in a particular business or exercising a

Appeals (CA) in CA-G.R. CV No. 86623, which

particular privilege. Examples include

reversed the Decision[3] dated August 5, 2005 of

performance and payment bonds, customs

the Regional Trial Court (RTC) of Makati City,

bonds, tax bonds and warehouse bonds.

Branch 59 in Civil Case No 02-857.

Court bonds, including:

Judicial bonds, required of either a plaintiff

Respondent Chevron Philippines, Inc., formerly


Caltex Philippines, Inc., sued petitioner First

or defendant in judicial proceedings, to reserve

Lepanto-Taisho

the rights of the opposing litigant or other

known as FLT Prime Insurance Corporation) for

interested parties

the

Fiduciary bonds, required of those who


administer a trust under court supervision.

Present

CORON
Chairpe
LEONAR
BERSAM
DEL CA
VILLARA

obligations under the bonded contract

associated with the construction project.

G.R. N

payment

Insurance
of

unpaid

Corporation
oil

and

(now

petroleum

purchases made by its distributor Fumitechniks


Corporation (Fumitechniks).

3
Fumitechniks,

represented

by

Ma.

Lourdes

Apostol, had applied for and was issued Surety

connection with the settlement of the obligations


subject of the Caltex letter.

Bond FLTICG (16) No. 01012 by petitioner for the


amount

of P15,700,000.00. As

stated

in

the

In its letter dated March 1, 2002, Fumitechniks

attached rider, the bond was in compliance with

through its counsel wrote petitioners counsel

the requirement for the grant of a credit line with

informing that it cannot submit the requested

the respondent to guarantee payment/remittance

agreement

of the cost of fuel products withdrawn within the

executed

stipulated time in accordance with the terms and

respondent. Fumitechniks also enclosed a copy of

conditions of the agreement. The surety bond

another surety bond issued by CICI General

was executed on October 15, 2001 and will expire

Insurance Corporation in favor of respondent to

on October 15, 2002.[4]

secure the obligation of Fumitechniks and/or

since

no

between

such

agreement

Fumitechniks

was
and

Prime Asia Sales and Services, Inc. in the amount


Fumitechniks defaulted on its obligation. The

of P15,000,000.00.[7] Consequently,

check dated December 14, 2001 it issued to

advised respondent of the non-existence of the

respondent in the amount of P11,461,773.10,

principal

when presented for payment, was dishonored for

Fumitechniks. Petitioner explained that being an

reason

letter

accessory contract, the bond cannot exist without

notified

a principal agreement as it is essential that the

petitioner of Fumitechniks unpaid purchases in

copy of the basic contract be submitted to the

the total amount ofP15,084,030.30. In its letter-

proposed surety for the appreciation of the extent

reply dated February 13, 2002, petitioner through

of the obligation to be covered by the bond

its counsel, requested that it be furnished copies

applied for.[8]

of Account

dated February

6,

Closed.
2002,

In

respondent

agreement

as

petitioner

confirmed

by

of the documents such as delivery receipts.


[5]

Respondent complied by sending copies of

On April 9, 2002, respondent formally demanded

invoices showing deliveries of fuel and petroleum

from petitioner the payment of its claim under

products

the surety bond. However, petitioner reiterated

between November

11,

2001 and December 1, 2001.

its position that without the basic contract subject


of the bond, it cannot act on respondents claim;

Simultaneously, a letter

[6]

was sent to

Fumitechniks demanding that the latter submit to

petitioner

also

contested

the

amount

of

Fumitechniks supposed obligation.[9]

petitioner the following: (1) its comment on


respondents February 6, 2002 letter; (2) copy of

Alleging that petitioner unjustifiably refused to

the agreement secured by the Bond, together

heed its demand for payment, respondent prayed

with copies of documents such as delivery

for judgment ordering petitioner to pay the sum

receipts; and (3) information on the particulars,

of P15,080,030.30,

including the terms and conditions, of any

attorneys fees equivalent to ten percent of the

arrangement that [Fumitechniks] might have

total obligation.[10]

made or any ongoing negotiation with Caltex in

plus

interest,

costs

and

4
Petitioner,
[11]

in

its

Answer

with

entered
ORDERING
defendantappellant
First
Lepanto-Taisho
Insurance Corporation to pay
plaintiff-appellant
Caltex
(Philippines) Inc. now Chevron
Philippines, Inc. the sum of
P15,084,030.00.

Counterclaim,

asserted that the Surety Bond was issued for

the purpose of securing the performance of the


obligations embodied in the Principal Agreement
stated therein, which contract should have been
attached and made part thereof.

SO ORDERED.[12]

After trial, the RTC rendered judgment dismissing


the

complaint

as

well

as

petitioners

counterclaim. Said court found that the terms and


conditions of the oral credit line agreement
between respondent and Fumitechniks have not
been relayed to petitioner and neither were the
same conveyed even during trial. Since the
surety bond is a mere accessory contract, the RTC
concluded that the bond cannot stand in the
absence

of

the

written

agreement

secured

thereby. In holding that petitioner cannot be held


liable under the bond it issued to Fumitechniks,
the RTC noted the practice of petitioner, as
testified on by its witnesses, to attach a copy of
the

written

agreement

(principal

contract)

whenever it issues a surety bond, or to be


submitted later if not yet in the possession of the
assured, and in case of failure to submit the said
written agreement, the surety contract will not be
binding despite payment of the premium.
Respondent

filed

motion

for

reconsideration while petitioner filed a motion for


partial reconsideration as to the dismissal of its
counterclaim. With the denial of their motions,
both parties filed their respective notice of
appeal.
The CA ruled in favor of respondent, the
dispositive portion of its decision reads:
WHEREFORE, the appealed
Decision is REVERSED and SET
ASIDE. A new judgment is hereby

According

to

the

appellate

court,

petitioner cannot insist on the submission of a


written agreement to be attached to the surety
bond considering that respondent was not aware
of such requirement and unwritten company
policy. It also declared that petitioner is estopped
from assailing the oral credit line agreement,
having consented to the same upon presentation
by

Fumitechniks

issued. Considering

of

the

that

surety

such

oral

bond

it

contract

between Fumitechniks and respondent has been


partially

executed,

the

CA

ruled

that

the

provisions of the Statute of Frauds do not apply.


With the denial of its motion for reconsideration,
petitioner appealed to this Court raising the
following issues:
I. WHETHER OR NOT THE
HONORABLE COURT OF APPEALS
ERRED IN ITS INTERPRETATION OF
THE PROVISIONS OF THE SURETY
BOND WHEN IT HELD THAT THE
SURETY BOND SECURED AN ORAL
CREDIT
LINE
AGREEMENT
NOTWITHSTANDING
THE
STIPULATIONS THEREIN CLEARLY
SHOWING BEYOND DOUBT THAT
WHAT WAS BEING SECURED WAS A
WRITTEN
AGREEMENT,
PARTICULARLY,
THE
WRITTEN
AGREEMENT A COPY OF WHICH
WAS EVEN REQUIRED TO BE
ATTACHED TO THE SURETY BOND
AND MADE A PART THEREOF.
II. WHETHER OR NOT THE
HONORABLE COURT OF APPEALS
ERRED IN NOT STRIKING OUT THE
QUESTIONED
RESPONDENTS

5
EVIDENCE FOR BEING CONTRARY
TO THE PAROL EVIDENCE RULE,
IMMATERIAL AND IRRELEVANT AND
CONTRARY TO THE STATUTE OF
FRAUDS.

or duty of another although it possesses no direct


or personal interest over the obligations nor does
it

undertaking.[16]
The extent of a suretys liability is determined by
the language of the suretyship contract or bond
itself. It

determine

a suretyship as a contract or agreement whereby

principal

or

by

another

obligor,

of

party,
an

called

obligation

the
the
or

undertaking in favor of a third party, called the


obligee.

It

includes

official

recognizances,

stipulations, bonds or undertakings issued under


Act 536,[14] as amended. Suretyship arises upon
the solidary binding of a person deemed the
surety with the principal debtor, for the purpose
of

fulfilling

an

by

implication,

whether

petitioner

is

liable

to

itself.

Section 175 of the Insurance Code defines

performance

extended

necessary to examine the terms of the contract

the principal.

guarantees

be

respondent under the surety bond, it becomes

creditor in the absence of a written contract with

surety,

cannot

beyond the terms of the contract. [17]Thus, to

impression: whether a surety is liable to the

the

therefrom. And

surety assumes liability as a regular party to the

The main issue to be resolved is one of first

called

benefit

is secondary to the principal obligation, the

IV. WHETHER OR NOT THE


HONORABLE COURT OF APPEALS
ERRED IN REVERSING THE RTC
DECISION AND IN NOT GRANTING
PETITIONERS COUNTERCLAIM.[13]

party,

any

notwithstanding the fact that the surety contract

III. WHETHER OR NOT THE


HONORABLE COURT OF APPEALS
ERRED IN NOT STRIKING OUT THE
RESPONDENTS
MOTION
FOR
RECONSIDERATION OF THE RTC
DECISION FOR BEING A MERE
SCRAP
OF
PAPER
AND PRO
FORMA AND, CONSEQUENTLY, IN
NOT
DECLARING
THE
RTC
DECISION
AS
FINAL
AND
EXECUTORY IN SO FAR AS IT
DISMISSED THE COMPLAINT.

receive

obligation.[15] Such undertaking

makes a surety agreement an ancillary contract


as it presupposes the existence of a principal
contract. Although the contract of a surety is in
essence secondary only to a valid principal
obligation, the surety becomes liable for the debt

Surety Bond FLTICG (16) No. 01012 is a standard


form used by petitioner, which states:
That
we, FUMITECHNIKS
CORP. OF THE PHILS. of #154
Anahaw St., Project 7, Quezon
City as principal and First LepantoTaisho Insurance Corporation a
corporation duly organized and
existing under and by virtue of the
laws of the Philippines as Surety,
are held firmly bound unto CALTEX
PHILIPPINES, INC. of ______ in the
sum of FIFTEEN MILLION SEVEN
HUNDRED
THOUSAND
ONLY PESOS (P15,700,000.00),
Philippine
Currency,
for
the
payment of which sum, well and
truly to be made, we bind
ourselves, our heirs, executors,
administrators, successors, and
assigns, jointly and severally, firmly
by these presents:
The
conditions
obligation are as follows:

of

this

WHEREAS,
the
abovebounden
principal,
on 15th day
of October, 2001 entered
into
[an] agreement with CALTEX
PHILIPPINES,
INC. of

6
________________ to
faithfully

fully

and

only (P15,700,000.00),
Currency.

a copy of which is attached


hereto and made a part hereof:

NOW THEREFORE, if the


principal shall well and truly
perform
and
fulfill
all
the
undertakings, covenants, terms
and conditions and agreements
stipulated in said undertakings,
then this obligation shall be null
and void; otherwise, it shall remain
in full force and effect.

WHEREAS,
said Obligee__ requires
said
principal to give a good and
sufficient bond in the above stated
sum to secure the full and faithful
performance on his part of
said agreement__.

The
liability
of
FIRST
LEPANTO-TAISHO
INSURANCE
CORPORATION, under this Bond will
expire on 10.15.01_. Furthermore,
it is hereby understood that FIRST
LEPANTO-TAISHO
INSURANCE
CORPORATION will not be liable for
any claim not presented to it in
writing within fifteen (15) days
from the expiration of this bond,
and that the Obligee hereby waives
its right to claim or file any court
action against the Surety after the
termination of fifteen (15) days
from the time its cause of action
accrues.[19]

NOW THEREFORE, if the


principal shall well and truly
perform
and
fulfill
all
the
undertakings, covenants, terms,
conditions,
and
agreements
stipulated in said agreement__ then
this obligation shall be null and
void; otherwise it shall remain in
full force and effect.
The liability of First LepantoTaisho Insurance Corporation under
this bond will expire on October 15,
2002__.
x
x
supplied.)

Philippine

x[18] (Emphasis
Petitioner posits that non-compliance with the

The rider attached to the bond sets forth the


following:

submission of the written agreement, which by


the express terms of the surety bond, should be
attached and made part thereof, rendered the

WHEREAS, the Principal has


applied for a Credit Line in the
amount of PESOS: Fifteen Million
Seven Hundred thousand only
(P15,700,000.00),
Philippine
Currency with the Obligee for the
purchase of Fuel Products;

bond

WHEREAS,
the
obligee
requires the Principal to post a
bond to
guarantee
payment/remittance of the cost
of fuel products withdrawn
within the stipulated time in
accordance with terms and
conditions of the agreement;

written agreement. Thus, by deleting the required

IN NO CASE, however, shall


the liability of the Surety hereunder
exceed the sum of PESOS: Fifteen
million seven hundred thousand

ineffective. Since

all

stipulations

and

provisions of the surety contract should be taken


and

interpreted

together,

in

this

case,

the

unmistakable intention of the parties was to


secure only those terms and conditions of the
submission

and

attachment

of

the

written

agreement to the surety bond and replacing it


with the oral credit agreement, the obligations of
the surety have been extended beyond the limits
of the surety contract.
On the other hand, respondent contends that the
surety bond had been delivered by petitioner to
Fumitechniks which paid the

premiums and

7
delivered the bond to respondent, who in turn,

and by implication included the credit agreement

opened the credit line which Fumitechniks availed

mentioned in the rider. However, it turned out

of to purchase its merchandise from respondent

that

on credit. Respondent points out that a careful

executed written agreements only with its direct

reading of the surety contract shows that there is

customers but not distributors like Fumitechniks

no such requirement of submission of the written

and

credit

bonds

conditions of its distributorship agreement to the

effectivity. Moreover, respondents witnesses had

petitioner after the delivery of the bond. This was

already explained that distributorship accounts

clearly

are

Coordinator, Alden Casas Fajardo, who testified as

agreement

not

for

covered

agreements.

by

Supplying

the

written
the

distribution

details

of

these

agreements is allowed as an exception to the


parol evidence rule even if it is proof of an oral
agreement. Respondent

argues

that

by

introducing documents that petitioner sought to


exclude, it never intended to change or modify
the contents of the surety bond but merely to
establish the actual terms of the distribution
agreement

between

Fumitechniks

and

respondent

it

also

never

admitted

xxxx

agreement

was

never

attached

thereto,

Q : Is it the practice or procedure at


Caltex
to
reduce
distributorship account into
writing?

respondent avers that clearly, such attaching of

xxxx

the copy of the principal agreement, was for


evidentiary purposes only.The real intention of

A : No, its not a practice to make


an agreement.

the bond was to secure the payment of all the

xxxx

purchases of Fumitechniks from respondent up to


the maximum amount allowed under the bond.
A

reading

of Surety

Bond

FLTICG

(16)

No.

01012 shows that it secures the payment of


purchases

on

credit

by

Fumitechniks

in

accordance with the terms and conditions of the


agreement it entered into with respondent. The
word

agreement

has

reference

to

the

distributorship agreement, the principal contract

and

Marketing

Q : Mr. Fajardo[,] you mentioned


during
your
crossexamination that the surety
bond
as
part
of
the
requirements
of
[Fumitechniks] before the
Distributorship Agreement
was approved?

executed shortly after the issuance of the surety

the fact that a copy of the written distribution

respondents

terms

Atty. Selim:

A : Yes Sir.

allowed it to be delivered to respondent despite

the

follows:

respondent, a separate agreement that was


bond. Because petitioner still issued the bond and

by

relayed

has

Atty. Quiroz:
Q : What was the reason why you
are
not
reducing
your
agreement with your client
into writing?
A : Well, of course as I said, there is
no fix pricing in terms of
distributorship agreement,
its usually with regards to
direct
service
to
the
customers
which
have
direct fixed price.

8
xxxx

The law is clear that a surety contract should be


read and interpreted together with the contract

Q : These supposed terms and


conditions that you agreed
with [Fumitechniks], did you
relay to the defendant

entered

the

176

creditor and
of

the

the Insurance

Code states:
Sec. 176. The liability of the
surety or sureties shall be joint and
several with the obligor and shall
be limited to the amount of the
bond. It is determined strictly by
the terms of the contract of
suretyship in relation to the
principal contract between the
obligor
and
the
obligee. (Emphasis supplied.)

xxxx
Q : How did you relay that, how did
you relay the terms and
conditions to the defendant?
A : I dont know, it was during the
time for collection because I
collected them and explain
the terms and conditions.
Q : You testified awhile ago that
you did not talk to the
defendant First LepantoTaisho
Insurance
Corporation?

A surety contract is merely a collateral one, its


basis is the principal contract or undertaking
which it secures.[21] Necessarily, the stipulations
in such principal agreement must at least be

was confused with the


question. Im talking about
Malou Apostol.

Q : So, in your answer,


not relayed those
conditions to the
First Lepanto, you

communicated or made known to the surety


particularly in this case where the bond expressly
guarantees the payment of respondents fuel

you have
terms and
defendant
have not?

products

withdrawn

by

Fumitechniks

in

accordance with the terms and conditions of their


agreement. The

A : Yes Sir.

bond

specifically

makes

reference to a written agreement. It is basic that

Q : And as of this present, you have


not yet relayed the terms
and conditions?

if the terms of a contract are clear and leave no


doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall

A : Yes Sir.
xxxx

between

principal. Section

A : Yes Sir.

A:I

into

control.[22] Moreover,

[20]

undertaking,

being

surety

an

agreement

onerous
is

strictly

construed against the creditor, and every doubt is


Respondent, however, maintains that the delivery
of the bond and acceptance of premium payment
by

petitioner

binds

the

latter

as

surety,

notwithstanding the non-submission of the oral


distributorship

and

credit

agreement

which

understandably cannot be attached to the bond.

resolved in favor of the solidary debtor. [23] Having


accepted the bond, respondent as creditor must
be held bound by the recital in the surety bond
that

the

and

conditions

of

its

distributorship contract be reduced in writing or


at the very least communicated in writing to the
surety. Such

The contention has no merit.

terms

non-compliance

by

the

creditor

(respondent) impacts not on the validity or

9
legality of the surety contract but on the creditors

be without merit. The mere fact that a motion for

right to demand performance.

reconsideration reiterates issues already passed


upon by the court does not, by itself, make it

It bears stressing that the contract of suretyship

a pro forma motion. Among the ends to which a

imports entire good faith and confidence between

motion

the parties in regard to the whole transaction,

precisely to convince the court that its ruling is

although it has been said that the creditor does

erroneous and improper, contrary to the law or

not stand as a fiduciary in his relation to the

evidence; the movant has to dwell of necessity on

surety. The creditor is generally held bound to a

issues already passed upon.[26]

for

reconsideration

is

addressed

is

faithful observance of the rights of the surety and


to the performance of every duty necessary for

Finally, we hold that the trial court correctly

the protection of those rights.[24] Moreover, in this

dismissed

jurisdiction, obligations arising from contracts

damages and attorneys fees. The filing alone of a

have the force of law between the parties and

civil action should not be a ground for an award

should

faith.

of moral damages in the same way that a clearly

Respondent is charged with notice of the

unfounded civil action is not among the grounds

specified form of the agreement or at least the

for moral damages.[27] Besides, a juridical person

disclosure of basic terms and conditions of its

is generally not entitled to moral damages

distributorship and credit agreements with its

because, unlike a natural person, it cannot

client Fumitechniks after its acceptance of the

experience physical suffering or such sentiments

bond delivered by the latter. However, it never

as wounded feelings, serious anxiety, mental

made any effort to relay those terms and

anguish or moral shock.[28] Although in some

conditions of its contract with Fumitechniks upon

recent cases we have held that the Court may

the commencement of its transactions with said

allow

client, which obligations are covered by the

corporations, it is not automatically granted;

surety bond issued by petitioner. Contrary to

there must still be proof of the existence of the

respondents assertion, there is no indication in

factual basis of the damage and its causal

the records that petitioner had actual knowledge

relation to the defendants acts. This is so because

of

[25]

its

be

complied

alleged

with

business

in

good

grant

counterclaim

of

moral

for

moral

damages

to

of

not

moral damages, though incapable of pecuniary

distributors;

and

estimation, are in the category of an award

even assuming petitioner was aware of such

designed to compensate the claimant for actual

practice, the bond issued to Fumitechniks and

injury suffered and not to impose a penalty on

accepted by respondent specifically referred to a

the wrongdoer.[29] There is no evidence presented

written agreement.

to establish the factual basis of petitioners claim

having writtencontracts

practice

the

petitioners

with

for moral damages.


As

to

the

respondents

contention
motion

for

of

petitioner

that

reconsideration

filed

Petitioner

is

fees. The

likewise
settled

not
rule

entitled

to

is

no

before the trial court should have been deemed

attorneys

that

not filed for being pro forma, the Court finds it to

premium should be placed on the right to litigate

10
and that not every winning party is entitled to an
automatic grant of attorneys fees.[30] In pursuing
its claim on the surety bond, respondent was
acting on the belief that it can collect on the
obligation of Fumitechniks notwithstanding the
non-submission of the written principal contract.
WHEREFORE, the petition for review on
certiorari

is PARTLY

dated November

20,

GRANTED. The Decision


2006 and

Resolution

dated May 8, 2007 of the Court of Appeals in CAG.R.

CV

No.

86623,

are REVERSED and SET

ASIDE. The Decision dated August 5, 2005 of


the Regional Trial Court of Makati City, Branch 59
in Civil Case No. 02-857 dismissing respondents
complaint as well as petitioners counterclaim, is
hereby REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.
PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, Petitioner, v. THE HONORABLE
COURT OF APPEALS & ALPHA INSURANCE
and SURETY COMPANY, INC., Respondents.

issued Surety Bond No. G-1689 but alleged that


the P150,000 debt had been paid by virtue of the
assignment by Rojas to PCIB of his receivables
from the Armed Forces of the Philippines. As
special defense, ALPHA alleged that the
promissory note evidencing the loan is dated
later than the surety bond which was issued for
an amount less than the debt. (The promissory
note is dated September 26, 1962 while the
surety bond is dated August 22, 1960.)
During the pre-trial, Rojas and Community
Builders failed to appear; hence, they were
declared as in default. ALPHA reiterated its
defenses stated above, namely, (1) that the bond
was issued for less than the amount of the debt,
(2) that it was issued earlier, and (3) that the
debt had been paid.
These were reflected in the following pre-trial
order dictated by the trial judge in open
court:chanrobles.com:cralaw:red
At the pre-trial conference, the parties agreed
that the defendants Filadelfo Rojas and
Community Builders Co., Inc. secured a loan from
the plaintiff in the amount of P150,000 for which
they executed a promissory note dated
September 26, 1962. In order to secure the
payment of this obligation which was to mature
January 24, 1963, the defendants assigned their
receivables based on three contracts which they
had with the Armed Forces of the Philippines, plus
the surety bond issued by the defendant Alpha
Insurance & Surety Co., Inc. in the amount of
P50,000. Notwithstanding repeated demands and
the expiration of the promissory note, the
defendants failed to pay their obligation.
The defendants Filadelfo Rojas and Community
Builders have been declared as in default for
failure to appear at the pre-trial conference.

DECISION
CORTES, J.:
On January 7, 1966, Philippine Commercial and
Industrial Bank (PCIB) filed a complaint against
Alpha Insurance and Surety Co., Inc., (ALPHA),
Community Builders, Inc. and Filadelfo Rojas in
the Court of First Instance (CFI) of Manila. The
complaint alleged that Community Builders and
Rojas borrowed P150,000 from PCIB , that ALPHA
issued Surety Bond No. G-1689 in the amount of
P50,000 to guarantee payment of the loan, and
that upon maturity the defendants failed to pay.
In its answer with cross-claim against Community
Builders and Rojas, ALPHA admitted having

The remaining defendant Alpha Insurance and


Surety Co., Inc. now contends that it is not bound
by the surety bond for the reason that it was
issued for less than the amount of the plaintiffs
claim and that the same was issued prior to the
execution of the promissory note, and that the
obligation had already been fully paid by the
assignment of the receivables.
The issue, therefore, is whether the defendants
have already paid the amount stated in the
promissory note by virtue of the assignment
aforesaid.
On the basis of this issue, let the trial hereof on
the merits be, as it is hereby, set for December

11
19, 1966, at 8:30 a.m.
SO ORDERED.
After trial, the CFI rendered judgment in favor of
PCIB and against Rojas, Community Builders and
ALPHA, ordering them to pay P50,000 plus
attorneys fees and costs. The Court further
ordered defendants Rojas and Community
Builders to pay the remaining P100,000.
Rojas and Community Builders appealed to the
Court of Appeals. However, since their counsel
could not be served with the notice to file brief,
their appeal was dismissed.
ALPHA likewise appealed to the appellate court
which reversed the decision of the CFI on the
ground that it was not shown that the surety
bond bears any relation to the promissory note.
Hence, this petition, PCIB raising a purely
procedural issue. Petitioner contends that the
appellate court erred in ruling in favor of ALPHA
on the basis of a question of fact which had not
been raised before the CFI and which is not within
the issues raised in the pleadings, nor in the pretrial order.
The issue raised calls for a determination of
whether or not the relations of the surety bond to
the promissory note was ever raised as an issue
in the Answer filed by ALPHA or in the pre-trial
conference held between the
parties.chanrobles.com : virtual law library
The pertinent allegation in PCIBs complaint
reads:chanrob1es virtual 1aw library
3. That in conjunction with the aforesaid
promissory note entered into by and between the
plaintiff and the defendants Filadelfo Rojas and
Community Builders Co., Inc., as principals and
the Alpha Insurance and Surety Co., Inc., as
surety, executed jointly and severally in the City
of Manila, Philippines, Alpha Bond No. G-1689 in
the amount of P50,000 to guarantee the payment
by the said principals of their obligation to the
plaintiff in accordance with the terms and
conditions recited in the said promissory note,
copy of the surety bond is attached hereto as
Annex "B" and made integral part hereof by
reference;
while the corresponding denial in the answer of
ALPHA states:chanrob1es virtual 1aw library
3. (Defendant) ADMITS the material allegations of
paragraph 3 of the complaint in so far as the
same refers to its surety bond (Annex "B") only;

that is has no knowledge nor information


sufficient to form a belief as to the truth of the
rest of the averments therein concerning the
promissory note (Annex "A"), hence, it specifically
denies the rest of the allegations having
reference to the promissory note;
PCIB contends that paragraph (3) of the
complaint states three material facts which are
separable from each other, to wit:chanrob1es
virtual 1aw library
(a) That defendants Filadelfo Rojas and
Community Builders Co., Inc., as principals, and
respondent Alpha Insurance and Surety Co., Inc.,
as surety, executed Surety Bond No. G-1689
(Annex "B" of the complaint);
(b) That the said surety was executed to
guarantee the payment of the promissory note
(Annex "A" of the complaint); and
(c) That the guarantee thus made secures the
performance of the obligations of Filadelfo Rojas
and Community Builders Co., Inc. as set forth or
recited in the promissory note (Annex "A" of the
complaint).
It is asserted that since the answer of ALPHA
"admits the allegations of paragraph (3) of the
complaint in so far as the same refers to its
surety bond," then what was admitted was not
only the execution of the surety bond but also
that the surety bond was issued to secure the
promissory note. Hence, the answer did not raise
any issue as to the relation of the security bond
to the promissory note.
One basic rule in interpretation of pleadings is
that "pleadings (should) be liberally construed to
do substantial justice." [Rule 6, Sec. 15]
Constructions which result in absurdity must also
be avoided. If we construe paragraph 3 of the
answer together with paragraph 2 in which
ALPHA denied knowledge of the debt contracted
by Rojas and Community Builders, which debt
was evidenced by the promissory note, it is clear
that ALPHA could not have admitted that the
surety bond it issued secured the payment of the
debt. It would have been inconsistent for ALPHA
to claim in paragraph 2 that it was unaware of the
debt, and then to admit in paragraph 3 that the
surety bond it issued was executed to secure the
debt. In fact, a reading of the suretyship contract
readily shows that it was executed on August 22,
1960 to secure the P50,000 discounting line
credit accommodation granted by PCIB to
Community Builders. At the time Surety Bond G1689 was executed, the promissory note for

12
P150,000 dated September 26, 1962 was not yet
executed. The Court thus rules that paragraph 3
of the answer of ALPHA merely admitted the
execution of Surety Bond No. G-1689, but did not
admit, nay, denied, that said bond secured the
debt of Rojas and Community Builders. In view of
the specific denial, the relation of the bond to the
debt was properly raised as an issue in the
Answer.
We next consider the pre-trial order.chanrobles
law library
PCIB calls the attention of this Court to that
portion of the pre-trial order which
reads:chanrob1es virtual 1aw library
The issue, therefore, is whether the defendants
have already paid the amount stated in the
promissory note by virtue of the assignment
aforesaid.
and contends that since the trial court has so
limited the issue, then ALPHA can no longer raise
the defense that bond bears no relation to the
promissory note.
The pertinent provision of the Rules of Court
provides:chanrob1es virtual 1aw library
Sec. 4 Record of pre-trial results. After the pretrial the court shall make an order which recites
the action taken at the conference, the
amendments allowed to the pleadings, and the
agreements made by the parties as to any of the
matters considered. Such order shall limit the
issues for trial to those not disposed of by
admissions or agreements of counsel and when
entered controls the subsequent course of action,
unless modified before trial to prevent manifest
injustice. (Italics supplied.)
While the rule provides that the pre-trial order of
the court "controls the subsequent course of
action," it is categorical that the issues for trial
must be limited to "those not disposed of by
admissions or agreements of counsel." In other
words, the court has no discretion to exclude
from trial issues not resolved by voluntary
agreement between the parties.
The pre-trial order clearly states that ALPHA
claimed that "it is not bound by the surety bond
for the reason that it was issued for less than the
amount of the plaintiffs claim and that the same
was issued prior to the execution of the
promissory note." This particular issue not having
been disposed of by admissions or agreements
during the pre-trial, it remained a proper subject

of litigation. In fact, this particular issue was


raised by respondent ALPHA not only in its brief
field with the Court of Appeals, but even before
the trial court, in its Memorandum and Motion for
Reconsideration.
One other important aspect of this case compels
the Court to affirm the decision of the Court of
Appeals insofar as it absolves ALPHA from any
liability to PCIB. Even as appellate courts do not
normally consider those errors not properly
assigned or specified, the rule is not, without
qualification. As the Court stated in Insular Life
Assurance Co., Ltd. Employees Association-NATU
v. Insular Life Assurance Co., Ltd., Et. Al. [G.R. No.
L-25291, March 10, 1977, 76 SCRA 50, 6162]:chanrob1es virtual 1aw library
. . . (T)he Supreme Court has ample authority to
review and resolve matters not assigned and
specified as errors by either of the parties in the
appeal if it finds the consideration and
determination of the same essential and
indispensable in order to arrive at a just decision
in the case. This Court, thus, has the authority to
waive the lack of proper assignment of errors if
the unassigned errors closely relate to errors
properly pinpointed out or if the unassigned
errors refer to matters upon which the
determination of the questions raised by the
errors properly assigned depend.
The same also applies to issues not specifically
raised by the parties. The Supreme Court,
likewise, has broad discretionary powers, in the
resolution of a controversy, to take into
consideration matters on record which the parties
fail to submit to the Court as specific questions
for determination. Where the issues raised also
rest on other issues not specifically presented, as
long as the latter issues bear relevance and close
relation to the former and as long as they arise
from matters on record, the Court has authority
to include them in its discussion of the
controversy as well as to pass upon them. In
brief, in those cases wherein questions not
particularly raised by the parties surface as
necessary for the complete adjudication of the
rights and obligations of the parties and such
questions fall within the issues already framed by
the parties, the interests of justice dictate that
the Court consider and resolve them.
This qualification applies to the instant case.
It is basic that liability on a bond is contractual in
nature and is ordinarily restricted to the
obligation expressly assumed therein. The extent
of a suretys liability is determined only by the

13
clause of the contract of suretyship. It cannot be
extended by implication, beyond the terms of the
contract. [Zenith Insurance Corp. v. CA Et. Al., No.
57957, December 29, 1982, 119 SCRA 485.]
In the case at bar, Surety Bond No. G-1689 was
executed to secure a discounting line of credit
accommodation granted by PCIB to Community
Builders Co., Inc. in the amount of P50,000.
PCIB contends that the loan evidenced by the
promissory note signed by Filadelfo Rojas, both in
his personal capacity and as President of
Community Builders, was granted in line with the
credit accommodation secured by the surety
bond; hence, ALPHA is liable for the
debt.chanrobles.com:cralaw:red
Note however that by the express terms of Surety
Bond No. G-1689, ALPHA bound itself to pay the
discounting line of Community Builders only
which has a personality distinct and separate
from Rojas. The promissory note, on the other
hand, was signed both by Rojas and by
Community Builders. Also, the amount of the
credit line which ALPHA agreed to secure was
only P50,000; whereas, the promissory note was
for P150,000. Clearly therefore, the debt on which
PCIB bases its action is not within the purview of
the Surety Bond No. G-1689. Thus, even granting
that Rojas and Community Builders offered Surety
Bond No. G-1689 as security for the P150,000
debt, ALPHA, which merely undertook to secure a
P50,000 credit line of Community Builders,
cannot be held answerable for the debt.
WHEREFORE, the petition is hereby DENIED. The
appealed decision is AFFIRMED.
SO ORDERED.
INTRA-STRATA ASSURANCE CORPORATION
and PHILIPPINE HOME ASSURANCE
CORPORATION,Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, represented
by the BUREAU OF CUSTOMS, Respondent.
DECISION
BRION, J.:
Before this Court is the Petition for Review on
Certiorari under Rule 45 of the Rules of Court filed
by Intra-Strata Assurance Corporation (IntraStrata) and Philippine Home Assurance
Corporation (PhilHome), collectively referred to
as "petitioners."

The petition seeks to set aside the decision dated


November 26, 2002 of the Court of Appeals1 (CA)
that in turn affirmed the ruling of the Regional
Trial Court (RTC), Branch 20, Manila in Civil Case
No. 83-15071.2 In its ruling, the RTC found the
petitioners liable as sureties for the customs
duties, internal revenue taxes, and other charges
due on the importations made by the importer,
Grand Textile Manufacturing Corporation (Grand
Textile).3
BACKGROUND FACTS
Grand Textile is a local manufacturing
corporation. In 1974, it imported from different
countries various articles such as dyestuffs, spare
parts for textile machinery, polyester filament
yarn, textile auxiliary chemicals, trans open type
reciprocating compressor, and trevira filament.
Subsequent to the importation, these articles
were transferred to Customs Bonded Warehouse
No. 462. As computed by the Bureau of Customs,
the customs duties, internal revenue taxes, and
other charges due on the importations amounted
to P2,363,147.00. To secure the payment of these
obligations pursuant to Section 1904 of the Tariff
and Customs Code (Code),4 Intra-Strata and
PhilHome each issued general warehousing bonds
in favor of the Bureau of Customs. These bonds,
the terms of which are fully quoted below,
commonly provide that the goods shall be
withdrawn from the bonded warehouse "on
payment of the legal customs duties, internal
revenue, and other charges to which they shall
then be subject."5
Without payment of the taxes, customs duties,
and charges due and for purposes of domestic
consumption, Grand Textile withdrew the
imported goods from storage.6 The Bureau of
Customs demanded payment of the amounts due
from Grand Textile as importer, and from IntraStrata and PhilHome as sureties. All three failed
to pay. The government responded on January 14,
1983 by filing a collection suit against the parties
with the RTC of Manila.
LOWER COURT DECISIONS
After hearing, the RTC rendered its January 4,
1995 decision finding Grand Textile (as importer)
and the petitioners (as sureties) liable for the
taxes, duties, and charges due on the imported
articles. The dispositive portion of this decision
states: 7

14
WHEREFORE, premises considered, the Court
RESOLVES directing:
(1) the defendant Grand Textile
Manufacturing Corporation to pay plaintiff,
the sum of P2,363,174.00, plus interests
at the legal rate from the filing of the
Complaint until fully paid;

2. that their non-involvement in the active


handling of the warehoused items from
the time they were stored up to their
withdrawals substantially increased the
risks they assumed under the bonds they
issued, thereby releasing them from
liabilities under these bonds.8

(2) the defendant Intra-Strata Assurance


Corporation to pay plaintiff, jointly and
severally, with defendant Grand, the sum
of P2,319,211.00 plus interest from the
filing of the Complaint until fully paid; and
the defendant Philippine Home Assurance
Corporation to pay plaintiff the sum
of P43,936.00 plus interests to be
computed from the filing of the Complaint
until fully paid;

In their arguments, they essentially pose the


legal issue of whether the withdrawal of the
stored goods, wares, and merchandise without
notice to them as sureties released them from
any liability for the duties, taxes, and charges
they committed to pay under the bonds they
issued. They additionally posit that they should
be released from any liability because the Bureau
of Customs, through the fault or negligence of its
employees, allowed the withdrawal of the goods
without the payment of the duties, taxes, and
other charges due.

(3) the forfeiture of all the General


Warehousing Bonds executed by IntraStrata and PhilHome; and

The respondent, through the Solicitor General,


maintains the opposite view.

(4) all the defendants to pay the costs of


suit.

THE COURTS RULING


We find no merit in the petition and consequently
affirm the CA decision.

SO ORDERED.
The CA fully affirmed the RTC decision in its
decision dated November 26, 2002. From this CA
decision, the petitioners now come before this
Court through a petition for review on certiorari
alleging that the CA decided the presented legal
questions in a way not in accord with the law and
with the applicable jurisprudence.
ASSIGNED ERRORS
The petitioners present the following points as
the conclusions the CA should have made:
1. that they were released from their
obligations under their bonds when Grand
Textile withdrew the imported goods
without payment of taxes, duties, and
other charges; and

Nature of the Suretys Obligations


Section 175 of the Insurance Code defines a
contract of suretyship as an agreement whereby
a party called the surety guarantees the
performance by another party called the principal
or obligor of an obligation or undertaking in favor
of another party called the obligee, and includes
among its various species bonds such as those
issued pursuant to Section 1904 of the
Code.9 Significantly, "pertinent provisions of the
Civil Code of the Philippines shall be applied in a
suppletory character whenever necessary in
interpreting the provisions of a contract of
suretyship."10By its very nature under the terms
of the laws regulating suretyship, the liability of
the surety is joint and several but limited to the
amount of the bond, and its terms are
determined strictly by the terms of the contract
of suretyship in relation to the principal contract
between the obligor and the obligee.11
The definition and characteristics of a suretyship
bring into focus the fact that a surety agreement
is an accessory contract that introduces a third

15
party element in the fulfillment of the principal
obligation that an obligor owes an obligee. In
short, there are effectively two (2) contracts
involved when a surety agreement comes into
play a principal contract and an accessory
contract of suretyship. Under the accessory
contract, the surety becomes directly, primarily,
and equally bound with the principal as the
original promissor although he possesses no
direct or personal interest over the latters
obligations and does not receive any benefit
therefrom.12
The Bonds Under Consideration
That the bonds under consideration are surety
bonds (and hence are governed by the above
laws and rules) is not disputed; the petitioners
merely assert that they should not be liable for
the reasons summarized above. Two elements,
both affecting the suretyship agreement, are
material in the issues the petitioners pose. The
first is the effect of the law on the suretyship
agreement; the terms of the suretyship
agreement constitute the second.
A feature of the petitioners bonds, not stated
expressly in the bonds themselves but one that is
true in every contract, is that applicable laws
form part of and are read into the contract
without need for any express reference. This
feature proceeds from Article 1306 of the Civil
Code pursuant to which we had occasion to rule:
It is to be recognized that a large degree of
autonomy is accorded the contracting parties.
Not that it is unfettered. They may, according to
Article 1306 of the Civil Code "establish such
stipulations, clauses, terms, and conditions as
they may deem convenient, provided that they
are not contrary to law, morals, good customs,
public order, or public policy." The law thus sets
limits. It is a fundamental requirement that
the contract entered into must be in
accordance with, and not repugnant to, an
applicable statute. Its terms are embodied
therein. The contracting parties need not
repeat them. They do not even have to be
referred to. Every contract thus contains
not only what has been explicitly stipulated
but also the statutory provisions that have
any bearing on the matter."13

Two of the applicable laws, principally pertaining


to the importer, are Sections 101 and 1204 of the
Tariff and Customs Code which provide that:
Sec 101. Imported Items Subject to Duty All
articles when imported from any foreign country
into the Philippines shall be subject to duty upon
such importation even though previously
exported from the Philippines, except as
otherwise specifically provided for in this Code or
in clear laws.
xxxx
Sec. 1204. Liability of Importer for Duties Unless
relieved by laws or regulations, the liability for
duties, taxes, fees, and other charges attaching
on importation constitutes a personal debt due
from the importer to the government which can
be discharged only by payment in full of all
duties, taxes, fees, and other charges legally
accruing. It also constitutes a lien upon the
articles imported which may be enforced which
such articles are in custody or subject to the
control of the government.
The obligation to pay, principally by the importer,
is shared by the latter with a willing third party
under a suretyship agreement under Section
1904 of the Code which itself provides:
Section 1904. Irrevocable Domestic Letter of
Credit or Bank Guarantee or Warehousing Bond
After articles declared in the entry of warehousing
shall have been examined and the duties, taxes,
and other charges shall have been determined,
the Collector shall require from the importer, an
irrevocable domestic letter of credit, bank
guarantee, or bond equivalent to the amount of
such duties, taxes, and other charges conditioned
upon the withdrawal of the articles within the
period prescribed by Section 1908 of this Code
and for payment of any duties, taxes, and other
charges to which the articles shall then be subject
and upon compliance with all legal requirements
regarding their importation.
We point these out to stress the legal basis for
the submission of the petitioners bonds and the
conditions attaching to these bonds. As
heretofore mentioned, there is, firstly, a principal
obligation belonging to the importer-obligor as
provided under Section 101; secondly, there is an
accessory obligation, assumed by the sureties
pursuant to Section 1904 which, by the nature of

16
a surety agreement, directly, primarily, and
equally bind them to the obligee to pay the
obligors obligation.
The second element to consider in a suretyship
agreement relates to the terms of the bonds
themselves, under the rule that the terms of the
suretyship are determined by the suretyship
contract itself.14 The General Warehousing
Bond15 that is at the core of the present dispute
provides:
KNOW ALL MEN BY THESE PRESENTS:
That I/we GRAND TEXTILE MANUFACTURING
CORPORATION Km. 21, Marilao, Bulacan, as
Principal, and PHILIPPINE HOME ASSURANCE as
the latter being a domestic corporation duly
organized and existing under and by virtue of the
laws of the Philippines, as Surety, are held and
firmly bound unto the Republic of the Philippines,
in the sum of PESOS TWO MILLION ONLY
(P2,000,000.00), Philippine Currency, to be paid
to the Republic of the Philippines, for the
payment whereof, we bind ourselves, our heirs,
executors, administrators and assigns, jointly and
severally, firmly by these presents:
WHEREAS, the above-bounden Principal will from
time to time make application to make entry for
storing in customs-internal revenue bonded
warehouse certain goods, wares, and
merchandise, subject to customs duties and
special import tax or internal revenue taxes or
both;
WHEREAS, the above principal in making
application for storing merchandise in customsinternal revenue bonded warehouse as above
stated, will file this in his name as principal, which
bond shall be approved by the Collector of
Customs or his Deputy; and
WHEREAS, the surety hereon agrees to accept all
responsibility jointly and severally for the acts of
the principal done in accordance with the terms
of this bond.
NOW THEREFORE, the condition of this obligation
is such that if within six (6) months from the date
of arrival of the importing vessel in any case, the
goods, wares, and merchandise shall be regularly
and lawfully withdrawn from public stores or
bonded warehouse on payment of the legal

customs duties, internal revenue taxes, and other


charges to which they shall then be subject; or if
at any time within six (6) months from the said
date of arrival, or within nine (9) months if the
time is extended for a period of three (3) months,
as provided in Section 1903 of the Tariff and
Customs Code of the Philippines, said importation
shall be so withdrawn for consumption, then the
above obligation shall be void, otherwise, to
remain in full force and effect.
Obligations hereunder may only be accepted
during the calendar year 1974 and the right to
reserve by the corresponding Collector of
Customs to refuse to accept further liabilities
under this general bond, whenever, in his
opinion, conditions warrant doing so.
IN WITNESS WHEREOF, we have signed our
names and affixed our seals on this 20th day of
September, 1974 at Makati, Rizal, Philippines.
Considered in relation with the underlying laws
that are deemed read into these bonds, it is at
once clear that the bonds shall subsist that is,
"shall remain in full force and effect" unless the
imported articles are "regularly and lawfully
withdrawn. . .on payment of the legal customs
duties, internal revenue taxes, and other charges
to which they shall be subject." Fully fleshed
out, the obligation to pay the duties, taxes, and
other charges primarily rested on the principal
Grand Textile; it was allowed to warehouse the
imported articles without need for prior payment
of the amounts due, conditioned on the filing of a
bond that shall remain in full force and effect until
the payment of the duties, taxes, and charges
due. Under these terms, the fact that a
withdrawal has been made and its circumstances
are not material to the sureties liability, except to
signal both the principals default and the
elevation to a due and demandable status of the
sureties solidary obligation to pay. Under the
bonds plain terms, this solidary obligation
subsists for as long as the amounts due on the
importations have not been paid. Thus, it is
completely erroneous for the petitioners to say
that they were released from their obligations
under their bond when Grand Textile withdrew the
imported goods without payment of taxes, duties,
and charges. From a commonsensical
perspective, it may well be asked: why else would
the law require a surety when such surety would
be bound only if the withdrawal would be regular

17
due to the payment of the required duties, taxes,
and other charges?
We note in this regard the rule that a surety is
released from its obligation when there is a
material alteration of the contract in connection
with which the bond is given, such as a change
which imposes a new obligation on the promising
party, or which takes away some obligation
already imposed, or one which changes the legal
effect of the original contract and not merely its
form. A surety, however, is not released by a
change in the contract which does not have the
effect of making its obligation more onerous.16
We find under the facts of this case no significant
or material alteration in the principal contract
between the government and the importer, nor in
the obligation that the petitioners assumed as
sureties. Specifically, the petitioners never
assumed, nor were any additional obligation
imposed, due to any modification of the terms of
importation and the obligations thereunder. The
obligation, and one that never varied, is on the
part of the importer, to pay the customs duties,
taxes, and charges due on the importation, and
on the part of the sureties, to be solidarily bound
to the payment of the amounts due on the
imported goods upon their withdrawal or upon
expiration of the given terms. The petitioners
lack of consent to the withdrawal of the goods, if
this is their complaint, is a matter between them
and the principal Grand Textile; it is a matter
outside the concern of government whose
interest as creditor-obligee in the importation
transaction is the payment by the importerobligor of the duties, taxes, and charges due
before the importation process is concluded. With
respect to the sureties who are there as third
parties to ensure that the amounts due are paid,
the creditor-obligee's active concern is to enforce
the sureties solidary obligation that has become
due and demandable. This matter is further and
more fully explored below.
The Need for Notice to Bondsmen
To support the conclusion that they should be
released from the bonds they issued, the
petitioners argue that upon the issuance and
acceptance of the bonds, they became direct
parties to the bonded transaction entitled to
participate and actively intervene, as sureties, in
the handling of the imported articles; that, as
sureties, they are entitled to notice of any act of

the bond obligee and of the bond principal that


would affect the risks secured by the bond; and
that otherwise, the door becomes wide open for
possible fraudulent conspiracy between the bond
obligee and principal to defraud the surety.17
In taking these positions, the petitioners appear
to misconstrue the nature of a surety relationship,
particularly the fact that two types of
relationships are involved, that is, the underlying
principal relationship between the creditor
(government) and the debtor (importer), and the
accessory surety relationship whereby the surety
binds itself, for a consideration paid by the
debtor, to be jointly and solidarily liable to the
creditor for the debtors default. The creditor in
this latter relationship accepts the suretys
solidary undertaking to pay if the debtor does not
pay.18 Such acceptance, however, does not
change in any material way the creditors
relationship with the principal debtor nor does it
make the surety an active party to the principal
creditor-debtor relationship. The contract of
surety simply gives rise to an obligation on the
part of the surety in relation with the creditor and
is a one-way relationship for the benefit of the
latter.19
In other words, the surety does not, by reason of
the surety agreement, earn the right to intervene
in the principal creditor-debtor relationship; its
role becomes alive only upon the debtors
default, at which time it can be directly held liable
by the creditor for payment as a solidary obligor.
A surety contract is made principally for the
benefit of the creditor-obligee and this is ensured
by the solidary nature of the sureties
undertaking.20 Under these terms, the surety is
not entitled as a rule to a separate notice of
default,21 nor to the benefit of excussion,22 and
may be sued separately or together with the
principal debtor.23 The words of this Court in
Palmares v. CA24 are worth noting:
Demand on the surety is not necessary before
bringing the suit against them. On this point, it
may be worth mentioning that a surety is not
even entitled, as a matter of right, to be given
notice of the principals default. Inasmuch as the
creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure
to voluntarily give information to the surety of the
default of the principal cannot have the effect of
discharging the surety. The surety is bound to
take notice of the principals default and to

18
perform the obligation. He cannot complain that
the creditor has not notified him in the absence of
a special agreement to that effect in the contract
of suretyship.
Significantly, nowhere in the petitioners bonds
does it state that prior notice is required to fix the
sureties liabilities. Without such express
requirement, the creditors right to enforce
payment cannot be denied as the petitioners
became bound as soon as Grand Textile, the
principal debtor, defaulted. Thus, the filing of the
collection suit was sufficient notice to the sureties
of their principals default.
The petitioners reliance on Visayan Surety and
Insurance Corporation v. Pascual25 and Aguasin v.
Velasquez26does not appear to us to be well taken
as these cases do not squarely apply to the
present case. These cases relate to bonds issued
as a requirement for the issuance of writs of
replevin. The Rules of Court expressly require that
before damages can be claimed against such
bonds, notice must be given to the sureties to
bind them to the award of damages. No such
requirement is evident in this case as neither the
Tariff and Customs Code nor the issued bonds
require prior notice to sureties.
The petitioners argument focusing on the
additional risks they incur if they cannot
intervene in the handling of the warehoused
articles must perforce fail in light of what we have
said above regarding the nature of their
obligation as sureties and the relationships
among the parties where a surety agreement
exists. We add that the petitioners have
effectively waived as against the creditor (the
government) any such claim in light of the
provision of the bond that "the surety hereon
agrees to accept all responsibility jointly and
severally for the acts of the principal done in
accordance with the terms of this bond."27 Any
such claim including those arising from the
withdrawal of the warehoused articles without the
payment of the requisite duties, taxes and
charges is for the principal and the sureties to
thresh out between or among themselves.
Government is Not Bound by Estoppel
As its final point, the petitioners argue that they
cannot be held liable for the unpaid customs
duties, taxes, and other charges because it is the
Bureau of Customs duty to ensure that the duties

and taxes are paid before the imported goods are


released from its custody and they cannot be
made to pay for the error or negligence of the
Bureaus employees in authorizing the unlawful
and irregular withdrawal of the goods.
It has long been a settled rule that the
government is not bound by the errors committed
by its agents. Estoppel does not also lie against
the government or any of its agencies arising
from unauthorized or illegal acts of public
officers.28 This is particularly true in the collection
of legitimate taxes due where the collection has
to be made whether or not there is error,
complicity, or plain neglect on the part of the
collecting agents.29 In CIR v. CTA,30 we pointedly
said:
It is axiomatic that the government cannot and
must not be estopped particularly in matters
involving taxes.lawphi1 Taxes are the lifeblood of
the nation through which the government
agencies continue to operate and with which the
State effects its functions for the welfare of its
constituents. Thus, it should be collected without
unnecessary hindrance or delay.
We see no reason to deviate from this rule and
we shall not do so now.
WHEREFORE, premises considered, we hereby
DENY the petition and AFFIRM the Decision of the
Court of Appeals. Costs against the petitioners.
SO ORDERED.
REINSURANCE
SEC. 97. A contract of reinsurance is one by
which an insurer procures a third person to insure
him against loss or liability by reason of such
original insurance.
SEC. 98. Where an insurer obtains reinsurance,
except under automatic reinsurance treaties, he
must communicate all the representations of the
original insured, and also all the knowledge and
information he possesses, whether previously or
subsequently acquired, which are material to the
risk.
SEC. 99. A reinsurance is presumed to be a
contract of indemnity against liability, and not
merely against damage.

19
SEC. 100. The original insured has no interest in
a contract of reinsurance.
AVON INSURANCE V. CA

Just how far can our court assert jurisdiction


over the persons of foreign entities being charged
with contractual liabilities by residents of the
Philippines?
Appealing from the Court of Appeals October
11, 1990 Decision[1] in CA-G.R. No. 22005,
petitioners claim that the trial courts jurisdiction
does not extend to them, since they are foreign
reinsurance companies that are not doing
business in the Philippines.Having entered into
reinsurance contracts abroad, petitioners are
beyond the jurisdictional ambit of our courts and
cannot
be
rendered
summons
through
extraterritorial service, as under Section 17, Rule
14 of the Rules of Court, nor through the
Insurance
Commissioner,
under
Section
14. Private respondent Yupangco Cotton Mills
contend on the other hand that petitioners are
within our courts cognitive powers, having
submitted voluntarily to their jurisdiction by filing
motions to dismiss[2] the private respondents suit
below.
The antecedent facts, as found by the
appellate court, are as follows:
Respondent Yupangco Cotton Mills filed a
complaint against several foreign reinsurance
companies (among which are petitioners) to
collect their alleged percentage liability under
contract treaties between the foreign insurance
companies and the international insurance broker
C.J. Boatright, acting as agent for respondent
Worldwide Surety and Insurance
Company. Inasmuch as petitioners are not
engaged in business in the Philippines with no
offices, places of business or agents in the
Philippines, the reinsurance treaties having been
rendered abroad, service of summons upon
motion of respondent Yupangco, was made upon
petitioners through the office of the Insurance
Commissioner. Petitioners, by counsel on special
appearance, seasonably filed motions to dismiss
disputing the jurisdiction of respondent Court and
the extra-territorial service of
summons.Respondent Yupangco filed its
opposition to the motion to dismiss, petitioners

filed their reply, and respondent Yupangco filed


its rejoinder. In an order dated April 30, 1990
respondent Court denied the motions to dismiss
and directed petitioners to file their answer. On
May 29, 1990, petitioners filed their notice of
appeal. In an order dated June 4, 1990,
respondent court denied due course to the
appeal.[3]
To this day, trial on the merits of the
collection suit has not proceeded as in the
present petition, petitioners continue vigorously
to dispute the trial courts assumption of
jurisdiction over them.
It will be remembered that in the plaintiffs
complaint,[4] it was contended that on July 6, 1979
and on October 1, 1980, Yupangco Cotton Mills
engaged to secure with Worldwide Security and
Insurance Co. Inc., several of its properties for the
periods July 6, 1979 to July 6, 1980 as under
Policy
No.
20719
for
a
coverage
of P100,000,000.00 and from October 1, 1980 to
October 1, 1981, under Policy No. 25896, also
for P100,000,000.00.Both contracts were covered
by reinsurance treaties between Worldwide
Surety and Insurance and several foreign
reinsurance
companies,
including
the
petitioners. The reinsurance arrangements had
been made through international broker C.J.
Boatright and Co. Ltd., acting as agent of
Worldwide Surety and Insurance.
As fate would have it, on December 16, 1979
and May 2, 1981, with in the respective effectivity
periods of Policies 20719 and 25896, the
properties therein insured were razed by fire ,
thereby giving rise to the obligation of the insurer
to indemnify the Yupangco Cotton Mills. Partial
payments were made by Worldwide Surety and
Insurance and some of the reinsurance
companies.
On May 2, 1983, Worldwide Surety and
Insurance, in a deed of Assignment, acknowledge
a remaining balance of P19,444,447.75 still due
Yupangco Cotton Mills, and assigned to the latter
all reinsurance proceeds still collectible from all
the foreign reinsurance companies. Thus, in its
interest as assignee and original insured,
Yupangco Cotton Mills instituted this collection
suit against the petitioners.
Service of summons upon the petitioners was
made
by
notification
to
the
Insurance

20
Commissioner, pursuant to Section 14, Rule 14 of
the Rules of Court.[5]
In a Petition for Certiorari filed with the Court
of Appeals, petitioners submitted that respondent
Court has no jurisdiction over them, being all
foreign corporations not doing business in the
Philippines with no office, place of business or
agents
in
the
Philippines.The
remedy
of Certiorari was resorted to by petitioners on the
premise that if petitioners had filed an answer to
the complaint as ordered by the respondent
court, they would risk abandoning the issue of
jurisdiction. Moreover, extra-territorial service of
summons on petitioners is null and void because
the complaint for collection is not one affecting
plaintiffs status and not relating to property
within the Philippines.
The Court of Appeals found the petition
devoid of merit, stating that:
1. Petitioners were properly served with
summons and whatever defect, if any,
in the service of summons were cured
by their voluntary appearance in
court, via motion to dismiss.
2. Even assuming that petitioners have
not yet voluntarily appeared as codefendants in the case below even
after having filed the motion to
dismiss adverted to, still the situation
does not deserve dismissal of the
complaint as far as they are
concerned, since as held by this Court
in Linger Fisher GMBH vs. IAC, 125
SCRA 253.
A case should not be dismissed simply because
an original summons was wrongfully served. It
should be difficult to conceive for example, that
when a defendant personally appears before a
court complaining that he had not been validly
summoned, that the case filed against him should
be dismissed. An alias summons can be actually
served on said defendant.
3. Being
reinsurers
of
respondent
Worlwide Surety and Insurance of the
risk which the latter assumed when it
issued the fire insurance policies in
dispute in favor of respondent
Yupangco, petitioners cannot now
validly argue that they do not do

business in this country. At the very


least, petitioners must be deemed to
have engaged in business in the
Philippines no matter how isolated or
singular such business might be, even
on the assumption that among the
local domestic insurance corporations
of this country, it is only in favor of
Worldwide Surety and Insurance that
they have ever reinsured any risk
arising from reinsurance within the
territory.
4. The issue of whether or not petitioners
are doing business in the country is a
matter best reffered to a trial on the
merits of the case and so should be
addressed there.
Maintaining its submission that they are
beyond the jurisdiction of the Philippine Courts,
petitioners are now before us, stating:
Petitioners, being foreign corporations, as found
by the trial court, not doing business in the
Philippines with no office, place of business or
agents in the Philippines, are not subject to the
jurisdiction of the Philippine courts.
The complaint for sum of money being a personal
action not affecting status or relating to property,
extraterritorial service of summons on petitioners
all not doing business in the Philippines is null
and void.
The appearance of counsel for petitioners being
explicitly by special appearance without waiving
objections to the jurisdiction over their persons or
the subject matter and the motions do dismiss
having excluded non-jurisdictional grounds, there
is no voluntary submission to the jurisdiction of
the trial court.[6]
For its part, private respondent Yupangco
counter-submits:
1. Foreign corporations, such as petitioners, not
doing business in the Philippines, can be sued in
the Philippine Courts, not withstanding petitioners
claim to the contrary.
2. While the complaint before the Honorable Trial
Court is for a sum of money, not affecting status
or relating to property, petitioners (then

21
defendants) can submit themselves voluntarily to
the jurisdiction of Philippine Courts, even if there
is no extra-judicial (sic) service of summons upon
them.
3. The voluntary appearance of the petitioners
(then defendants) before the Honorable Trial
Court amounted, in effect, to voluntary
submission to its jurisdiction over their persons.[7]
In the decisions of the courts below, there is
much left to speculation and conjecture as to
whether or not the petitioners were determined
to be doing business in the Philippines or not.
To qualify the petitioners business of
reinsurance within the Philippine forum, resort
must be made to established principles in
determining what is meant by doing business in
the Philippines. In Communication Materials and
Design, Inc. et. al vs. Court of Appeals,[8]it was
observed that:
There is no exact rule of governing principle as to
what constitutes doing or engaging in or
transacting business. Indeed, such case must be
judged in the light of its peculiar circumstances,
upon its peculiar facts and upon the language of
the statute applicable. The true test, however,
seems to be whether the foreign corporation is
continuing the body or substance of the business
or enterprise for which it was organized.
Article 44 of the Omnibus Investments Code of
1987 defines the phrase to include:
'soliciting orders, purchases, service contracts
opening offices, whether called liaison offices of
branches; appointing representatives or
distributors who are domiciled in the Philippines
or who in any calendar year stay in the
Philippines for a period or periods totaling one
hundred eighty (180) days or more; participating
in the management, supervision or control of any
domestic business firm, entity or corporation in
the Philippines, and any other act or acts that
imply a continuity or commercial dealings or
arrangements and contemplate to that extent the
performance of acts or works, or the exercise of
some of the functions normally incident to and in
progressive prosecution of, commercial gain or of
purpose and object of the business organization.

The term ordinarily implies a continuity of


commercial dealings and arrangements, and
contemplates, to that extent, the performance of
acts or works or the exercise of the functions
normally incident to and in progressive
prosecution of the purpose and object of its
organization.[9]
A single act or transaction made in the
Philippines, however, could not qualify a foreign
corporation to be doing business in the
Philippines, if such singular act is not merely
incidental or casual, but indicates the foreign
corporations intention to do business in the
Philippines.[10]
There is no sufficient basis in the records
which would merit the institution of this collection
suit in the Philippines. More specifically, there is
nothing to substantiate the private respondents
submission that the petitioners had engaged in
business activities in this country. This is not an
instance where the erroneous service of
summons upon the defendant can be cured by
the issuance and service of alias summons, as in
the absence of showing that petitioners had been
doing business in the country, they cannot be
summoned to answer for the charges leveled
against them.
The Court is cognizant of the doctrine is
Signetics Corp. vs. Court of Appeals[11] that for the
purpose of acquiring jurisdiction by way of
summons on a defendant foreign corporation,
there is no need to prove first the fact that
defendant
is
doing
business
in
the
Philippines. The plaintiff only has to allege in the
complaint that the defendant has an agent in the
Philippines for summons to be validly served
thereto, even without prior evidence advancing
such factual allegation.
As it is, private respondent has made no
allegation or demonstration of the existence of
petitioners domestic agent, but avers simply that
they are doing business not only abroad but in
the Philippines as well. It does not appear at all
that the petitioners had performed any act which
would give the general public the impression that
it had been engaging, or intends to engage in its
ordinary and usual business undertakings in the
country. The reinsurance treaties between the
petitioners and Worldwide Surety and Insurance
were made through an international insurance
brokers, and not through any entity of means

22
remotely
connected
with
the
Philippines. Moreover there is authority to the
effect that a reinsurance company is not doing
business in a certain state merely because the
property of lives which are insured by the original
insurer company are located in that state. [12] The
reason for this is that a contract or reinsurance is
generally a separate and distinct arrangement
from the original contract of insurance, whose
contracted risk is insured in the reinsurance
agreement.[13] Hence, the original insured has
generally no interest in the contract of
reinsurance.[14]
A foreign corporation, is one which owes its
existence to the laws of another state, [15]and
generally has no legal existence within the state
in which it is foreign. In Marshall Wells Co. vs.
Elser,[16] it was held that corporations have no
legal status beyond the bounds of sovereignty by
which they are created. Nevertheless, it is widely
accepted that foreign corporations are, by reason
of state comity, allowed to transact business in
other states and to sue in the courts of
such fora. In the Philippines foreign corporations
are allowed such privileges, subject to certain
restrictions, arising from the states sovereign
right of regulation.
Before a foreign corporation can transact
business in the country, it must first obtain a
license to transact business here [17] and secure
the proper authorizations under existing law.
If a foreign corporation engages in business
activities without the necessary requirements, it
opens itself to court actions against it, but it shall
not be allowed maintain or intervene in an action,
suit or proceeding for its own account in any
court or tribunal or agency in the Philippines.[18]
The purpose of the law in requiring that
foreign corporations doing business in the
country be licensed to do so, is to subject the
foreign corporations doing business in the
Philippines to the jurisdiction of the courts,
[19]
otherwise, a foreign corporation illegally doing
business here because of its refusal or neglect to
obtain the required license and authority to do
business may successfully though unfairly plead
such neglect or illegal act so as to avoid service
and thereby impugn the jurisdiction of the local
courts.

The same danger does not exist among


foreign corporations that are indubitably not
doing business in the Philippines. Indeed, if a
foreign corporation does not do business here,
there would be no reason for it to be subject to
the States regulation. As we observed, in so far
as State is concerned, such foreign corporation
has no legal existence.Therefore, to subject such
corporation to the courts jurisdiction would
violate the essence of sovereignty.
In the alternative, private respondent
submits that foreign corporations not doing
business in the Philippines are not exempt from
suits leveled against them in courts, citing the
case of Facilities Management Corporation vs.
Leonardo Dela Osa, et. al.[20] where we ruled that
indeed, if a foreign corporation, not engaged in
business in the Philippines, is not barred from
seeking redress from Courts in the Philippines,
a fortiori, that same corporation cannot claim
exemption from being sued in the Philippines
Courts for acts done against a person or persons
in the Philippines.
We are not persuaded by the position taken
by
the
private
respondent. In
Facilities
Management case, the principal issue presented
was whether the petitioner had been doing
business in the Philippines, so that service of
summons upon its agent as under Section 14,
Rule 14 of the Rules of Court can be made in
order that the Court of First Instance could
assume jurisdiction over it. The court ruled that
the petitioner was doing business in the
Philippines, and that by serving summons upon
its resident agent, the trial court had effectively
acquired jurisdiction. In that case, the court made
no prescription as the absolute suability of foreign
corporations not doing business in the country,
but merely discounts the absolute exemption of
such
foreign
corporations
from
liabilities
particularly arising from acts done against a
person or persons in the Philippines.
As we have found, there is no showing that
petitioners had performed any act in the country
that would place it within the sphere of the courts
jurisdiction. A general allegation standing alone,
that a party is doing business in the Philippines
does not make it so. A conclusion of fact or law
cannot be derived from the unsubstantiated
assertions of parties notwithstanding the
demands of convenience or dispatch in legal
actions, otherwise, the Court would be guilty of

23
sorcery;
extracting
substance
out
of
nothingness. In addition, the assertion that a
resident of the Philippines will be inconvenienced
by an out-of-town suit against a foreign entity, is
irrelevant and unavailing to sustain the
continuance of a local action, for jurisdiction is
not dependent upon the convenience or
inconvenience of a party.[21]
It is also argued that having filed a motion to
dismiss in the proceedings before the trial court,
petitioners have thus acquiesced to the courts
jurisdiction, and they cannot maintain the
contrary at this juncture.
This argument is at the most, flimsy.
In civil cases, jurisdiction over the person of
the defendant is acquired either by his voluntary
appearance in court and his submission to its
authority or by service of summons.[22]
Fundamentally, the service of summons is
intended to give official notice to the defendant
or respondent that an action had been
commenced
against
it. The
defendant
or
respondent is thus put on guard as to the
demands of the plaintiff as stated in the
complaint.[23] The service of summons, upon the
defendant becomes an important element in the
operation of a courts jurisdiction upon a party to
a suit, as service of summons upon the defendant
is the means by which the court acquires
jurisdiction over his person.[24]Without service of
summons, or when summons are improperly
made, both the trial and the judgment, being in
violation of due process, are null and void,
[25]
unless the defendant waives the service of
summons by voluntarily appearing and answering
the suit.[26]
When a defendant voluntarily appears, he is
deemed to have submitted himself to the
jurisdiction of the court.[27] This is not, however,
always the case. Admittedly, and without
subjecting himself to the courts jurisdiction, the
defendant in an action can, by special
appearance object to the courts assumption on
the ground of lack of jurisdiction. If he so wishes
to assert this defense, he must do so seasonably
by motion for the purpose of objecting to the
jurisdiction of the court, otherwise, he shall be
deemed to have submitted himself to that
jurisdiction.[28] In the case of foreign corporations,
it has been held that they may seek relief against

the wrongful assumption of jurisdiction by local


courts. In Time, Inc. vs. Reyes,[29] it was held that
the action of a court in refusing to rule of
deferring its ruling on a motion to dismiss for lack
or excess of jurisdiction is correctable by a writ of
prohibition or certiorari sued out in the appellate
court even before trial on the merits is had. The
same remedy is available should the motion to
dismiss be denied, and the court, over the foreign
corporations objections, theratens to impose its
jurisdiction upon the same.
If the defendant, besides setting up in a
motion to dismiss his objections to the jurisdiction
of the court, alleges at the same time any other
ground for dismissing the action, or seeks an
affirmative refief in the motion,[30] he is deemed
to have submitted himself to the jurisdiction of
the court.
In this instance, however, the petitioners
from the time they filed their motions to dismiss,
their submission have been consistently and
unfailingly to object to the trial courts assumption
of jurisdiction, anchored on the fact that they are
all foreign corporations not doing business in the
Philippines.
As we have consistently held, if the
appearance of a party in a suit is precisely to
question the jurisdiction of the said tribunal over
the person of the defendant, then this
appearance is not equivalent to service of
summons, nor does is constitute an acquiescence
to the courts jurisdiction.[31] Thus it cannot be
argued that the petitioners had abandoned their
objections to the jurisdiction of the court, as their
motions to dismiss in the trial court, and all their
subsequent posturings, were all in protest of the
private respondent's insistence on holding them
so answer a charge in a forum where they believe
they are not subject to. Clearly, to continue the
proceedings in a case such as those before Us
would just be useless and a waste of time.[32]
ACCORDINGLY, the decision appealed from
dated October 11, 1990, is SET ASIDE and the
instant
petition
is
hereby
GRANTED. The
respondent Regional Trial Court of Manila, Branch
51 is declared without jurisdiction to take
cognizance of Civil Case No. 86-37932, and all its
orders and issuances in connection therewith are
hereby
ANNULLED
and
SET
ASIDE. The
respondent court is hereby ORDERED to DESIST

24
from maintaining further proceeding in the case
aforestated.
SO ORDERED.
DOUBLE INSURANCE
SEC. 95. A double insurance exists where the
same person is insured by several insurers
separately in respect to the same subject and
interest.
SEC. 96. Where the insured in a policy other
than life is over insured by double insurance:
(a) The insured, unless the policy otherwise
provides, may claim payment from the insurers in
such order as he may select, up to the amount for
which the insurers are severally liable under their
respective contracts;
(b) Where the policy under which the insured
claims is a valued policy, any sum received by
him under any other policy shall be deducted
from the value of the policy without regard to the
actual value of the subject matter insured;
(c) Where the policy under which the insured
claims is an unvalued policy, any sum received by
him under any policy shall be deducted against
the full insurable value, for any sum received by
him under any policy;
(d) Where the insured receives any sum in
excess of the valuation in the case of valued
policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust
for the insurers, according to their right of
contribution among themselves;
(e) Each insurer is bound, as between himself
and the other insurers, to contribute ratably to
the loss in proportion to the amount for which he
is liable under his contract.
GENERAL INSURANCE vs. NG
HUA, respondent.
Suit to recover on a fire insurance policy. The
insurer presented several defenses in the Manila
court of first instance. After trial, it was required
to pay.

On appeal to the Courts of Appeal, the judgment


was affirmed. This is now a revision on certiorari,
upon the insurer's insistence on two of its main
defenses: prescription and breach of warranty.
The principal of facts on which adjudication may
rest are these:
On April 15, 1952, the defendant General
Insurance and Surety Corporation issued its
insurance Policy No. 471, insuring against fire, for
one year, the stock in trade of the Central
Pomade Factory owned by Ng Hua, the court
insured. The next day, the Pomade factory
building burned, resulting in destruction by fire of
the insured properties. Ng Hua claimed indemnity
from the insurer. The policy covered damages up
to P10,000.00; but after some negotiations and
upon suggestion of the Manila Adjustment
Company, he reduced the claim of P5,000.00.
Nevertheless, the defendant insurer refused to
pay for various reasons, namely (a) action was
not filed in time; (b) violation of warranty; (c)
submission of fraudulent claim; and (f) failure to
pay the premium.
The aforesaid Policy No. 471 contains this
stipulation on the back thereof;.
3. The insured shall give notice to the
company of any insurance or insurances
already affected, or which may
subsequently be effected, covering any of
the property hereby insured, and unless
such notice be given and the particulars of
such insurance or insurances be stated
in or endorsed on this Policy by or on
behalf of the Company before the
occurrence of any loss or damage, all
benefits under the policy shall be
forfeited. (Emphasis ours.)
The face of the policy bore the annotation: "CoInsurance Declared NIL"
It is undenied that Ng Hua had obtained fire
insurance on the same goods, for the same
period of time, in the amount of P20,000.00 from
General Indemnity Co. However, the Court of
Appeals referring to the annotation and
overruling the defense, held that there was no
violation of the above clause, inasmuch as "coinsurance exists when a condition of the policy
requires the insured to bear ratable proportion of
the loss when the value of the insured property

25
exceeds the face value of the policy," hence there
is no co-insurance here.
Discussion Undoubtedly, co-insurance exists
under the condition described by the appellate
court. But that is one kind of co-insurance. It
is not the only situation where co-insurance
exists. Other insurers of the same property
against the same hazard are sometimes referred
as co-insurers and the ensuing combination as
co-insurance.1 And considering the terms of the
policy which required the insured to declare other
insurances, the statement in question must be
deemed to be a statement (warranty) binding on
both insurer and insured, that there were no
other insurance on the property. Remember it
runs "Co-Insurance declared"; emphasis on the
last word. If "Co-Insurance" means that the Court
of Appeals says, the annotation served no
purpose. It would even be contrary to the
policyitself, which in its clause No. 17 made the
insured a co-insurer for the excess of the value of
the property over the amount of the policy.
The annotation then, must be deemed to be a
warranty that the property was not insured by
any other policy. Violation thereof entitles the
insurer to rescind. (Sec. 69. Insurance Act) Such
misrepresentation is fatal in the light of our views
in Santa Ana vs. Commercial Union Assurance
Company, Ltd., 55 Phil., 329. The materiality of
non-disclosure of other insurance policies is not
open to doubt.
Furthermore, even if the annotations were
overlooked, the defendant insurer would still be
free from liability because there is no question
that the policy issued by General Indemnity had
not been stated in nor endorsed on Policy No. 471
of defendant. And as stipulated in the abovequoted provisions of such policy "all benefit under
this policy shall be forfeited."2

To avoid the dissastrous effect of the


misrepresentation or concealment of the other
insurance policy, Ng Hua alleges "actual
knowledge" on the part of General insurance of
the fact that he had taken out additional
insurance with General Indemnity. He does not
say when such knowledge was acquired or
imparted. If General Insurance know before
issuing its policy or before the fire, such
knowledge might overcome the insurer's
defense.3 However, the Court of Appeals found no
evidence of such knowledge. We have read the
pages of the stenographic notes cited by Ng Hua
and we all gather is evidence of the existence of
the Insurance General Indemnity Company. As to
knowledge of General Insurance before issuance
of its policy or the fire, there was none.
Indeed, this concealment and violation was
expressly set up as a special defense in the
answer. Yet plaintiff did not, in avoidance, reply
nor assert such knowledge. And it is doubtful
whether the evidence on the point would be
admissible under the pleadings. (See Rule 11,
sec. 1.)
All the above considerations lead to the
conclusion that the defendant insurer
successfully established its defense of warranty
breach or concealment of the other insurance
and/or violation of the provision of the policy
above-mentioned.
Having reached the conclusion, we deem it
unnecessary to discuss the other defenses.
Wherefore, the judgment under review will be
revoked, and the defendant insurer (herein
petitioner) acquitted from all the liability under
the policy. Costs against respondent. So ordered.

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