[G.R. No.
177839 : January 18, 2012] the copy of the basic contract be submitted to the proposed surety for the appreciation of the
FIRST LEPANTO-TAISHO INSURANCE CORPORATION (NOW KNOWN AS FLT PRIME INSURANCE
CORPORATION), PETITIONER, VS. CHEVRON PHILIPPINES, INC. (FORMERLY KNOWN AS CALTEX
[PHILIPPINES], INC.), RESPONDENT.
VILLARAMA, JR., J.:
Before this Court is a Rule 45 Petition assailing the Decision[1] dated November 20, 2006 and
Resolution[2] dated May 8, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86623, which
reversed the Decision[3] dated August 5, 2005 of the Regional Trial Court (RTC) of Makati City,
Branch 59 in Civil Case No 02-857.cralaw
Respondent Chevron Philippines, Inc., formerly Caltex Philippines, Inc., sued petitioner First
Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) for the
payment of unpaid oil and petroleum purchases made by its distributor Fumitechniks
Corporation (Fumitechniks).
Fumitechniks, represented by Ma. Lourdes Apostol, had applied for and was issued Surety Bond
FLTICG (16) No. 01012 by petitioner for the amount of P15,700,000.00. As stated in the
attached rider, the bond was in compliance with the requirement for the grant of a credit line
with the respondent "to guarantee payment/remittance of the cost of fuel products withdrawn
within the stipulated time in accordance with the terms and conditions of the agreement." The
surety bond was executed on October 15, 2001 and will expire on October 15, 2002.[4]
Fumitechniks defaulted on its obligation. The check dated December 14, 2001 it issued to
respondent in the amount of P11,461,773.10, when presented for payment, was dishonored
for reason of "Account Closed." In a letter dated February 6, 2002, respondent notified
petitioner of Fumitechniks' unpaid purchases in the total amount of P15,084,030.30. In its
letter-reply dated February 13, 2002, petitioner through its counsel, requested that it be
furnished copies of the documents such as delivery receipts.[5]Respondent complied by sending
copies of invoices showing deliveries of fuel and petroleum products between November 11,
2001 and December 1, 2001.
Simultaneously, a letter[6] was sent to Fumitechniks demanding that the latter submit to
petitioner the following: (1) its comment on respondent's February 6, 2002 letter; (2) copy of
the agreement secured by the Bond, together with copies of documents such as delivery
receipts; and (3) information on the particulars, including "the terms and conditions, of any
arrangement that [Fumitechniks] might have made or any ongoing negotiation with Caltex in
connection with the settlement of the obligations subject of the Caltex letter."
In its letter dated March 1, 2002, Fumitechniks through its counsel wrote petitioner's counsel
informing that it cannot submit the requested agreement since no such agreement was
executed between Fumitechniks and respondent. Fumitechniks also enclosed a copy of another
surety bond issued by CICI General Insurance Corporation in favor of respondent to secure the
obligation of Fumitechniks and/or Prime Asia Sales and Services, Inc. in the amount of
P15,000,000.00.[7] Consequently, petitioner advised respondent of the non-existence of the
principal agreement as confirmed by Fumitechniks. Petitioner explained that being an
accessory contract, the bond cannot exist without a principal agreement as it is essential that
extent of the obligation to be covered by the bond applied for.[8]
On April 9, 2002, respondent formally demanded from petitioner the payment of its claim under
the surety bond. However, petitioner reiterated its position that without the basic contract
subject of the bond, it cannot act on respondent's claim; petitioner also contested the amount
of Fumitechniks' supposed obligation.[9]
Alleging that petitioner unjustifiably refused to heed its demand for payment, respondent
prayed for judgment ordering petitioner to pay the sum of P15,080,030.30, plus interest, costs
and attorney's fees equivalent to ten percent of the total obligation.[10]
Petitioner, in its Answer with Counterclaim,[11] 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.
After trial, the RTC rendered judgment dismissing the complaint as well as petitioner's
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 a 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
entered ORDERING defendant-appellant First Lepanto-Taisho Insurance Corporation to pay
plaintiff-appellant Caltex (Philippines) Inc. now Chevron Philippines, Inc. the sum of
P15,084,030.00.
SO ORDERED.[12]
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 of the surety bond it issued. Considering that such oral 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 unto CALTEX PHILIPPINES, INC. of ______ in the sum of FIFTEEN MILLION SEVEN HUNDRED
following issues: 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,
I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF and assigns, jointly and severally, firmly by these presents:
THE PROVISIONS OF THE SURETY BOND WHEN IT HELD THAT THE SURETY BOND SECURED AN
ORAL CREDIT LINE AGREEMENT NOTWITHSTANDING THE STIPULATIONS THEREIN CLEARLY The conditions of this obligation are as follows:
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 WHEREAS, the above-bounden principal, on 15th day of October, 2001 entered into
ATTACHED TO THE SURETY BOND AND MADE A PART THEREOF. [an] agreement with CALTEX PHILIPPINES, INC. of ________________ to fully and faithfully

II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING OUT THE a copy of which is attached hereto and made a part hereof:
QUESTIONED RESPONDENT'S EVIDENCE FOR BEING CONTRARY TO THE PAROL EVIDENCE RULE,
IMMATERIAL AND IRRELEVANT AND CONTRARY TO THE STATUTE OF FRAUDS. 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__.
III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING OUT THE
RESPONDENT'S MOTION FOR RECONSIDERATION OF THE RTC DECISION FOR BEING A MERE NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings,
SCRAP OF PAPER AND PRO FORMA AND, CONSEQUENTLY, IN NOT DECLARING THE RTC covenants, terms, conditions, and agreements stipulated in said agreement__ then this
DECISION AS FINAL AND EXECUTORY IN SO FAR AS IT DISMISSED THE COMPLAINT. obligation shall be null and void; otherwise it shall remain in full force and effect.

IV. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE RTC The liability of First Lepanto-Taisho Insurance Corporation under this bond will expire
DECISION AND IN NOT GRANTING PETITIONER'S COUNTERCLAIM.[13] on October 15, 2002__.

The main issue to be resolved is one of first impression: whether a surety is liable to the creditor x x x x[18] (Emphasis supplied.)
in the absence of a written contract with the principal.
The rider attached to the bond sets forth the following:
Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a
party, called the surety, guarantees the performance by another party, called the principal or WHEREAS, the Principal has applied for a Credit Line in the amount of PESOS: Fifteen Million
obligor, of an obligation or undertaking in favor of a third party, called the obligee. It includes Seven Hundred thousand only (P15,700,000.00), Philippine Currency with the Obligee for the
official recognizances, stipulations, bonds or undertakings issued under Act 536,[14] as purchase of Fuel Products;
amended. Suretyship arises upon the solidary binding of a person - deemed the surety - with
the principal debtor, for the purpose of fulfilling an obligation.[15] Such undertaking makes a WHEREAS, the obligee requires the Principal to post a bond to guarantee payment/remittance
surety agreement an ancillary contract as it presupposes the existence of a principal of the cost of fuel products withdrawn within the stipulated time in accordance with terms and
contract. Although the contract of a surety is in essence secondary only to a valid principal conditions of the agreement;
obligation, the surety becomes liable for the debt or duty of another although it possesses no
direct or personal interest over the obligations nor does it receive any benefit therefrom. And IN NO CASE, however, shall the liability of the Surety hereunder exceed the sum of
notwithstanding the fact that the surety contract is secondary to the principal obligation, the PESOS: Fifteen million seven hundred thousand only (P15,700,000.00), Philippine Currency.
surety assumes liability as a regular party to the undertaking.[16]
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings,
The extent of a surety's liability is determined by the language of the suretyship contract or covenants, terms and conditions and agreements stipulated in said undertakings, then this
bond itself. It cannot be extended by implication, beyond the terms of the contract.[17] Thus, obligation shall be null and void; otherwise, it shall remain in full force and effect.
to determine whether petitioner is liable to respondent under the surety bond, it becomes
necessary to examine the terms of the contract itself. 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
Surety Bond FLTICG (16) No. 01012 is a standard form used by petitioner, which states: 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
That we, FUMITECHNIKS CORP. OF THE PHILS. of #154 Anahaw St., Project 7, Quezon City as file any court action against the Surety after the termination of fifteen (15) days from the time
principal and First Lepanto-Taisho Insurance Corporation a corporation duly organized and its cause of action accrues.[19]
existing under and by virtue of the laws of the Philippines as Surety, are held firmly bound
Petitioner posits that non-compliance with the submission of the written agreement, which by
the express terms of the surety bond, should be attached and made part thereof, rendered the
bond ineffective. Since all stipulations and provisions of the surety contract should be taken and A: No, its not a practice to make an agreement.
interpreted together, in this case, the unmistakable intention of the parties was to secure only
those terms and conditions of the written agreement. Thus, by deleting the required xxxx
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 Atty. Quiroz:
of the surety contract.
Q: What was the reason why you are not reducing your agreement with your client into
On the other hand, respondent contends that the surety bond had been delivered by petitioner writing?
to Fumitechniks which paid the premiums and delivered the bond to respondent, who in turn, A: Well, of course as I said, there is no fix pricing in terms of distributorship agreement,
opened the credit line which Fumitechniks availed of to purchase its merchandise from its usually with regards to direct service to the customers which have direct fixed price.
respondent on credit. Respondent points out that a careful reading of the surety contract
shows that there is no such requirement of submission of the written credit agreement for the xxxx
bond's effectivity. Moreover, respondent's witnesses had already explained that distributorship
accounts are not covered by written distribution agreements. Supplying the details of these Q: These supposed terms and conditions that you agreed with [Fumitechniks], did you
agreements is allowed as an exception to the parol evidence rule even if it is proof of an oral relay to the defendant...
agreement. Respondent argues that by introducing documents that petitioner sought to A: Yes Sir.
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, xxxx
a separate agreement that was executed shortly after the issuance of the surety bond. Because
petitioner still issued the bond and allowed it to be delivered to respondent despite the fact Q: How did you relay that, how did you relay the terms and conditions to the defendant?
that a copy of the written distribution agreement was never attached thereto, respondent avers A: I don't know, it was during the time for collection because I collected them and explain
that clearly, such attaching of the copy of the principal agreement, was for evidentiary purposes the terms and conditions.
only. The real intention of the bond was to secure the payment of all the purchases of
Fumitechniks from respondent up to the maximum amount allowed under the bond. Q: You testified awhile ago that you did not talk to the defendant First Lepanto-Taisho
Insurance Corporation?
A reading of Surety Bond FLTICG (16) No. 01012 shows that it secures the payment of purchases A: I was confused with the question. I'm talking about Malou Apostol.
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 Q: So, in your answer, you have not relayed those terms and conditions to the defendant
agreement, the principal contract and by implication included the credit agreement mentioned First Lepanto, you have not?
in the rider. However, it turned out that respondent has executed written agreements only with A: Yes Sir.
its direct customers but not distributors like Fumitechniks and it also never relayed the terms
and conditions of its distributorship agreement to the petitioner after the delivery of the bond. Q: And as of this present, you have not yet relayed the terms and conditions?
This was clearly admitted by respondent's Marketing Coordinator, Alden Casas Fajardo, who A: Yes Sir.
testified as follows:
x x x x [20]
Atty. Selim:
Respondent, however, maintains that the delivery of the bond and acceptance of premium
Q: Mr. Fajardo[,] you mentioned during your cross-examination that the surety bond as payment by petitioner binds the latter as surety, notwithstanding the non-submission of the
part of the requirements of [Fumitechniks] before the Distributorship Agreement oral distributorship and credit agreement which understandably cannot be attached to the
was approved? bond.
A: Yes Sir.
The contention has no merit.
xxxx
The law is clear that a surety contract should be read and interpreted together with the contract
Q: Is it the practice or procedure at Caltex to reduce distributorship account into entered into between the creditor and the principal. Section 176 of the Insurance Code states:
writing?
Sec. 176. The liability of the surety or sureties shall be joint and several with the obligor and
xxxx 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 in some recent cases we have held that the Court may allow the grant of moral damages to
supplied.) corporations, it is not automatically granted; there must still be proof of the existence of the
factual basis of the damage and its causal relation to the defendant's acts. This is so because
A surety contract is merely a collateral one, its basis is the principal contract or undertaking moral damages, though incapable of pecuniary estimation, are in the category of an award
which it secures.[21] Necessarily, the stipulations in such principal agreement must at least be designed to compensate the claimant for actual injury suffered and not to impose a penalty on
communicated or made known to the surety particularly in this case where the bond expressly the wrongdoer.[29] There is no evidence presented to establish the factual basis of petitioner's
guarantees the payment of respondent's fuel products withdrawn by Fumitechniks in claim for moral damages.
accordance with the terms and conditions of their agreement. The bond specifically makes
reference to a written agreement. It is basic that if the terms of a contract are clear and leave Petitioner is likewise not entitled to attorney's fees. The settled rule is that no premium should
no doubt upon the intention of the contracting parties, the literal meaning of its stipulations be placed on the right to litigate and that not every winning party is entitled to an automatic
shall control.[22] Moreover, being an onerous undertaking, a surety agreement is strictly grant of attorney's fees.[30] In pursuing its claim on the surety bond, respondent was acting on
construed against the creditor, and every doubt is resolved in favor of the solidary the belief that it can collect on the obligation of Fumitechniks notwithstanding the non-
debtor.[23] Having accepted the bond, respondent as creditor must be held bound by the recital submission of the written principal contract.cralaw
in the surety bond that the terms and conditions of its distributorship contract be reduced in
writing or at the very least communicated in writing to the surety. Such non-compliance by the WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The Decision dated
creditor (respondent) impacts not on the validity or legality of the surety contract but on the November 20, 2006 and Resolution dated May 8, 2007 of the Court of Appeals in CA-G.R. CV
creditor's right to demand performance. 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 respondent's complaint
It bears stressing that the contract of suretyship imports entire good faith and confidence as well as petitioner's counterclaim, is hereby REINSTATED and UPHELD.
between the parties in regard to the whole transaction, although it has been said that the
creditor does not stand as a fiduciary in his relation to the surety. The creditor is generally held No pronouncement as to costs.
bound to a faithful observance of the rights of the surety and to the performance of every duty
necessary for the protection of those rights.[24] Moreover, in this jurisdiction, obligations arising SO ORDERED.
from contracts have the force of law between the parties and should be complied with in good
faith.[25] Respondent is charged with notice of the specified form of the agreement or at least
the disclosure of basic terms and conditions of its distributorship and credit agreements with its
client Fumitechniks after its acceptance of the bond delivered by the latter. However, it never
made any effort to relay those terms and conditions of its contract with Fumitechniks upon the
commencement of its transactions with said client, which obligations are covered by the surety
bond issued by petitioner. Contrary to respondent's assertion, there is no indication in the
records that petitioner had actual knowledge of its alleged business practice of not
having written contracts with distributors; and even assuming petitioner was aware of such
practice, the bond issued to Fumitechniks and accepted by respondent specifically referred to
a "written agreement."

As to the contention of petitioner that respondent's motion for reconsideration filed before the
trial court should have been deemed not filed for being pro forma, the Court finds it to be
without merit. The mere fact that a motion for reconsideration reiterates issues already passed
upon by the court does not, by itself, make it a pro forma motion. Among the ends to which a
motion for reconsideration is addressed is precisely to convince the court that its ruling is
erroneous and improper, contrary to the law or evidence; the movant has to dwell of necessity
on issues already passed upon.[26]

Finally, we hold that the trial court correctly dismissed petitioner's counterclaim for moral
damages and attorney's fees. The filing alone of a civil action should not be a ground for an
award of moral damages in the same way that a clearly unfounded civil action is not among the
grounds for moral damages.[27]Besides, a juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.[28] Although

G.R. No. L-43706 November 14, 1986
NATIONAL POWER CORPORATION, petitioner,
vs.
COURT OF APPEALS and PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.
PARAS, J.:
This is a petition for review on certiorari seeking to set aside: (a) the judgment of respondent
Court of Appeals dated March 25, 1976 in CA-G.R. No. 50112-R, entitled National Power
Corporation, Plaintiff-Appellee vs. The Philippine American Insurance Company, Inc. Defendant-
Appellant, which reversed the decision of the Court of First Instance of Manila in Civil Case No.
70811 entitled "National Power Corporation v. Far Eastern Electric, Inc., et al." and (b)
respondent's Court's resolution dated April 19, 1976 denying petitioner National Power
Corporation's Motion for Reconsideration (Petition, p. 13, Rollo).
The undisputed facts of this case are as follows:
The National Power Corporation (NPC) entered into a contract with the Far Eastern Electric, Inc.
(FFEI) on December 26, 1962 for the erection of the Angat Balintawak 115-KW-3-Phase
transmission lines for the Angat Hydroelectric Project. FEEI agreed to complete the work within
120 days from the signing of the contract, otherwise it would pay NPC P200.00 per calendar day
as liquidated damages, while NPC agreed to pay the sum of P97,829.00 as consideration. On the
other hand, Philippine American General Insurance Co., Inc. (Philamgen) issued a surety bond
in the amount of P30,672.00 for the faithful performance of the undertaking by FEEI, as
required.
The condition of the bond reads:
The liability of the PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC.
under this bond will expire One (1) year from final Completion and Acceptance and
said bond will be cancelled 30 days after its expiration, unless surety is notified of any
existing obligation thereunder. (Exhibit 1-a)
in correlation with the provisions of the construction contract between Petitioner and Far
Eastern Electric, Inc. particularly the following provisions of the Specifications. to wit:
1. Par. 1B-2l Release of Bond
1B-21 Release of Bond
The Contractor's performance bond will be released by the National Power
Corporation at the expiration of one (1) year from the completion and final
acceptance of the work, pursuant to the provisions of Act No. 3959, and subject to
the General Conditions of this contract. (Page 49, Printed Record on Appeal); and
2. GP-19 of Specifications, which reads:
(a) Should the Contractor fail to complete the construction of the work as
herein specified and agreed upon, or if the work is abandoned, ... the
Corporation shall have the power to take over the work by giving notice in
writing to that effect to the Contractor and his sureties of its intention to
take over the construction work.
(b) ... It is expressly agreed that in the event the corporation takes over the
work from the Contractor, the latter and his bondsmen shall continue to be
liable under this contract for any expense in the completion of the work in
excess of the contract price and the bond filed by the Contractor shall be
answerable for the same and for any and all damages that the Corporation
may suffer as a result thereof. (pp. 76-78, Printed Record on Appeal)
FEEI started construction on December 26, 1962 but on May 30, 1963, both FEEI and Philamgen
wrote NPC requesting the assistance of the latter to complete the project due to unavailability
of the equipment of FEEI. The work was abandoned on June 26, 1963, leaving the construction
unfinished. On July 19, 1963, in a joint letter, Philamgen and FEEI informed NPC that FEEI was
giving up the construction due to financial difficulties. On the same date, NPC wrote Philamgen
informing it of the withdrawal of FEEI from the work and formally holding both FEEI and
Philamgen liable for the cost of the work to be completed as of July 20, 1962 plus damages.
The work was completed by NPC on September 30, 1963. On January 30, 1967 NPC notified
Philamgen that FEEI had an outstanding obligation in the amount of P75,019.85, exclusive of
interest and damages, and demanded the remittance of the amount of the surety bond the
answer for the cost of completion of the work. In reply, Philamgen requested for a detailed
statement of account, but after receipt of the same, Philamgen did not pay as demanded but
contended instead that its liability under the bond has expired on September 20, 1964 and
claimed that no notice of any obligation of the surety was made within 30 days after its
expiration. (Record on Appeal, pp. 191-194; Rollo, pp. 62-64).
NPC filed Civil Case No. 70811 for collection of the amount of P75,019.89 spent to complete the
work abandoned; P144,000.00 as liquidated damages and P20,000.00 as attorney's fees. Only
Philamgen answered while FEEI was declared in default.
The trial court rendered judgment in favor of NPC, the dispositive portion of which reads:
WHEREFORE, the defendant Far Eastern Electric, Inc., is ordered to pay the plaintiff the sum of
P75,019.86 plus interest at the legal rate from September 21, 1967 until fully paid. Out of said
amount, both defendants, Far Eastern Electric, Inc., and the Philippine American Insurance
Company, Inc., are ordered to pay, jointly and severally, the amount of P30,672.00 covered by
Surety Bond No. 26268, dated December 26, 1962, plus interest at the legal rate from
September 21, 1967 until fully paid,
Both defendants are also ordered to pay plaintiff the sum of P3,000.00 as attorney's fees and
costs.
On appeal by Philamgen, the Court of Appeals reversed the lower court's decision and dismissed
the complaint.
Hence this petition.
Respondent Philamgen filed its comment on the petition on August 6, 1978 (Rollo, p. 62) in
compliance with the resolution dated June 16, 1976 of the First Division of this Court (Rollo, p.
52) while petitioner NPC filed its Reply to the comment of respondent (Rollo, p. 76) as required
in the resolution of this Court of August 16, 1976, (Rollo, p. 70). In the resolution of September
20, 1976, the petition for certiorari was given due course (Rollo, p. 85). Petitioner's brief was
filed on November 27, 1976 (Rollo, p. 97) while Philamgen failed to file brief within the required
period and this case was submitted for decision without respondent's brief in the resolution of
this Court of February 25. 1977) Rollo, p. 103).
In its brief, petitioner raised the following assignment of errors:
I - RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER SHOULD HAVE
GIVEN NOTICE TO PRIVATE RESPONDENT PHILAMGEN OF ANY EXISTING OBLIGATION WITHIN
30 DAYS FROM EXPIRATION OF THE BOND TO HOLD SAID SURETY LIABLE THEREUNDER, DESPITE
PETITIONER'S TAKING OVER OF THE WORK ABANDONED BY THE CONTRACTOR BEFORE ITS
COMPLETION.
II - ASSUMING ARGUENDO THAT PETITIONER SHOULD STILL NOTIFY PRIVATE RESPONDENT
PHILAMGEN OF ANY EXISTING OBLIGATION UNDER THE BOND DESPITE THE TAKE-OVER OF
WORK BY PETITIONER, RESPONDENT COURT OF APPEALS NONETHELESS ERRED IN HOLDING
THAT PETITIONER'S LETTER DATED JULY 19, 1963 (EXH. E) TO PRIVATE RESPONDENT WAS NOT
SUFFICIENT COMPLIANCE WITH THE CONDITION OF THE BOND.
III - RESPONDENT COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT PHILAMGEN
FROM ITS LIABILITY UNDER THE BOND.
The decisive issue in this case is the correct interpretation and/or application of the condition
of the bond relative to its expiration, in correlation with the provisions of the construction
contract, the faithful performance of which, said bond was issued to secure.
The bone of contention in this case is the compliance with the notice requirement as a condition
in order to hold the surety liable under the bond.
Petitioner claims that it has already complied with such requirement by virtue of its notice dated
July 19, 1963 of abandonment of work by FEEI and of its takeover to finish the construction, at
the same time formally holding both FEEI and Philamgen liable for the uncompleted work and
damages. It further argued that the notice required in the bond within 30 days after its
expiration of any existing obligation, is applicable only in case the contractor itself had
completed the contract and not when the contractor failed to complete the work, from which
arises the continued liability of the surety under its bond as expressly provided for in the
contract. Petitioner's contention was sustained by the trial court.
On the other hand, private respondent insists that petitioner's notice dated July 19, 1983 is not
sufficient despite previous events that it had knowledge of FEEI's failure to comply with the
contract and claims that it cannot be held liable under the bond without notice within thirty
days from the expiration of the bond, that there is a subsisting obligation. Private respondent's
contention is sustained by the Court of Appeals.
The petition is impressed with merit.
As correctly assessed by the trial court, the evidence on record shows that as early as May 30,
1963, Philamgen was duly informed of the failure of its principal to comply with its undertaking.
In fact, said notice of failure was also signed by its Assistant Vice President. On July 19, 1963,
when FEEI informed NPC that it was abandoning the construction job, the latter forthwith
informed Philamgen of the fact on the same date. Moreover, on August 1, 1963, the fact that
Philamgen was seasonably notified, was even bolstered by its request from NPC for information
of the percentage completed by the bond principal prior to the relinquishment of the job to the
latter and the reason for said relinquishment. (Record on Appeal, pp. 193-195). The 30-day
notice adverted to in the surety bond applies to the completion of the work by the contractor.
This completion by the contractor never materialized.
The surety bond must be read in its entirety and together with the contract between NPC and
the contractors. The provisions must be construed together to arrive at their true meaning.
Certain stipulations cannot be segregated and then made to control.
Furthermore, it is well settled that contracts of insurance are to be construed liberally in favor
of the insured and strictly against the insurer. Thus ambiguity in the words of an insurance
contract should be interpreted in favor of its beneficiary. (Serrano v. Court of Appeals, 130 SCRA
327, July 16, 1984).
In the case at bar, it cannot be denied that the breach of contract in this case, that is, the
abandonment of the unfinished work of the transmission line of the petitioner by the contractor
Far Eastern Electric, Inc. was within the effective date of the contract and the surety bond. Such
abandonment gave rise to the continuing liability of the bond as provided for in the contract
which is deemed incorporated in the surety bond executed for its completion. To rule therefore
that private respondent was not properly notified would be gross error.
PREMISES CONSIDERED, the decision dated March 25, 1976 and the resolution dated April 19,
1976 of the Court of Appeals are hereby SET ASIDE, and a new one is hereby rendered
reinstating the decision of the Court of First Instance of Manila in Civil Case No. 70811 entitled
"National Power Corporation v. Far Eastern Electric, Inc., et al."
SO ORDERED.
[G.R. Nos. 90273-75. November 15, 1989.]
FINMAN GENERAL ASSURANCE CORP., Petitioner, v. WILLIAM INOCENCIO, ET AL. AND EDWIN
CARDONES, THE ADMINISTRATOR, PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION,
THE SECRETARY OF LABOR AND EMPLOYMENT, Respondents.
David I. Unay, Jr. for Petitioner.
SYLLABUS
1. LABOR AND SOCIAL LEGISLATION; RECRUITMENT AND PLACEMENT; SOLIDARILY LIABILITY OF
A SURETY. — Petitioner cannot seriously dispute the direct and solidary nature of its obligations
under its own surety bond. Under Section 176 of the Insurance Code, as amended, the liability
of a surety in a surety bond is joint and several with the principal obligor. Petitioner’s bond was
posted by Pan Pacific in compliance with the requirements of Article 31 of the Labor Code. The
tenor and scope of petitioner Finman’s obligations under the bond it issued are set out in broad
ranging terms by Section 4, Rule II, Book I of the POEA Rules and Regulations.
2. ID.; ID.; ID.; SURETY BOND; CONDITIONS OF A BOND REQUIRED IN THE STATUTE OR
REGULATION ARE INCORPORATED INTO BONDS SO TENDERED. — It is settled doctrine that the
conditions of a bond specified and required the provisions of the statute or regulation providing
for the submission of the bond, are incorporated or built into all bonds tendered under that
statute or regulation, even though not there set out in printer’s ink.
3. ID.; RECRUITMENT AND PLACEMENT; VIOLATION OF ARTICLE 32 AND 34 OF THE LABOR CODE
IS A VIOLATION OF THE RECRUITMENT LICENSE GRANT. — In the case at bar, the POEA held,
and the Secretary of Labor affirmed, that Pan Pacific had violated Article 32 of the Labor Code,
as amended. There is, hence, no question that, both under the Labor Code and the POEA Rules
and Regulations, Pan Pacific had violated at least one of the conditions for the grant and
continued use of the recruitment license granted to it.
4. ID.; ID.; POWERS OF THE SECRETARY OF LABOR AND POEA ADMINISTRATOR. — There can,
similarly, be no question that the POEA Administrator and the Secretary of Labor are authorized
to require Pan Pacific to refund the placement fees it had charged private respondents without
securing employment for them and to impose the fine of P60,000.00 upon Pan Pacific. Article
36 of the Labor Code authorizes the Secretary of Labor "to restrict and regulate" the recruitment
and placement activities of agencies like Pan Pacific and "to issue orders and promulgate rules
and regulations to carry out the objectives and implement the provisions of [Title I on
"Recruitment and Placement of Workers]," including of course, Article 32 on "Fees to be paid
by workers," quoted earlier. Upon the otherhand, Section 13 of Rule VI, Book I of the POEA Rules
and Regulations expressly authorize the POEA Administrator or the Secretary of Labor to impose
fines "in addition to or in lieu of the penalties of suspension or cancellation" of the violator
recruitment agency’s license.
5. ID.; ID.; SURETY BEING PARTY IN INTEREST OR A PROPER PARTY MAY BE IMPLEADED MOTU-
PROPRIO. — If Pan Pacific is liable to private respondents for the refunds claimed by them and
to the POEA for the fine of P60,000.00, and if petitioner Finman is solidarily liable with Pan
Pacific under the operative terms of the bond, it must follow that Finman is liable both to the
private respondents and to the POEA. Certainly, petitioner Finman is a party-in-interest in,
certainly a proper party to, the proceedings private respondents had initiated against Pan Pacific
the principal obligor. Since Pan Pacific had thoughtfully refrained from notifying the POEA of its
new address and from responding to the complaints, petitioner Finman may well be regarded
as an indispensable party to the proceedings before the POEA. Whether Finman was an
indepensable or merely a proper party to the proceedings, we believe and so hold that the POEA
could properly implead it as party respondent either upon the request of the private
respondents or, as it happened, motu propio. Such is the situation under the Revised Rules of
Court and the application thereof, directly or by analogy, by the POEA can certainly not be
regarded as arbitrary, oppressive or capricious.
6. ID.; ID.; LIABILITY UNDER THE BOND MAY BE ENFORCED BY THE POEA OR BY THE SECRETARY
OF LABOR. — There appears nothing so special or unique about the determination of a surety’s
liability under its bond as to restrict that determination to the Office of the Insurance
Commissioner and to the regular courts of justice exclusively. The exact opposite is strongly
stressed by the second paragraph of Article 31 of the Labor Code. We believe and so hold that
to compel the POEA and private respondents — the beneficiaries of Finman’s bond — to go to
the Insurance Commissioner or to a regular court of law to enforce that bond, would be to
collide with the public policy which requires prompt resolution of claims against private
recruitment and placement agencies.
RESOLUTION
FELICIANO, C.J.:
Pan Pacific Overseas Recruiting Services, Inc. ("Pan Pacific") is a private, fee-charging,
recruitment and employment agency. In accordance with the requirements of Section 4, Rule
II, Book II of the Rules and Regulations of the Philippine Overseas Employment Administration
(POEA), Pan Pacific Overseas surety bond issued by petitioner Finman General Assurance
Corporation ("Finman") and was granted a license to operate by the POEA.
Private respondents William Inocencio, Perfecto Palero, Jr., Edwin Cardones and one Edwin
Hernandez filed with the POEA separate complaints against Pan Pacific for violation of Articles that (2) the POEA had no authority to enforce directly the surety bond against petitioner. In an
32 and 34 (a) of the Labor Code, as amended and for refund of placement fees paid to Pan Order dated 3 August 1989, the Secretary of Labor upheld the POEA Order appealed from and
Pacific. The complainants alleged that Pan Pacific charged and collected such fees from them denied the appeal for lack of merit.chanrobles.com : virtual law library
but did not secure employment for them.chanrobles virtual lawlibrary
Petitioner Finman now comes before this Court on a Petition for Certiorari with prayer for
Acting on the complaints, the POEA Administrator motu proprio impleaded petitioner Finman preliminary injunction or temporary restraining order, raising much the same issues it had
as party respondent in its capacity as surety for Pan Pacific. Separate summonses were served already ventilated before the POEA and the Secretary of Labor. It is contended once again by
upon Finman and Pan Pacific. The return of the summons served on Pan Pacific at its official petitioner Finman that the POEA had no authority to implead petitioner in the proceedings
address registered in the POEA records, showed that Pan Pacific had moved out therefrom; no commenced by private respondents: and that the POEA was not authorized to require, in those
prior notice of transfer or change of address was furnished by Pan Pacific to the POEA as same proceedings, petitioner to pay private respondents’ claims for refund against Pan Pacific
required under POEA rules. The POEA considered that constructive service of the complaints on the basis of the surety bond issued by petitioner.
had been effected upon Pan Pacific and proceeded accordingly.
Petitioner’s contentions are interrelated and will be dealt with together. They are, however,
For its part, petitioner Finman filed an answer denying liability and pleading, by way of special quite bereft of merit and must be rejected.
and affirmative defenses, that: (1) the POEA had no "jurisdiction over surety bonds," that
jurisdiction being vested in the Insurance Commission or the regular courts; (2) it (Finman) had Petitioner cannot seriously dispute the direct and solidary nature of its obligations under its own
not violated Articles 32 and 34 (a) of the Labor Code and complainants’ claims had accrued surety bond. Under Section 176 of the Insurance Code, as amended, the liability of a surety in a
during the suspension of the principal obligor, Pan Pacific; (3) complainants had no cause of surety bond is joint and several with the principal obligor. Petitioner’s bond was posted by Pan
action against Finman, since it was not privy to the transactions between them and Pan Pacific Pacific in compliance with the requirements of Article 31 of the Labor Code, which states that
and had not received any moneys from them; and (4) the amounts claimed by complainants —
had been paid by them as deposits and not as placement fees.
"Art. 31. Bonds. — All applicants for license or authority shall post such cash and surety bonds
A hearing was held by the POEA on 14 April 1988, at which time complainants presented their as determined by the Secretary of Labor to guarantee compliance with prescribed recruitment
evidence. Petitioner Finman, though notified of this hearing, did not appear. procedures, rules and regulations, and terms and conditions of employment as appropriate.

On 30 May 1989, the POEA Administrator issued an Order which, in its dispositive portion, The Secretary of Labor shall have the exclusive power to determine, decide, order or direct
said:jgc:chanrobles.com.ph payment from, or application of, the cash and surety bond for any claim or injury covered and
guaranteed by the bonds." (Emphasis supplied).
"WHEREFORE, premises considered, respondents are hereby ordered to pay jointly and
severally complainants’ claims as follows:chanrob1es virtual 1aw library The tenor and scope of petitioner Finman’s obligations under the bond it issued are set out in
broad ranging terms by Section 4, Rule II, Book I of the POEA Rules and
1. William Inocencio P6,000.00 Regulations:jgc:chanrobles.com.ph

2. Perfecto Palero, Sr. P5,500.00 "Section 4. Payment of Fees and Posting of Bonds. — Upon approval of the application by the
Minister, the applicant shall pay an annual license fee of P6,000.00. It shall also post a cash bond
3. Edwin Cardones P2,000.00 of P100,000.00 and a surety bond of P150,000.00 from a bonding company acceptable to the
Administration duly accredited by the Office of the Insurance Commission. The bonds shall
Respondent agency is ordered to release Cardones’ passport, the expenses or obtaining the answer for all valid and legal claims arising from violations of the conditions for the grant and
same of which (sic) shall be deducted from the amount of P2,000.00 as it appears that it was use of the license or authority and contracts of employment. The bonds shall likewise guarantee
respondent agency who applied for the processing thereof. The claim of Edwin Hernandez is compliance with the provisions of the Labor Code and its implementing rules and regulations
dismissed without prejudice. relating to recruitment and placement, the rules of the Administration and relevant issuances
of the Ministry and all liabilities which the Administration may impose. The surety bonds shall
"For the established violations respondent agency is hereby imposed a penalty fine in the include the condition that notice of garnishment to the principal is notice to the surety." 1
amount of P60,000.00. Further, the ban earlier imposed upon it is herein reiterated. (Emphasis supplied).

"SO ORDERED."cralaw virtua1aw library While petitioner Finman has refrained from attaching a copy of the bond it had issued to its
Petition for Certiorari, there can be no question that the conditions of the Finman surety bond
Petitioner Finman went on appeal to the Secretary of Labor insisting that: (1) the POEA had no Pan Pacific had posted with the POEA include the italicized portions of Section 4, Rule II, Book I
authority to implead petitioner as party respondent in the proceedings before the POEA; and quoted above. It is settled doctrine that the conditions of a bond specified and required the
provisions of the statute or regulation providing for the submission of the bond, are respondents or, as it happened, motu propio. Such is the situation under the Revised Rules of
incorporated or built into all bonds tendered under that statute or regulation, even though not Court 5 and the application thereof, directly or by analogy, by the POEA can certainly not be
there set out in printer’s ink. 2 regarded as arbitrary, oppressive or capricious.chanrobles virtual lawlibrary

In the case at bar, the POEA held, and the Secretary of Labor affirmed, that Pan Pacific had The fundamental argument of Finman is that its liability under its own bond must be determined
violated Article 32 of the Labor Code, as amended. and enforced, not by the POEA or the Secretary of Labor, but rather by the Insurance
Commission or by the regular courts. Once more, we are not moved by petitioner’s argument.
"Article 32. Fees to be paid by workers. — Any person applying with a private fee charging
employment agency for employment assistance shall not be charged any fee until he has There appears nothing so special or unique about the determination of a surety’s liability under
obtained employment through its efforts or has actually commenced employment. Such fee its bond as to restrict that determination to the Office of the Insurance Commissioner and to
shall be always covered with the approved receipt clearly showing the amount paid. The the regular courts of justice exclusively. The exact opposite is strongly stressed by the second
Secretary of Labor shall promulgate a schedule of allowable fees." (Emphasis supplied). paragraph of Article 31 of the Labor Code:jgc:chanrobles.com.ph

as well as Article 34 (a) of the same Code:jgc:chanrobles.com.ph "Art. 31. Bonds. —

"Article 34. Prohibited practices. — It shall be unlawful for any individual, entity, licensee, or x x x
holder of authority:chanrob1es virtual 1aw library

(a) To charge or accept, directly or indirectly, any amount than that specified in the schedule of The secretary of Labor shall have the exclusive power to determine, decide, order or direct
allowable fees prescribed by the Secretary of Labor, or to make a worker pay any amount payment from, or application of, the cash or surety bond for any claim or injury covered and
greater than actually received by him as a loan or advance." (Emphasis supplied). guaranteed by the bonds." (Emphasis supplied).

There is, hence, no question that, both under the Labor Code 3 and the POEA Rules and
Regulations, 4 Pan Pacific had violated at least one of the conditions for the grant and continued
use of the recruitment license granted to it. There can, similarly, be no question that the POEA
Administrator and the Secretary of Labor are authorized to require Pan Pacific to refund the
placement fees it had charged private respondents without securing employment for them and
to impose the fine of P60,000.00 upon Pan Pacific. Article 36 of the Labor Code authorizes the
Secretary of Labor "to restrict and regulate" the recruitment and placement activities of
agencies like Pan Pacific and "to issue orders and promulgate rules and regulations to carry out
the objectives and implement the provisions of [Title I on "Recruitment and Placement of
Workers]," including of course, Article 32 on "Fees to be paid by workers," quoted earlier. Upon
the otherhand, Section 13 of Rule VI, Book I of the POEA Rules and Regulations expressly
authorize the POEA Administrator or the Secretary of Labor to impose fines "in addition to or in
lieu of the penalties of suspension or cancellation" of the violator recruitment agency’s license.
If Pan Pacific is liable to private respondents for the refunds claimed by them and to the POEA
for the fine of P60,000.00, and if petitioner Finman is solidarily liable with Pan Pacific under the
operative terms of the bond, it must follow that Finman is liable both to the private respondents
and to the POEA. Petitioner Finman asserts, however, that the POEA had no authority to implead
it in the proceedings against Pan Pacific.
We believe and so hold that to compel the POEA and private respondents — the beneficiaries
of Finman’s bond — to go to the Insurance Commissioner or to a regular court of law to enforce
that bond, would be to collide with the public policy which requires prompt resolution of claims
against private recruitment and placement agencies. The Court will take judicial notice of the
appealing frequency with which some, perhaps many, of such agencies have cheated workers
avid for overseas employment by, e.g., collecting placement fees without securing employment
for them at all, extracting exorbitant fees or "kickbacks" from those for whom employment is
actually obtained, abandoning hapless and unlettered workers to exploitative foreign principals,
and so on. Cash and surety bonds are required by the POEA and its predecessor agencies from
recruitment and employment companies precisely as a means of ensuring prompt and effective
recourse against such companies when held liable for applicants’ or workers’ claims. Clearly that
public policy will be effectively negated if POEA and the Department of Labor and Employment
were held powerless to compel a surety company to make good on its solidary undertaking in
the same quasi-judicial proceeding where the liability of the principal obligor, the recruitment
or employment agency, is determined and fixed and where the surety is given reasonable
opportunity to present any defenses it or the principal obligor may be entitled to set up.
Petitioner surety whose liability to private respondents and the POEA is neither more nor less
than that of Pan Pacific, is not entitled to another or different procedure for determination or
fixing of that liability than that which Pan Pacific is entitled and subject to.

We are not persuaded by this assertion. Clearly, petitioner Finman is a party-in-interest in, WHEREFORE, the Petition for Certiorari with prayer for preliminary injunction or temporary
certainly a proper party to, the proceedings private respondents had initiated against Pan Pacific restraining order is hereby DISMISSED for lack of merit. Costs against petitioner. This Resolution
the principal obligor. Since Pan Pacific had thoughtfully refrained from notifying the POEA of its is immediately executory.
new address and from responding to the complaints, petitioner Finman may well be regarded
as an indispensable party to the proceedings before the POEA. Whether Finman was an
indepensable or merely a proper party to the proceedings, we believe and so hold that the POEA
could properly implead it as party respondent either upon the request of the private

G.R. No. 165487 July 13, 2011
COUNTRY BANKERS INSURANCE CORPORATION, Petitioner,
vs.
ANTONIO LAGMAN, Respondent.
PEREZ, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
assailing the Decision1and Resolution2 of the Court of Appeals dated 21 June 2004 and 24
September 2004, respectively.
These are the undisputed facts.
Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage
in the business of storing not more than 30,000 sacks of palay valued at ₱5,250,000.00 in his
warehouse at Barangay Malacampa, Camiling, Tarlac. Under Act No. 3893 or the General
Bonded Warehouse Act, as amended, 3 the approval for said license was conditioned upon
posting of a cash bond, a bond secured by real estate, or a bond signed by a duly authorized
bonding company, the amount of which shall be fixed by the NFA Administrator at not less than
thirty-three and one third percent (33 1/3%) of the market value of the maximum quantity of
rice to be received.
Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse Bond
No. 033044 for ₱1,749,825.00 on 5 November 1989 and Warehouse Bond No. 023555 for
₱749,925.00 on 13 December 1989 (1989 Bonds) through its agent, Antonio Lagman (Lagman).
Santos was the bond principal, Lagman was the surety and the Republic of the Philippines,
through the NFA was the obligee. In consideration of these issuances, corresponding Indemnity
Agreements6 were executed by Santos, as bond principal, together with Ban Lee Lim Santos
(Ban Lee Lim), Rhosemelita Reguine (Reguine) and Lagman, as co-signors. The latter bound
themselves jointly and severally liable to Country Bankers for any damages, prejudice, losses,
costs, payments, advances and expenses of whatever kind and nature, including attorney’s fees
and legal costs, which it may sustain as a consequence of the said bond; to reimburse Country
Bankers of whatever amount it may pay or cause to be paid or become liable to pay thereunder;
and to pay interest at the rate of 12% per annum computed and compounded monthly, as well
as to pay attorney’s fees of 20% of the amount due it.7
Santos then secured a loan using his warehouse receipts as collateral.8 When the loan matured,
Santos defaulted in his payment. The sacks of palay covered by the warehouse receipts were no
longer found in the bonded warehouse.9 By virtue of the surety bonds, Country Bankers was
compelled to pay ₱1,166,750.37.10
Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No.
95-73048 before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that
the 1989 Bonds were valid only for 1 year from the date of their issuance, as evidenced by
receipts; that the bonds were never renewed and revived by payment of premiums; that on 5
November 1990, Country Bankers issued Warehouse Bond No. 03515 (1990 Bond) which was
also valid for one year and that no Indemnity Agreement was executed for the purpose; and
that the 1990 Bond supersedes, cancels, and renders no force and effect the 1989 Bonds.11
The bond principals, Santos and Ban Lee Lim, were not served with summons because they
could no longer be found.12 The case was eventually dismissed against them without
prejudice.13 The other co-signor, Reguine, was declared in default for failure to file her answer.14
On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly
and severally liable to pay Country Bankers the amount of ₱2,400,499.87.15 The dispositive
portion of the RTC Decision16 reads:
WHEREFORE, premises considered, judgment is hereby rendered, ordering defendants
Rhomesita [sic] Reguine and Antonio Lagman, jointly and severally liable to pay plaintiff, Country
Bankers Assurance Corporation, the amount of ₱2,400,499.87, with 12% interest from the date
the complaint was filed until fully satisfied plus 20% of the amount due plaintiff as and for
attorney’s fees and to pay the costs.
As the Court did not acquire jurisdiction over the persons of defendants Nelson Santos and Ban
Lee Lim Santos, let the case against them be DISMISSED. Defendant Antonio Lagman’s
counterclaim is likewise DISMISSED, for lack of merit.17
In holding Lagman and Reguine solidarily liable to Country Bankers, the trial court relied on the
express terms of the Indemnity Agreement that they jointly and severally bound themselves to
indemnify and make good to Country Bankers any liability which the latter may incur on account
of or arising from the execution of the bonds.18
The trial court rationalized that the bonds remain in force unless cancelled by the Administrator
of the NFA and cannot be unilaterally cancelled by Lagman. The trial court emphasized that for
the failure of Lagman to comply with his obligation under the Indemnity Agreements, he is
likewise liable for damages as a consequence of the breach.
Lagman filed an appeal to the Court of Appeals, docketed as CA G.R. CV No. 61797. He insisted
that the lifetime of the 1989 Bonds, as well as the corresponding Indemnity Agreements was
only 12 months. According to Lagman, the 1990 Bond was not pleaded in the complaint because
it was not covered by an Indemnity Agreement and it superseded the two prior bonds.19
On 21 June 2004, the Court of Appeals rendered the assailed Decision reversing and setting
aside the Decision of the RTC and ordering the dismissal of the complaint filed against Lagman.20
The appellate court held that the 1990 Bond superseded the 1989 Bonds. The appellate court
observed that the 1990 Bond covers 33.3% of the market value of the palay, thereby manifesting
the intention of the parties to make the latter bond more comprehensive. Lagman was also
exonerated by the appellate court from liability because he was not a signatory to the alleged
Indemnity Agreement of 5 November 1990 covering the 1990 Bond. The appellate court
rejected the argument of Country Bankers that the 1989 bonds were continuing, finding, as
reason therefor, that the receipts issued for the bonds indicate that they were effective for only
one-year.
Country Bankers sought reconsideration which was denied in a Resolution dated 24 September
2004.21
Expectedly, Country Bankers filed the instant petition attributing two (2) errors to the Court of
Appeals, to wit:
A.
THE HONORABLE COURT OF APPEALS seriously erred in disregarding the express
provisions of Section 177 of the insurance code when it held that the subject surety
bonds were superseded by a subsequent bond notwithstanding the non-cancellation
thereof by the bond obligee.
B.
The honorable court of appeals seriously erred in holding that receipts for the
payment of premiums prevail over the express provision of the surety bond that fixes
the term thereof.22
Country Bankers maintains that by the express terms of the 1989 Bonds, they shall remain in
full force until cancelled by the Administrator of the NFA. As continuing bonds, Country Bankers
avers that Section 177 of the Insurance Code applies, in that the bond may only be cancelled by
the obligee, by the Insurance Commissioner or by a competent court.
Country Bankers questions the existence of a third bond, the 1990 Bond, which allegedly
cancelled the 1989 Bonds on the following grounds: First, Lagman failed to produce the original
of the 1990 Bond and no basis has been laid for the presentation of secondary evidence; Second,
the issuance of the 1990 Bond was not approved and processed by Country Bankers; Third, the
NFA as bond obligee was not in possession of the 1990 Bond. Country Bankers stresses that the
cancellation of the 1989 Bonds requires the participation of the bond obligee. Ergo, the bonds
remain subsisting until cancelled by the bond obligee. Country Bankers further assert that
Lagman also failed to prove that the NFA accepted the 1990 Bond in replacement of the 1989
Bonds.
Country Bankers notes that the receipts issued for the 1989 Bonds are mere evidence of
premium payments and should not be relied on to determine the period of effectivity of the
bonds. Country Bankers explains that the receipts only represent the transactions between the
bond principal and the surety, and does not involve the NFA as bond obligee.
Country Bankers calls this Court’s attention to the incontestability clause contained in the
Indemnity Agreements which prohibits Lagman from questioning his liability therein.
In his Comment, Lagman raises the issue of novation by asserting that the 1989 Bonds were
superseded by the 1990 Bond, which did not include Lagman as party. Therefore, Lagman
argues, Country Bankers has no cause of action against him. Lagman also reiterates that because
of novation, the 1989 bonds are neither perpetual nor continuing.
Lagman anchors his defense on two (2) arguments: 1) the 1989 Bonds have expired and 2) the
1990 Bond novates the 1989 Bonds.
The Court of Appeals held that the 1989 bonds were effective only for one (1) year, as evidenced
by the receipts on the payment of premiums.
We do not agree.
The official receipts in question serve as proof of payment of the premium for one year on each
surety bond. It does not, however, automatically mean that the surety bond is effective for only
one (1) year. In fact, the effectivity of the bond is not wholly dependent on the payment of
premium. Section 177 of the Insurance Code expresses:
Sec. 177. 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 reasonable amount, not exceeding fifty per centum 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 non-acceptance of the bond be due to the fault or
negligence of the surety, no such service fee, stamps or taxes shall be collected. (Emphasis
supplied)
The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of
these bonds, viz:
NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the depositors
PALAY received by him for STORAGE at any time that demand therefore is made, or shall pay
the market value therefore in case he is unable to return the same, then this obligation shall be
null and void; otherwise it shall remain in full force and effect and may be enforced in the
manner provided by said Act No. 3893 as amended by Republic Act No. 247 and P.D. No. 4. This
bond shall remain in force until cancelled by the Administrator of National Food Authority.23
This provision in the bonds is but in compliance with the second paragraph of Section 177 of
the Insurance Code, which specifies that a continuing bond, as in this case where there is no
fixed expiration date, may be cancelled only by the obligee, which is the NFA, by the Insurance
Commissioner, and by the court. Thus:
In 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.
By law and by the specific contract involved in this case, the effectivity of the bond required for
the obtention of a license to engage in the business of receiving rice for storage is determined
not alone by the payment of premiums but principally by the Administrator of the NFA. From
beginning to end, the Administrator’s brief is the enabling or disabling document.
The clear import of these provisions is that the surety bonds in question cannot be unilaterally
cancelled by Lagman. The same conclusion was reached by the trial court and we quote:
As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355
either by the administrator of the NFA or by the Insurance Commissioner or by the Court, the
Warehouse Bonds are valid and binding and cannot be unilaterally cancelled by defendant
Lagman as general agent of the plaintiff.24
While the trial court did not directly rule on the existence and validity of the 1990 Bond, it
upheld the 1989 Bonds as valid and binding, which could not be unilaterally cancelled by
Lagman. The Court of Appeals, on the other hand, acknowledged the 1990 Bond as having
cancelled the two previous bonds by novation. Both courts however failed to discuss their basis
for rejecting or admitting the 1990 Bond, which, as we indicated, is bone to pick in this case.
Lagman’s insistence on novation depends on the validity, nay, existence of the allegedly
novating 1990 Bond. Country Bankers understandably impugns both. We see the point. Lagman
presented a mere photocopy of the 1990 Bond. We rule as inadmissible such copy.
Under the best evidence rule, the original document must be produced whenever its contents
are the subject of inquiry.25 The rule is encapsulated in Section 3, Rule 130 of the Rules of Court,
as follow:
Sec. 3. Original document must be produced; exceptions. — When the subject of inquiry is the
contents of a documents, no evidence shall be admissible other than the original document
itself, except in the following cases:
(a) When the original has been lost or destroyed, or cannot be produced in court,
without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party against whom
the evidence is offered, and the latter fails to produce it after reasonable notice;
(c) When the original consists of numerous accounts or other documents which
cannot be examined in court without great loss of time and the fact sought to be
established from them is only the general result of the whole; and
(d) When the original is a public record in the custody of a public officer or is recorded
in a public office.26
A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the
original is unavailable.27 Section 5, Rule 130 of the Rules of Court states:
SEC.5 When original document is unavailable. — When the original document has been lost or
destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence
and the cause of its unavailability without bad faith on his part, may prove its contents by a
copy, or by a recital of its contents in some authentic document, or by the testimony of
witnesses in the order stated.
Before a party is allowed to adduce secondary evidence to prove the contents of the original,
the offeror must prove the following: (1) the existence or due execution of the original; (2) the
loss and destruction of the original or the reason for its non-production in court; and (3) on the
part of the offeror, the absence of bad faith to which the unavailability of the original can be
attributed. The correct order of proof is as follows: existence, execution, loss, and contents.28
In the case at bar, Lagman mentioned during the direct examination that there are actually four
(4) duplicate originals of the 1990 Bond: the first is kept by the NFA, the second is with the Loan
Officer of the NFA in Tarlac, the third is with Country Bankers and the fourth was in his
possession.29 A party must first present to the court proof of loss or other satisfactory
explanation for the non-production of the original instrument.30 When more than one original
copy exists, it must appear that all of them have been lost, destroyed, or cannot be produced in
court before secondary evidence can be given of any one. A photocopy may not be used without
accounting for the other originals.31
Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman
merely presented a photocopy. He admitted that he kept a copy of the 1990 Bond but he could
no longer produce it because he had already severed his ties with Country Bankers. However,
he did not explain why severance of ties is by itself reason enough for the non-availability of his
copy of the bond considering that, as it appears from the 1989 Bonds, Lagman himself is a
bondsman. Neither did Lagman explain why he failed to secure the original from any of the
three other custodians he mentioned in his testimony. While he apparently was able to find the
original with the NFA Loan Officer, he was merely contented with producing its photocopy.
Clearly, Lagman failed to exert diligent efforts to produce the original.
Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an
Indemnity Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he
raises the defense of "non-existence of an indemnity agreement" which would conveniently
exempt him from liability. The trial court deemed this defense as indicia of bad faith, thus:
To the observation of the Court, defendant Lagman contended that being a general agent
(which requires a much higher qualification than an ordinary agent), he is expected to have
attended seminars and workshops on general insurance wherein he is supposed to have
acquired sufficient knowledge of the general principles of insurance which he had fully practised
or implemented from experience. It somehow appears to the Court’s assessment of his reneging
liability of the bonds in question, that he is still short of having really understood the principle
of suretyship with reference to the transaction of indemnity in which he is a signatory. If, as he
alleged, that he is well-versed in insurance, the Court finds no excuse for him to stand firm in
denying his liability over the claim against the bonds with indemnity provision. If he insists in
not recognizing that liability, the more that this Court is convinced that his knowledge that
insurance operates under the principle of good faith is inadequate. He missed the exception
provided by Section 177 of the Insurance Code, as amended, wherein non-payment of premium
would not have the same essence in his mind that the agreements entered into would not have
full force or effect. It could be glimpsed, therefore, that the mere fact of cancelling bonds with
indemnity agreements and replacing them (absence of the same) to escape liability clearly
manifests bad faith on his part.32 (Emphasis supplied.)
Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to
speak of. Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. For novation to take place, the following
requisites must concur: 1) There must be a previous valid obligation; 2) The parties concerned
must agree to a new contract; 3) The old contract must be extinguished; and 4) There must be
a valid new contract.33
In this case, only the first element of novation exists. Indeed, there is a previous valid obligation,
i.e., the 1989 Bonds. There is however neither a valid new contract nor a clear agreement
between the parties to a new contract since the very existence of the 1990 Bond has been
rendered dubious. Without the new contract, the old contract is not extinguished.
Implied novation necessitates a new obligation with which the old is in total incompatibility such
that the old obligation is completely superseded by the new one.34 Quite obviously, neither can
there be implied novation. In this case, there is no new obligation.
The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the
1989 Bonds which we have considered as continuing contracts. Under both Indemnity
Agreements, Lagman, as co-signor, together with Santos, Ban Lee Lim and Reguine, bound
themselves jointly and severally to Country Bankers to indemnify it for any damage or loss
sustained on the account of the execution of the bond, among others. The pertinent identical
stipulations of the Indemnity Agreements state:
INDEMNITY: ─ To indemnify and make good to the COMPANY jointly and severally, any damages,
prejudice, loss, costs, payments advances and expenses of whatever kind and nature, including
attorney’s fees and legal costs, which the COMPANY may, at any time, sustain or incur, as well
as to reimburse to said COMPANY all sums and amounts of money which the COMPANY or its
representatives shall or may pay or cause to be paid or become liable to pay, on account of or
arising from the execution of the above-mentioned BOND or any extension, renewal, alteration
or substitution thereof made at the instance of the undersigned or anyone of them.35
Moreover, the Indemnity Agreements also contained identical Incontestability Clauses which
provide:
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: ─ Any payment or disbursement
made by the COMPANY on account of the above-mentioned Bond, its renewals, extensions,
alterations or substitutions either in the belief that the COMPANY was obligated to make such
payment or in the belief that said payment was necessary or expedient in order to avoid greater
losses or obligations for which the COMPANY might be liable by virtue of the terms of the above-
mentioned Bond, its renewals, extensions, alterations, or substitutions, shall be final and shall
not be disputed by the undersigned, who hereby jointly and severally bind themselves to
indemnify [Country Bankers] of any and all such payments, as stated in the preceding clauses.
In case the COMPANY shall have paid[,] settled or compromised any liability, loss, costs,
damages, attorney’s fees, expenses, claims[,] demands, suits, or judgments as above-stated,
arising out of or in connection with said bond, an itemized statement thereof, signed by an
officer of the COMPANY and other evidence to show said payment, settlement or compromise,
shall be prima facie evidence of said payment, settlement or compromise, as well as the liability
of the undersigned in any and all suits and claims against the undersigned arising out of said
bond or this bond application.361awphil
Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by virtue
of the 1989 Bonds gave rise to Lagman’s obligation to reimburse it under the Indemnity
Agreements. Lagman, being a solidary debtor, is liable for the entire obligation.
WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 61797 are SET ASIDE and the Decision dated 21 September 1998 of
the RTC is hereby REINSTATED.
SO ORDERED.
 Know all men by these Presents:

That we, Victorio L. Rodriguez — 232 Madrid St., Manila as principal, and the Rizal Surety &
Insurance Company, a corporation duly organized and existing under and by virtue of the laws
of the Philippine Islands, as surety, are held and firmly bound to the Republic of the Philippines
in the sum of Ten Thousand and 00/100 .............. (P10,000.00) Pesos, Philippine currency for
the benefit of the heirs, legatees or creditors of the said Honofre Leyson deceased, for which
payment, well and truly to be made, we bind ourselves, our heirs, executors and administrators,
jointly and severally, firmly by these presents.

G.R. No. L-21250 March 31, 1966
INTESTATE ESTATE OF HONOFRE LEYSON (Deceased); MARGARITA LEYSON
LAURENTE, administratrix-appellee,
vs.
RIZAL SURETY AND INSURANCE COMPANY, bondsman-appellant.
REGALA, J.:
The Rizal Surety & Insurance Co. brings this appeal from an order of the Court of First Instance
of Manila which declared it liable for P6,051.57 on its bond it had given in behalf of Victorio L.
Rodriguez.
Rodriguez was the administrator of the estate of Honofre Leyson. On December 27, 1951, the
Manila Court of First Instance, in which the estate was at the time pending settlement, ordered
Rodriguez relieved of his trust after finding him guilty of maladministration. As Rodriguez
appealed the order of relief, the court, as a measure of "protection of this estate," required him
to file an increased bond of P10,000 (which then was P500 only) to answer for "the faithful
execution of his trust as of the date of his appointment."
The condition of the foregoing bond is such that whereas an order was issued by the Court of
First Instance of Manila, Philippine Islands, on the .... day of ..........., 19 ... appointing ..........
administrator of the estate of Honofre Leyson deceased, and to whom it was ordered that
letters of administration be issued, upon him furnishing a bond in the sum of Ten Thousand and
00/100 (P10,000.00) Pesos, Philippine Currency, with good and sufficient surety to the
satisfaction of the Court.
THEREFORE, if the said Victorio L. Rodriguez faithfully prepares and present to the Court, within
three months from the date of his appointment, a correct inventory of all the property of the
deceased which may have come into his possession or into the possession of any other person
representing him according to law, if he administers all the property of the deceased which at
any time comes into his possession or any other person representing him faithfully pays all the
debts, legacies, and bequests which encumber said estate, pays whatever dividends which the
Court may decide should be paid, and renders a just and true account of his administration to
the Court within a year or at any other date that he may be required so to do, and faithfully
execute all orders and decrees of said Court, then in this case obligation shall be void, otherwise
it shall remain in full force and effect.1äwphï1.ñët
s/t VICTORIO L. RODRIGUEZ
Principal

Rodriguez filed a bond, given by the appellant, but instead of a bond for the purpose specified RIZAL SURETY & INSURANCE CO.
by the court in its order, he filed a bond which reads: By:

R.S. & I. No. 28764 (Sgd.) Pablo I. de Jesus

Executive Vice President

Republic of the Philippines

Court of First Instance of Manila xxx xxx xxx

Case No. 1894 In its order of June 27, 1952 approving the bond, the court stated:

The bond filed by Victorio L. Rodriguez in the amount of P10,000.00 in accordance

In the Matter of the Intestate )
Administrator's with the order of May 28, 1952 is hereby approved.
Estate of Honofre Leyson, )
Bond
; Deceased. )
Said bond shall answer for the faithful execution of his trust as of the date of his
appointment.
 Let the Rizal Surety & Insurance Company be notified of this order.
Required to account for the period June 27, 1951 to August 30, 1954, Rodriguez was found short
of P6,248.22. (The amount of shortage was later found by final judgment of the Court of Appeals
to be P6,051.57.) Despite several deadlines given to him, Rodriguez failed to pay the money in
court, for which reason he was ordered arrested and declared in contempt.
On November 8, 1962, the Court, acting on motion of the new administratrix, ordered the
confiscation of Rodriguez' bond for the satisfaction of the amount of P6,051.57. It is from this
order that the surety company appeals.
It is first of all contended that appellant cannot beheld liable on its bond because the
defalcations, for which the bond was ordered forfeited, were committed by the principal before
the bond was filed. The rule is invoked that a contract of suretyship must be strictly construed
and since the contract in this case contains no provision malting it expressly retroactive, the
point is made that the bond cannot cover violations of trust by the administrator before the
filing of that bond.
While it is indeed true that the bond does not specify the date when it took effect, the fact is
that both in its order requiring the administrator to file an increased bond and in its subsequent
order approving the bond, the court made plain that the bond would answer "for the faithful
execution of his (administrator's) trust as of the date of his appointment." Rodriguez'
appointment as administrator was made on December 8, 1947 and it was on this date that the
bond must be understood to have taken effect. That the court should require this condition is
understandable, considering that it had earlier found the former administrator guilty of
maladministration and, as a consequence, ordered his removal. To repeat, the bond in question
was required by the court "for the protection of (the) estate" in view of the fact that Rodriguez
had appealed the order of removal and, therefore, could not immediately be relieved of his
position of trust.
Of course the bond given by the appellant is not responsive to the requirement of the court
order. Instead of reciting that it is being given "to answer for the faithful execution (by the
administrator) of his trust as of the date of his appointment," it recites that —
The condition of the foregoing bond is such that whereas an order was issued by the
Court of First Instance of Manila, Philippine Islands, on the .... day
of ........, 19 ... to whom it was ordered that letters of administration be issued . . . .
But, then, the contract, having been made on a form prepared by the surety, must be construed
against the surety and in favor of the promisee. (Pacific Tobacco Corporation vs. Lorenzana, G.R.
No. L-8086, Oct. 31, 1957. Cf. Vadil v. de Venecia, G. R. No. L-16113, Oct 31, 1963). As this Court
explained in Pacific Tobacco:
Although We might acknowledge that a surety is a favorite of the law and his contract strictissimi
juris, this rule has no bearing on the case at bar. Anyway, it commonly refers to an
accommodation surety and should not be extended to favor a compensated surety, as is
appellant in this case. The rationale of this doctrine is reasonable; an accommodation surety
acts without motive of pecuniary gain and, hence, should be protected against unjust pecuniary
impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot be
said of a compensated corporate surety which is a business association organized for the
purpose of assuming classified risks in the medium of standardized written contractual forms
drawn by its representatives with the primary aim of protecting his own interest. (See Stearn's
The Law of Suretyship, 4th ed., 402-403) American courts in refusing to apply this rule on
compensated sureties have expressed themselves in varying language. Sometimes it is said that
a corporate compensated surety is not entitled to the benefit of the strictissimi juris (U.S. vs.
Geo. F. Pawling & Co., 297 F. 65); or that the contract is to be construed against the surety and
in favor of the promisee (Consolidated Indem. & Ins. Co. vs. State, 184 Ark. 581, 43 S.W. [2]
240); or that the contract is like one of insurance hence one or the other of the above rules is
to be applied (Lassetter vs. Becker, 26 Ariz. 224, 224 P. 810; Md. Cas. Co. vs. Dunlap, 68 F. [2d]
289 . . .
Slovenko states with lucidity the distinction between an accommodation and a compensated
corporate sureties and the reasons for treating them differently thus:
The law has authorized the formation of corporations for the purpose of conducting surety
business, and the corporate surety differs significantly from the individual private surety. First,
unlike the private surety, the corporate surety signs for cash and not for friendship. The private
surety is regarded as someone doing a rather foolish act for praiseworthy motives; the
corporate surety, to the contrary, is in business to be a profit and charges a premium depending
upon the amount of guaranty and the risk involved. Second, the corporate surety, like an
insurance company, prepares the instrument, which is a type of contract of adhesion, whereas
the private surety usually does not prepare the note or bond which he signs. Third, the
obligation of the private surety often is assumed simply on the basis of the debtor's
representations and without legal advice, while the corporate surety does not bind itself until a
full investigation has been made. For these reasons, the courts distinguish between the
individual gratuitous surety and the vocational corporate surety. In the case of the corporate
surety, the rule of strictissimi juris is not applicable, and courts apply the rules of
interpretation ... appertaining to contracts of insurance. (Slovenko, Suretyship, 39 TUL. L. REV.
427, 442-443 [1965] ).
Nor is there any merit in the claim that the bond in this case was confiscated without giving the
appellant a chance to be heard on "the reality and reasonableness of the damages." It has
already been held that the nature of a surety's obligation on an administrator's bond, which
makes him privy to the proceedings against his principal, is such that he is bound and concluded,
in the absence of fraud or collusion, by a judgment against his principal, even though the surety
was not a party to the proceedings. (Philippine Trust Co. v. Luzon Surety Co., G.R. No. L-13031,
May 30, 1961)
Furthermore, the record shows that the surety was given an opportunity to be heard. In the
order of the Court dated November 8, 1962, the following appears.
 The Rizal Surety and Insurance Company filed its opposition to the above motion on
October 22, this year, to which opposition the administratrix filed her reply, dated
October 27, 1962. . . . .
This motion refers to the petition filed by the heiress and the temporary administratrix to make
the surety liable to the extent of P6,051.57, which amount was found due from the said former
administrator.
Wherefore, the order appealed from is affirmed, without pronouncement as to costs.
G.R. No. 107062 February 21, 1994
PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents.
NOCON, J.:
Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a
favorable decision from the Regional Trial Court and then again in the Court of Appeals. 1 These
are non-appearance during the pre-trial despite due notice, and non-payment of docket fees
upon filing of its third-party complaint. Just how strict should these rules be applied is a crucial
issue in this present dispute.
Petitioner, Interworld Assurance Corporation (the company now carries the corporate name
Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum of
money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial
Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No. 0029,
dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum
General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION
(1,000,000.00) PESOS, respectively.
On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner.
Within the reglementary period, two successive motions were filed by petitioner praying for a
total of thirty (30) days extention within which to file a responsible pleading.
In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having
executed the said bonds, but denied liability because allegedly 1) the checks which were to pay
for the premiums bounced and were dishonored hence there is no contract to speak of between
petitioner and its supposed principal; and 2) that the bonds were merely to guarantee payment
of its principal's obligation, thus, excussion is necessary. After the issues had been joined, the
case was set for pre-trial conference on September 29, 1988. the petitioner received its notice
on September 9, 1988, while the notice addressed to its counsel was returned to the trial court
with the notation "Return to Sender, Unclaimed." 2
On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while
both the representative of respondent and its counsel were present. The counsel for petitioner
manifested that he was unable to contract the Vice-President for operations of petitioner,
although his client intended to file a third party complaint against its principal. Hence, the pre-
trial was re-set to October 14, 1988. 3
On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint"
with the Third-Party Complaint attached. On this same day, in the presence of the
representative for both petitioner and respondent and their counsel, the pre-trial conference
was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the
Third Party Complaint and ordered service of summons on third party defendants. 4
On scheduled conference in December, petitioner and its counsel did not appear
notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to February
1, 1989. However, when the case was called for pre-trial conference on February 1, 1989,
petitioner was again nor presented by its officer or its counsel, despite being duly notified.
Hence, upon motion of respondent, petitioner was considered as in default and respondent was
allowed to present evidence ex-parte, which was calendared on February 24, 1989. 6 Petitioner
received a copy of the Order of Default and a copy of the Order setting the reception of
respondent's evidence ex-parte, both dated February 1, 1989, on February 16, 1989. 7
On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant Interworld Assurance Corporation to pay the amount
of P1,500,000.00 representing the principal of the amount due, plus legal
interest thereon from April 7, 1988, until date of payment; and P20,000.00
as and for attorney's fees. 8
Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been
denied it elevated its case to the Court of Appeals which however, affirmed the decision of the
trial court as well as the latter's order denying petitioner's motion for reconsideration.
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely erred in declaring that the case
was already ripe for pre-trial conference when the trial court set it for the
holding thereof.
II. The respondent Court of Appeals gravely erred in affirming the decision
of the trial court by relying on the ruling laid down by this Honorable Court
in the case of Manchester Development Corporation v. Court of Appeals,
149 SCRA 562, and disregarding the doctrine laid down in the case of Sun
Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274.
 III. The respondent Court of Appeals gravely erred in declaring that it would
be useless and a waste of time to remand the case for further proceedings
as defendant-appellant has no meritorious defense.
We do not find any reversible error in the conclusion reached by the court a quo.
Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last pleading,
which was supposed to be the third-party defendant's answer has not been filed, the case is not
yet ripe for pre-trial. This argument must fail on three points. First, the trial court asserted, and
we agree, that no answer to the third party complaint is forthcoming as petitioner never
initiated the service of summons on the third party defendant. The court further said:
. . . Defendant's claim that it was not aware of the Order admitting the third-
party complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides:
Completeness of service — . . . Service by registered
mail is complete upon actual receipt by the addressee,
but if he fails to claim his mail from the post office
within five (5) days from the date of first notice of the
postmaster, service shall take effect at the expiration of
such time. 9
Moreover, we observed that all copies of notices and orders issued by the court for petitioner's
counsel were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to,
he would appear in court despite supposed lack of notice.
Second, in the regular course of events, the third-party defendant's answer would have been
regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just
disregard the court's order to be present during the pre-trial and give a flimsy excuse, such as
that the answer has yet to be filed.
The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and
expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character the
Rules oblige not only the lawyers but the parties as well to appear for this purpose before the
Court 10 and when a party fails to appear at a pre-trial conference he may be non-suited or
considered as in default. 11
Records show that even at the very start, petitioner could have been declared as in default since
it was not properly presented during the first scheduled pre-trial on September 29, 1988.
Nothing in the record is attached which would show that petitioner's counsel had a special
authority to act in behalf of his client other than as its lawyer.
We have said that in those instances where a party may not himself be present at the pre-trial,
and another person substitutes for him, or his lawyer undertakes to appear not only as an
attorney but in substitution of the client's person, it is imperative for that representative or the
lawyer to have "special authority" to enter into agreements which otherwise only the client has
the capacity to make. 12
Third, the court of Appeals properly considered the third-party complaint as a mere scrap of
paper due to petitioner's failure to pay the requisite docket fees. Said the court a quo:
A third-party complaint is one of the pleadings for which Clerks of court of
Regional Trial Courts are mandated to collect docket fees pursuant to
Section 5, Rule 141 of the Rules of Court. The record is bereft of any showing
tha(t) the appellant paid the corresponding docket fees on its third-party
complaint. Unless and until the corresponding docket fees are paid, the trial
court would not acquire jurisdiction over the third-party complaint
(Manchester Development Corporation vs. Court of Appeals, 149 SCRA
562). The third-party complaint was thus reduced to a mere scrap of paper
not worthy of the trial court's attention. Hence, the trial court can and
correctly set the case for pre-trial on the basis of the complaint, the answer
and the answer to the counterclaim.13
It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v.
Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun Insurance and
Manchester are mere reiteration of old jurisprudential pronouncements on the effect of non-
payment of docket fees. 16 In previous cases, we have consistently ruled that the court cannot
acquire jurisdiction over the subject matter of a case, unless the docket fees are paid.
Moreover, the principle laid down in Manchester could have very well been applied in Sun
Insurance. We then said:
The principle in Manchester [Manchester Development Corp. v. C.A., 149
SCRA 562 (1987)] could very well be applied in the present case. The pattern
and the intent to defraud the government of the docket fee due it is obvious
not only in the filing of the original complaint but also in the filing of the
second amended complaint.
xxx xxx xxx
In the present case, a more liberal interpretation of the rules is called for
considering that, unlike Manchester, private respondent demonstrated his
willingness to abide by the rules by paying the additional docket fees as
required. The promulgation of the decision in Manchester must have had
that sobering influence on private respondent who thus paid the additional
docket fee as ordered by the respondent court. It triggered his change of
stance by manifesting his willingness to pay such additional docket fees as
may be ordered. 17
Thus, we laid down the rules as follows:
 1. It is not simply the filing of the complaint or appropriate initiatory
pleading, but the payment of the prescribed docket fee, that vests a trial
court with jurisdiction over the subject-matter or nature of the action.
Where the filing of the initiatory pleading is not accompanied by payment
of the docket fee, the court may allow payment of the fee within a
reasonable time, but in no case beyond the applicable prescriptive or
reglamentary period.
2. The same rule applies to permissive counterclaims, third-party
claims and similar pleadings, which shall not be considered filed until and
unless the filing fee prescribed therefor is paid. The court may also allow
payment of said fee within a prescriptive or reglementary period.
3. Where the trial court acquires jurisdiction over a claim by the filing of the
appropriate pleading and payment of the prescribed filing fee, but
subsequently, the judgment awards a claim nor specified in the pleading, or
if specified the same has not been left for determination by the court, the
additional filing fee therefor shall constitute a lien on the judgment. It shall
be the responsibility of the clerk of court or his duly authorized deputy to
enforce said lien and assess and collect the additional
fee. 18
It should be remembered that both in Manchester and Sun Insurance plaintiffs therein paid
docket fees upon filing of their respective pleadings, although the amount tendered were found
to be insufficient considering the amounts of the reliefs sought in their complaints. In the
present case, petitioner did not and never attempted to pay the requisite docket fee. Neither is
there any showing that petitioner even manifested to be given time to pay the requisite docket
fee, as in fact it was not present during the scheduled pre-trial on December 1, 1988 and then
again on February 1, 1989. Perforce, it is as if the third-party complaint was never filed.
Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner
hinges its defense on two arguments, namely: a) that the checks issued by its principal which
were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak
of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance
Company (now Phil. Pryce) was not yet authorized by the insurance Commission to issue such
bonds.
The Insurance Code states that:
Sec. 177. 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. . . . (emphasis added)
The above provision outrightly negates petitioner's first defense. In a desperate attempt to
escape liability, petitioner further asserts that the above provision is not applicable because the
respondent allegedly had not accepted the surety bond, hence could not have delivered the
goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found by the
trial court and which are on record.
In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of
the original action. 19Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the
respondent, reveals the following:
Q. What are the conditions and terms of sales you
extended to Sagum General Merchandise?
A. First, we required him to submit to us Surety Bond to
guaranty payment of the spare parts to be purchased.
Then we sell to them on 90 days credit. Also, we
required them to issue post-dated checks.
Q. Did Sagum General merchandise comply with your
surety bond requirement?
A. Yes. They submitted to us and which we have
accepted two surety bonds.
Q Will you please present to us the aforesaid surety
bonds?
A. Interworld Assurance Corp. Surety Bond No. 0029 for
P500,000 dated July 24, 1987 and Interworld Assurance
Corp. Surety Bond No. 0037 for P1,000.000 dated
October 7, 1987. 20
Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices
addressed to Sagum General Merchandise proving that parts were purchased, delivered and
received.
On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond
when it did is an admission of fraud committed against respondent. No person can claim benefit
from the wrong he himself committed. A representation made is rendered conclusive upon the
person making it and cannot be denied or disproved as against the person relying thereon. 22
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the
petition before them and affirming the decision of the trial court and its order denying
petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is
DISMISSED for lack of merit.
SO ORDERED.
[G.R. NO. 151133 : June 30, 2008]
AFP GENERAL INSURANCE CORPORATION, Petitioner, v. NOEL MOLINA, JUANITO ARQUEZA,
LEODY VENANCIO, JOSE OLAT, ANGEL CORTEZ, PANCRASIO SIMPAO, CONRADO CALAPON AND
NATIONAL LABOR RELATIONS COMMISSION (FIRST DIVISION), Respondents.
DECISION
QUISUMBING, J.:
This is a Petition for Review on Certiorari of the Decision1 dated August 20, 2001 of the Court of
Appeals in CA-G.R. SP No. 58763 which dismissed herein petitioner's special civil action
for certiorari . Before the appellate court, petitioner AFP General Insurance Corporation
(AFPGIC) sought to reverse the Resolution2 dated October 5, 1999 of the National Labor
Relations Commission (NLRC) in NLRC NCR CA-011705-96 for having been issued with grave
abuse of discretion. The NLRC affirmed the Order3 dated March 30, 1999 of Labor Arbiter
Edgardo Madriaga in NLRC NCR Case No. 02-00672-90 which had denied AFPGIC's Omnibus
Motion to Quash Notice/Writ of Garnishment and Discharge AFPGIC's appeal bond for failure
of Radon Security & Allied Services Agency (Radon Security) to pay the premiums on said bond.
Equally challenged is the Resolution4 dated December 14, 2001 of the appellate court in CA-G.R.
SP No. 58763 which denied herein petitioner's motion for reconsideration.
The facts of this case are not disputed.
The private respondents are the complainants in a case for illegal dismissal, docketed as NLRC
NCR Case No. 02-00672-90, filed against Radon Security & Allied Services Agency and/or Raquel
Aquias and Ever Emporium, Inc. In his Decision dated August 20, 1996, the Labor Arbiter ruled
that the private respondents were illegally dismissed and ordered Radon Security to pay them
separation pay, backwages, and other monetary claims.
Radon Security appealed the Labor Arbiter's decision to public respondent NLRC and posted
a supersedeas bond, issued by herein petitioner AFPGIC as surety. The appeal was docketed as
NLRC NCR CA-011705-96.
On April 6, 1998, the NLRC affirmed with modification the decision of the Labor Arbiter. The
NLRC found the herein private respondents constructively dismissed and ordered Radon
Security to pay them their separation pay, in lieu of reinstatement with backwages, as well as
their monetary benefits limited to three years, plus attorney's fees equivalent to 10% of the
entire amount, with Radon Security and Ever Emporium, Inc. adjudged jointly and severally
liable.
Radon Security duly moved for reconsideration, but this was denied by the NLRC in its
Resolution dated June 22, 1998.
Radon Security then filed a Petition for Certiorari docketed as G.R. No. 134891 with this Court,
but we dismissed this petition in our Resolution of August 31, 1998.
When the Decision dated April 6, 1998 of the NLRC became final and executory, private
respondents filed an Urgent Motion for Execution. As a result, the NLRC Research and
Information Unit submitted a Computation of the Monetary Awards in accordance with the
NLRC decision. Radon Security opposed said computation in its Motion for Recomputation.
On February 5, 1999, the Labor Arbiter issued a Writ of Execution5incorporating the
computation of the NLRC Research and Information Unit. That same date, the Labor Arbiter
dismissed the Motion for Recomputation filed by Radon Security. By virtue of the writ of
execution, the NLRC Sheriff issued a Notice of Garnishment6 against the supersedeas bond.
Both Ever Emporium, Inc. and Radon Security moved to quash the writ of execution.
On March 30, 1999, the Labor Arbiter denied both motions, and Radon Security appealed to the
NLRC.
On April 14, 1999, AFPGIC entered the fray by filing before the Labor Arbiter an Omnibus Motion
to Quash Notice/Writ of Garnishment and to Discharge AFPGIC's Appeal Bond on the ground
that said bond "has been cancelled and thus non-existent in view of the failure of Radon Security
to pay the yearly premiums."7
On April 30, 1999, the Labor Arbiter denied AFPGIC's Omnibus Motion for lack of merit.8 The
Labor Arbiter pointed out that the question of non-payment of premiums is a dispute between
the party who posted the bond and the insurer; to allow the bond to be cancelled because of
the non-payment of premiums would result in a factual and legal absurdity wherein a surety will
be rendered nugatory by the simple expedient of non-payment of premiums.
The petitioner then appealed the Labor Arbiter's order to the NLRC. The appeals of Radon
Security and AFPGIC were jointly heard as NLRC NCR CA-011705-96.
On October 5, 1999, the NLRC disposed of NLRC NCR CA-011705-96 in this wise:
WHEREFORE, premises considered, the appeals under consideration are hereby DISMISSED for
lack of merit.
SO ORDERED.9
In dismissing the appeal of AFPGIC, the NLRC pointed out that AFPGIC's theory that the bond
cannot anymore be proceeded against for failure of Radon Security to pay the premium is
untenable, considering that the bond is effective until the finality of the decision. 10 The NLRC
stressed that a contrary ruling would allow respondents to simply stop paying the premium to
frustrate satisfaction of the money judgment.11
AFPGIC then moved for reconsideration, but the NLRC denied the motion in its
Resolution12 dated February 29, 2000.
AFPGIC then filed a special civil action for certiorari, docketed as CA-G.R. SP No. 58763, with the
Court of Appeals, on the ground that the NLRC committed a grave abuse of discretion in
affirming the Order dated March 30, 1999 of the Labor Arbiter.
On August 20, 2001, the appellate court dismissed CA-G.R. SP No. 58763, disposing as follows:
WHEREFORE, the foregoing considered, the petition is denied due course and
accordingly DISMISSED.
SO ORDERED.13
AFPGIC seasonably moved for reconsideration, but this was denied by the appellate court in its
Resolution14 of December 14, 2001.
Hence, the instant case anchored on the lone assignment of error that:
THE COURT OF APPEALS SERIOUSLY ERRED IN SUSTAINING THE PUBLIC RESPONDENT NLRC
ALTHOUGH THE LATTER GRAVELY ABUSED ITS DISCRETION WHEN IT ARBITRARILY IGNORED THE
FACT THAT SUBJECT APPEAL BOND WAS ALREADY CANCELLED FOR NON-PAYMENT OF
PREMIUM AND THUS IT COULD NOT BE SUBJECT OF EXECUTION OR GARNISHMENT.15
The petitioner contends that under Section 6416 of the Insurance Code, which is deemed written
into every insurance contract or contract of surety, an insurer may cancel a policy upon non-
payment of the premium. Said cancellation is binding upon the beneficiary as the right of a
beneficiary is subordinate to that of the insured. Petitioner points out that in South Sea Surety
& Insurance Co., Inc. v. CA,17 this Court held that payment of premium is a condition precedent
to and essential for the efficaciousness of a contract of insurance.18 Hence, following UCPB
General Ins. Co., Inc. v. Masagana Telamart, Inc.,19 no insurance policy, other than life, issued
originally or on renewal is valid and binding until actual payment of the premium. 20 The
petitioner also points to Malayan Insurance Co., Inc. v. Cruz Arnaldo,21 which reiterated that an
insurer may cancel an insurance policy for non-payment of premium.22 Hence, according to
petitioner, the Court of Appeals committed a reversible error in not holding that under Section
7723 of the Insurance Code, the surety bond between it and Radon Security was not valid and
binding for non-payment of premiums, even as against a third person who was intended to
benefit therefrom.
The private respondents adopted in toto the ratiocinations of the Court of Appeals that
inasmuch as a supersedeas bond was posted for the benefit of a third person to guarantee that
the money judgment will be satisfied in case it is affirmed on appeal, the third person who
stands to benefit from said bond is entitled to notice of its cancellation for any reason. Likewise,
the NLRC should have been notified to enable it to take the proper action under the
circumstances. The respondents submit that from its very nature, a supersedeas bond remains
effective and the surety liable thereon until formally discharged from said liability. To hold
otherwise would enable a losing party to frustrate a money judgment by the simple expedient
of ceasing to pay premiums.
We find merit in the submissions of the private respondents.
The controversy before the Court involves more than just the mere application of the provisions
of the Insurance Code to the factual circumstances. This instant case, after all, traces its roots
to a labor controversy involving illegally dismissed workers. It thus entails the application of
labor laws and regulations. Recall that the heart of the dispute is not an ordinary contract of
property or life insurance, but an appeal bond required by both substantive and adjective law
in appeals in labor disputes, specifically Article 22324 of the Labor Code, as amended by Republic
Act No. 6715,25 and Rule VI, Section 626 of the Revised NLRC Rules of Procedure. Said provisions
mandate that in labor cases where the judgment appealed from involves a monetary award, the
appeal may be perfected only upon the posting of a cash or surety bond issued by a reputable
bonding company accredited by the NLRC.27 The perfection of an appeal by an employer "only"
upon the posting of a cash or surety bond clearly and categorically shows the intent of the
lawmakers to make the posting of a cash or surety bond by the employer to be the exclusive
means by which an employer's appeal may be perfected.28 Additionally, the filing of a cash or
surety bond is a jurisdictional requirement in an appeal involving a money judgment to the
NLRC.29 In addition, Rule VI, Section 6 of the Revised NLRC Rules of Procedure is a
contemporaneous construction of Article 223 by the NLRC. As an interpretation of a law by the
implementing administrative agency, it is accorded great respect by this Court.30 Note that Rule
VI, Section 6 categorically states that the cash or surety bond posted in appeals involving
monetary awards in labor disputes "shall be in effect until final disposition of the case." This
could only be construed to mean that the surety bond shall remain valid and in force until finality
and execution of judgment, with the resultant discharge of the surety company only thereafter,
if we are to give teeth to the labor protection clause of the Constitution. To construe the
provision any other way would open the floodgates to unscrupulous and heartless employers
who would simply forego paying premiums on their surety bond in order to evade payment of
the monetary judgment. The Court cannot be a party to any such iniquity.
Moreover, the Insurance Code supports the private respondents' arguments. The petitioner's
reliance on Sections 64 and 77 of the Insurance Code is misplaced. The said provisions refer to
insurance contracts in general. The instant case pertains to a surety bond; thus, the applicable
provision of the Insurance Code is Section 177,31 which specifically governs suretyship. It
provides that a surety bond, once accepted by the obligee becomes valid and enforceable,
irrespective of whether or not the premium has been paid by the obligor. The private
respondents, the obligees here, accepted the bond posted by Radon Security and issued by the
petitioner. Hence, the bond is both valid and enforceable. A verbis legis non est
recedendum (from the language of the law there must be no departure).32

When petitioner surety company cancelled the surety bond because Radon Security failed to
pay the premiums, it gave due notice to the latter but not to the NLRC. By its failure to give
notice to the NLRC, AFPGIC failed to acknowledge that the NLRC had jurisdiction not only over
the appealed case, but also over the appeal bond. This oversight amounts to disrespect and
contempt for a quasi-judicial agency tasked by law with resolving labor disputes. Until the surety
is formally discharged, it remains subject to the jurisdiction of the NLRC.

Our ruling, anchored on concern for the employee, however, does not in any way seek to
derogate the rights and interests of the petitioner as against Radon Security. The former is not
devoid of remedies against the latter. Under Section 17633 of the Insurance Code, the liability
of petitioner and Radon Security is solidary in nature. There is solidary liability only when the
obligation expressly so states, or when the law so provides, or when the nature of the obligation
so requires.34 Since the law provides that the liability of the surety company and the obligor or
principal is joint and several, then either or both of them may be proceeded against for the
money award.
The Labor Arbiter directed the NLRC Sheriff to garnish the surety bond issued by the petitioner.
The latter, as surety, is mandated to comply with the writ of garnishment, for as earlier pointed
out, the bond remains enforceable and under the jurisdiction of the NLRC until it is discharged.
In turn, the petitioner may proceed to collect the amount it paid on the bond, plus the premiums
due and demandable, plus any interest owing from Radon Security. This is pursuant to the
principle of subrogation enunciated in Article 206735 of the Civil Code which we apply to the
suretyship agreement between AFPGIC and Radon Security, in accordance with Section 17836 of
the Insurance Code. Finding no reversible error committed by the Court of Appeals in CA-G.R.
SP No. 58763, we sustain the challenged decision.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed Decision dated August
20, 2001 of the Court of Appeals in CA-G.R. SP No. 58763 and the Resolution dated December
14, 2001, of the appellate court denying the herein petitioner's motion for reconsideration
are AFFIRMED. Costs against the petitioner.
SO ORDERED.
G.R. No. L-36488 July 25, 1983
CAPITAL INSURANCE & SURETY CO., INC., herein represented by its General Agent, the PAN
AMERICAN INSURANCE AGENCIES, INC., plaintiff-appellant,
vs.
RONQUILLO TRADING and JOSE L. BAUTISTA, defendants-appellees.
GUTIERREZ, JR., J.:
Before us for review is a decision of the Court of First Instance of Manila affirming a judgment
of the City Court of Manila dismissing the plaintiff- appellant's complaint for sum of money. The
case was originally appealed to the Court of Appeals but was certified to us on a finding that
only questions of law are raised.
Capital Surety and Insurance Co., Inc., thru its general agent, executed and issued a surety bond
in the amount of $14,800.00 or its peso equivalent in behalf of Ronquillo Trading and in favor
of S.S. Eurygenes, its master, and/or its agents, Delgado Shipping Agencies. The bond was a
guarantee for any additional freight which may be determined to be due on a cargo of 258
surplus army vehicles consigned from Pusan, Korea to the Ronquillo Trading on board the S.S.
Eurygenes and booked on said vessel by the Philippine Merchants Steamship Company, Inc.
In consideration for the issuance by the appellant of the aforesaid surety bond the appellees
executed an indemnity agreement whereby among other things, they jointly and severally
promised to pay the appellant the sum of P1,827.00 in advance as premium and documentary
stamps for each period of twelve months while the surety bond was in effect.

On April 30, 1963 or about five (5) days before the expiration of the liability on the bond, P.D.
Marchessini and Co., Ltd. and Delgado Shipping Agencies, Inc., filed Civil Case No. 53853 in the
Court of First Instance of Manila against the Philippine Merchants Steamship Co., Inc., Jose L.
Bautista, doing business under the name and style of "Ronquillo Trading", and the herein
appellant Capital Insurance & Surety Co., Inc. for the sum of $14,800.00 or its equivalent in
Philippine currency, the loss they allegedly suffered as a direct consequence of the failure of the
defendants to load the stipulated quantity of 406 U.S. surplus army vehicles. The appellant was
made party defendant because of the bond it posted in behalf of the appellees.
Upon the expiration of the 12 months life of the bond, the appellant made a formal demand for
the payment of the renewal premiums and cost of documentary stamps for another year in the
amount of P1,827.00.
The appellees refused to pay, contending that the liability of the appellant under the surety
bond accrued during the period of twelve months the said bond was originally in force and
before its expiration and that the defendants-appellees were under no obligation to renew the
surety bond.
The appellant, therefore, filed a complaint to recover the sum of P l,827.00 against the appellees
in the City Court of Manila. As earlier stated, the city court rendered judgment absolving the
appellees from the complaint.
The appellant appealed the judgment to the Court of First Instance of Manila where the decision
of the city court was affirmed and the complaint dismissed.
Its motion for reconsideration having been denied, appellant filed the instant appeal with the
following lone assignment of error:
THE TRIAL COURT ERRED IN HOLDING THAT ONCE SURETY'S LIABILITY
UNDER THE BOND HAS ACCRUED, DEFENDANTS- APPELLEES ARE UNDER
NO OBLIGATION TO PAY THE PREMIUMS AND COSTS OF DOCUMENTARY
STAMPS FOR THE SUCCEEDING PERIOD THAT IT IS IN EFFECT.
The appellant contends that the conclusion of the trial court that "once surety's liability under
the bond has accrued, defendants are under no obligation to pay the premiums and cost of
documentary stamps for the succeeding period that it is in effect by reason of existing obligation
of surety under the bond" is erroneous because it contradicts the provision of the indemnity
agreement which provides:
PREMIUMS. — As consideration for the Surety, the undersigned, jointly and
severally, agree to pay the COMPANY the sum of ONE THOUSAND EIGHT
HUNDRED ONLY (P1,800.00) PESOS, Philippine Currency, in advance as
premium thereof for every ... twelve (12) months or fraction thereof, while
this bond or any renewal or substitution thereof is in effect.
According to the appellant, it can be deduced that the payment of renewal premiums should
depend upon the life and effectivity of the bond and not on the accrual of its liability. It states
that as long as the bond is in full force and effect, the principal should pay the corresponding
renewal premium and should continue to do so even if the liability on the bond has accrued,
otherwise, surety companies will be at the mercy of their principals because while their liability
continues to subsist as long as their accrued liability is not determined, or as long as the court
has not determined their liability, which may take years, the principals pay no consideration for
the use of their bond. And if the case is decided against appellant thereby holding its bond liable,
it must pay the face value of its bond, and yet it is barred from collecting any consideration for
the use of its bond during the pendency of the case.
The appellees countered that the only purpose of Civil Case No. 53853 was to enforce a liability
which existed even before the bond was executed. The bond was given to secure payment by
appellees of such additional freight as would already be due on the cargo when it actually
arrived in Manila. The bond was not executed to secure obligation or liability which was still to
arise after its twelve month life. While it is true that the lower court held that the bond was still
in effect after its expiry date, the effectivity was not due to a renewal made by the appellees
but because the surety bond provided that "the liability of the surety will not expire if, as in this
case, it is notified of an existing obligation thereunder". The meaning of the bond's still being in
effect is that, the suit on the bond instituted by the obligees prior to the expiration of the
"liability" thereunder was only for the purpose of enforcing that liability and amounted to notice
to appellant of an already existing or accrued liability so as not to let that liability lapse or expire
and thereby bar enforcement.
We agree with the contention of the appellees. It must be noted that in the surety bond it is
stipulated that the "liability of surety on this bond will expire on May 5, 1963 and said bond will
be cancelled 15 days after its expiration, unless surety is notified of any existing obligations
thereunder." Under this stipulation the bond expired on the stated date and the phrase "unless
surety is notified of any existing obligations thereunder" refers to obligations incurred during
the term of the bond.
Furthermore, under the Indemnity Agreement, the appellees "agree to pay the COMPANY the
sum of ONE THOUSAND EIGHT HUNDRED ONLY (P1,800.00) Pesos, Philippine Currency, in
advance as premium thereof for every twelve (12) months or fraction thereof, while this bond
or any renewal or substitution thereof is in effect." Obviously, the duration of the bond is for
"every twelve (12) months or fraction thereof, while this bond or any renewal or substitution is
in effect." Since the appellees opted not to renew the contract they cannot be obliged to pay
the premiums. More specifically, where a contract of surety is terminated under its terms, the
liability of the principal for premiums after such termination ceases notwithstanding the
pendency of a lawsuit to enforce a liability that accrued during its stipulated lifetime.
WHEREFORE, the appeal is dismissed for lack of merit. The decision of the court a quo is
affirmed.
SO ORDERED.