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