G.R. No.

177839

January 18, 2012

FIRST LEPANTO-TAISHO INSURANCE CORPORATION (now known as FLT

PRIME INSURANCE CORPORATION), Petitioner,
vs.
CHEVRON PHILIPPINES, INC. (formerly known as CALTEX [PHILIPPINES],
INC.), Respondent.
DECISION
VILLARAMA, JR., J.:
Before this Court is a Rule 45 Petition assailing the Decision1 dated November 20,
2006 and Resolution2 dated May 8, 2007 of the Court of Appeals (CA) in CA-G.R. CV
No. 86623, which reversed the Decision3 dated August 5, 2005 of the Regional Trial
Court (RTC) of Makati City, Branch 59 in Civil Case No 02-857.
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guarantee payment/remittance of the cost of fuel products withdrawn within the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 ofP15,084,030.30. 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 letter6 was sent to Fumitechniks demanding that the latter
submit to petitioner the following: (1) its comment on respondents 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
petitioners 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
ofP15,000,000.00.7 Consequently, petitioner advised respondent of the nonexistence 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 the copy of the basic contract be
submitted to the proposed surety for the appreciation of the 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 respondents 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 attorneys 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
petitioners counterclaim. Said court found that the terms and conditions of the
oral credit line agreement between respondent and Fumitechniks have not been
relayed to petitioner and neither were the same conveyed even during trial. Since
the surety bond is a mere accessory contract, the RTC concluded that the bond
cannot stand in the absence of the written agreement secured thereby. In holding
that petitioner cannot be held liable under the bond it issued to Fumitechniks, the
RTC noted the practice of petitioner, as testified on by its witnesses, to attach a
copy of the written agreement (principal contract) whenever it issues a surety
bond, or to be submitted later if not yet in the possession of the assured, and in

case of failure to submit the said written agreement, the surety contract will not be
binding despite payment of the premium.
Respondent filed 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 following issues:
I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN ITS
INTERPRETATION OF THE PROVISIONS OF THE SURETY BOND WHEN IT HELD THAT
THE SURETY BOND SECURED AN ORAL CREDIT LINE AGREEMENT
NOTWITHSTANDING THE STIPULATIONS THEREIN CLEARLY SHOWING BEYOND
DOUBT THAT WHAT WAS BEING SECURED WAS A WRITTEN AGREEMENT,
PARTICULARLY, THE WRITTEN AGREEMENT A COPY OF WHICH WAS EVEN REQUIRED
TO BE ATTACHED TO THE SURETY BOND AND MADE A PART THEREOF.
II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT
STRIKING OUT THE QUESTIONED RESPONDENTS EVIDENCE FOR BEING CONTRARY
TO THE PAROL EVIDENCE RULE, IMMATERIAL AND IRRELEVANT AND CONTRARY TO
THE STATUTE OF FRAUDS.

III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT

STRIKING OUT THE RESPONDENTS MOTION FOR RECONSIDERATION OF THE RTC
DECISION FOR BEING A MERE SCRAP OF PAPER AND PRO FORMA AND,
CONSEQUENTLY, IN NOT DECLARING THE RTC DECISION AS FINAL AND EXECUTORY
IN SO FAR AS IT DISMISSED THE COMPLAINT.
IV. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN REVERSING
THE RTC DECISION AND IN NOT GRANTING PETITIONERS COUNTERCLAIM. 13
The main issue to be resolved is one of first impression: whether a surety is liable
to the creditor in the absence of a written contract with the principal.
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 obligor, of an obligation or undertaking in favor of a third
party, called the obligee. It includes official recognizances, stipulations, bonds or
undertakings issued under Act 536,14 as amended. Suretyship arises upon the
solidary binding of a person deemed the surety with the principal debtor, for
the purpose of fulfilling an obligation.15 Such undertaking makes a surety
agreement an ancillary contract as it presupposes the existence of a principal
contract. Although the contract of a surety is in essence secondary only to a valid
principal obligation, the surety becomes liable for the debt or duty of another
although it possesses no direct or personal interest over the obligations nor does it
receive any benefit therefrom. And notwithstanding the fact that the surety
contract is secondary to the principal obligation, the surety assumes liability as a
regular party to the undertaking.16
The extent of a suretys liability is determined by the language of the suretyship
contract or bond itself. It cannot be extended by implication, beyond the terms of
the contract.17 Thus, to determine whether petitioner is liable to respondent under
the surety bond, it becomes necessary to examine the terms of the contract itself.
Surety Bond FLTICG (16) No. 01012 is a standard form used by petitioner, which
states:
That we, FUMITECHNIKS CORP. OF THE PHILS. of #154 Anahaw St., Project 7,
Quezon City as principal and First Lepanto-Taisho Insurance Corporation a
corporation duly organized and existing under and by virtue of the laws of the
Philippines as Surety, are held firmly bound unto CALTEX PHILIPPINES, INC. of
______ in the sum of FIFTEEN MILLION SEVEN HUNDRED THOUSAND
ONLY PESOS (P15,700,000.00), Philippine Currency, for the payment of which sum,
well and truly to be made, we bind ourselves, our heirs, executors, administrators,
successors, and assigns, jointly and severally, firmly by these presents:

The conditions of this obligation are as follows:

WHEREAS, the above-bounden principal, on 15th day of October, 2001 entered into
[an] agreement with CALTEX PHILIPPINES, INC. of ________________ to fully and
faithfully
a copy of which is attached hereto and made a part hereof:
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__.
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms, conditions, and agreements stipulated in
said agreement__ then this obligation shall be null and void; otherwise it shall
remain in full force and effect.
The liability of First Lepanto-Taisho Insurance Corporation under this bond will
expire on October 15, 2002__.
x x x x18 (Emphasis supplied.)
The rider attached to the bond sets forth the following:
WHEREAS, the Principal has applied for a Credit Line in the amount of
PESOS: Fifteen Million Seven Hundred thousand only (P15,700,000.00), Philippine
Currency with the Obligee for the purchase of Fuel Products;
WHEREAS, the obligee requires the Principal to post a bond to guarantee
payment/remittance of the cost of fuel products withdrawn within the stipulated
time in accordance with terms and conditions of the agreement;
IN NO CASE, however, shall the liability of the Surety hereunder exceed the sum of
PESOS: Fifteen million seven hundred thousand only ( P15,700,000.00), Philippine
Currency.
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms and conditions and agreements stipulated in said
undertakings, then this obligation shall be null and void; otherwise, it shall remain
in full force and effect.

The liability of FIRST LEPANTO-TAISHO INSURANCE CORPORATION, under this Bond

will expire on 10.15.01_. Furthermore, it is hereby understood that FIRST LEPANTOTAISHO INSURANCE CORPORATION will not be liable for any claim not presented to
it in writing within fifteen (15) days from the expiration of this bond, and that the
Obligee hereby waives its right to claim or file any court action against the Surety
after the termination of fifteen (15) days from the time its cause of action
accrues.19
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 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 submission and
attachment of the written agreement to the surety bond and replacing it with the
oral credit agreement, the obligations of the surety have been extended beyond
the limits of the surety contract.
On the other hand, respondent contends that the surety bond had been delivered
by petitioner to Fumitechniks which paid the premiums and delivered the bond to
respondent, who in turn, opened the credit line which Fumitechniks availed of to
purchase its merchandise from 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 bonds effectivity. Moreover,
respondents witnesses had already explained that distributorship accounts are not
covered by written distribution agreements. Supplying the details of these
agreements is allowed as an exception to the parol evidence rule even if it is proof
of an oral agreement. Respondent argues that by introducing documents that
petitioner sought to exclude, it never intended to change or modify the contents of
the surety bond but merely to establish the actual terms of the distribution
agreement between Fumitechniks and respondent, 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 that
a copy of the written distribution agreement was never attached thereto,
respondent avers that clearly, such attaching of the copy of the principal
agreement, was for evidentiary purposes 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.
A reading of Surety Bond FLTICG (16) No. 01012 shows that it secures the payment
of purchases on credit by Fumitechniks in accordance with the terms and
conditions of the "agreement" it entered into with respondent. The word
"agreement" has reference to the distributorship agreement, the principal contract
and by implication included the credit agreement mentioned in the rider. However,
it turned out that respondent has executed written agreements only with 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. This was clearly admitted by respondents Marketing
Coordinator, Alden Casas Fajardo, who testified as follows:
Atty. Selim:
Q : Mr. Fajardo[,] you mentioned during your cross-examination that the
surety bond as part of the requirements of [Fumitechniks] before the
Distributorship Agreement was approved?
A : Yes Sir.
xxxx
Q : Is it the practice or procedure at Caltex to reduce distributorship
account into writing?
xxxx

xxxx
Q : How did you relay that, how did you relay the terms and conditions to
the defendant?
A : I dont know, it was during the time for collection because I collected
them and explain the terms and conditions.
Q : You testified awhile ago that you did not talk to the defendant First
Lepanto-Taisho Insurance Corporation?
A : I was confused with the question. Im talking about Malou Apostol.
Q : So, in your answer, you have not relayed those terms and conditions
to the defendant First Lepanto, you have not?
A : Yes Sir.
Q : And as of this present, you have not yet relayed the terms and
conditions?

A : No, its not a practice to make an agreement.

xxxx

A : Yes Sir.
xxxx

20

Atty. Quiroz:
Q : What was the reason why you are not reducing your agreement with
your client into writing?

Respondent, however, maintains that the delivery of the bond and acceptance of
premium payment by petitioner binds the latter as surety, notwithstanding the
non-submission of the oral distributorship and credit agreement which
understandably cannot be attached to the bond.

A : Well, of course as I said, there is no fix pricing in terms of

distributorship agreement, its usually with regards to direct service to the
customers which have direct fixed price.

The contention has no merit.

xxxx

The law is clear that a surety contract should be read and interpreted together with
the contract entered into between the creditor and the principal. Section 176 of
the Insurance Code states:

Q : These supposed terms and conditions that you agreed with

[Fumitechniks], did you relay to the defendant
A : Yes Sir.

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

A surety contract is merely a collateral one, its basis is the principal contract or
undertaking which it secures.21Necessarily, the stipulations in such principal
agreement must at least be communicated or made known to the surety
particularly in this case where the bond expressly guarantees the payment of
respondents fuel products withdrawn by Fumitechniks in 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
no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.22 Moreover, being an onerous undertaking, a surety
agreement is strictly construed against the creditor, and every doubt is resolved in
favor of the solidary debtor.23 Having accepted the bond, respondent as creditor
must be held bound by the recital in the surety bond that the 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 creditor
(respondent) impacts not on the validity or legality of the surety contract but on
the creditors right to demand performance.
It bears stressing that the contract of suretyship imports entire good faith and
confidence 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 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 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 respondents 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 respondents 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 petitioners counterclaim for
moral damages and attorneys 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 in some recent
cases we have held that the Court may allow the grant of moral damages to
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
defendants acts. This is so because moral damages, though incapable of
pecuniary estimation, are in the category of an award designed to compensate the
claimant for actual injury suffered and not to impose a penalty on the
wrongdoer.29 There is no evidence presented to establish the factual basis of
petitioners claim for moral damages.
Petitioner is likewise not entitled to attorneys fees. The settled rule is that no
premium should be placed on the right to litigate and that not every winning party
is entitled to an automatic grant of attorneys fees. 30 In pursuing its claim on the
surety bond, respondent was acting on the belief that it can collect on the
obligation of Fumitechniks notwithstanding the non-submission of the written
principal contract.
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The Decision
dated November 20, 2006 and Resolution dated May 8, 2007 of the Court of
Appeals in CA-G.R. CV No. 86623, are REVERSED and SET ASIDE. The Decision
dated August 5, 2005 of the Regional Trial Court of Makati City, Branch 59 in Civil
Case No. 02-857 dismissing respondents complaint as well as petitioners
counterclaim, is hereby REINSTATED and UPHELD.
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-34959 March 18, 1988
PHILIPPINE COMMERCIAL and INDUSTRIAL BANK petitioner,
vs.
THE HONORABLE COURT OF APPEALS & ALPHA INSURANCE and SURETY
COMPANY, INC., respondents.

1avvphi1

CORTES, J.:
On January 7, 1966, Philippine Commercial and Industrial Bank (PCIB) filed a
complaint against Alpha Insurance and Surety Co., Inc., (ALPHA), Community
Builders, Inc. and Filadelfo Rojas in the Court of First Instance (CFI) of Manila. The
complaint alleged that Community Builders and Rojas borrowed P 150,000 from
PCIB, that ALPHA issued Surety Bond No. G-1689 in the amount of P 50,000 to
guarantee payment of the loan, and that upon maturity the defendants failed to
pay.
In its answer with cross-claim against Community Builders and Rojas, ALPHA
admitted having issued Surety Bond No. G-1689 but alleged that the P 150,000
debt had been paid by virtue of the assignment by Rojas to PCIB of his receivables
from the Armed Forces of the Philippines. As special defense, ALPHA alleged that
the promissory note evidencing the loan is dated later than the surety bond which
was issued for an amount less than the debt. (The promissory note is dated
September 26, 1962 while the surety bond is dated August 22, 1960.)
During the pre-trial, Rojas and Community Builders failed to appear; hence, they
were declared as in default. ALPHA reiterated its defenses stated above, namely,
(1) that the bond was issued for less than the amount of the debt, (2) that it was
issued earlier, and (3) that the debt had been paid.
These were reflected in the following pre-trial order dictated by the trial judge in
open court:
At the pre-trial conference, the parties agreed that the defendant
defendants Filadelfo Rojas and Community Builders Co., Inc.
secured a loan from the plaintiff in the amount of P 150,000 for
which they executed a promissory note dated September 26,
1962. In order to secure the payment of this obligation which
was to mature January 24, 1963, the defendants assigned their
receivables based on three contracts which they had with the
Armed Forces of the Philippines, plus the surety bond issued by
the defendant Alpha Insurance & Surety Co., Inc. in the amount
of P 50,000. Notwithstanding repeated demands and the
expiration of the promissory note, the defendants failed to pay
their obligation.
The defendants Filadelfo Rojas and Community Builders have
been declared as in default for failure to appear at the pre-trial
conference.

The remaining defendant Alpha Insurance and Surety Co., Inc.

now contends that it is not bound by the surety bond for the
reason that it was issued for less than the amount of the
plaintiffs claim and that the same was issued prior to the
execution of the promissory note, and that the obligation had
already been fully paid by the assignment of the receivables.
The issue, therefore, is whether the defendants have already
paid the amount stated in the promissory note by virtue of the
assignment aforesaid.
On the basis of this issue, let the trial hereof on the merits be, as
it is hereby, set for December 19, 1966, at 8:30 a.m.
SO ORDERED.
After trial, the CFI rendered judgment in favor of PCIB and against Rojas,
Community Builders and ALPHA, ordering them to pay P50,000 plus attorney's fees
and costs. The Court further ordered defendants Rojas and Community Builders to
pay the remaining P100,000.
Rojas and Community Builders appealed to the Court of Appeals. However, since
their counsel could not be served with the notice to file brief, their appeal was
dismissed.
ALPHA likewise appealed to the appellate court which reversed the decision of the
CFI on the ground that it was not shown that the surety bond bears any relation to
the promissory note. Hence, this petition, PCIB raising a purely procedural issue.
Petitioner contends that the appellate court erred in ruling in favor of ALPHA on the
basis of a question of fact which had not been raised before the CFI and which is
not within the issues raised in the pleadings, nor in the pre-trial order.
The issue raised calls for a determination of whether or not the relation of the
surety bond to the promissory note was ever raised as an issue in the Answer filed
by ALPHA or in the pretrial conference held between the parties.
The pertinent allegation in PCIB's complaint reads:
3. That in conjunction with the aforesaid promissory note entered
into by and between the plaintiff and the defendants Filadelfo
Rojas and Community Builders Co., Inc., as principals and the
Alpha Insurance and Surety Co., Inc., as surety, executed jointly

and severally in the City of Manila, Philippines, Alpha Bond No. G1689 in the amount of P50,000 to guarantee the payment by the
said principals of their obligation to the plaintiff in accordance
with the terms and conditions recited in the said promissory
note, copy of the surety bond is attached hereto as Annex "B"
and made integral part hereof by reference;
while the corresponding denial in the answer of ALPHA states:
3. (Defendant) ADMITS the material allegations of paragraph 3 of
the complaint in so far as the same refers to its surety bond
(Annex "B") only; that it has no knowledge nor information
sufficient to form a belief as to the truth of the rest of the
averments therein concerning the promissory note (Annex "A")
hence, it specifically denies the rest of the allegations having
reference to the promissory note;
PCIB contends that paragraph (3) of the complaint states three material facts
which are separable from each other, to wit
(a) That defendants Filadelfo Rojas and Community Builders Co.,
Inc., as principals, and respondent Alpha Insurance and Surety
Co., Inc., as surety, executed Surety Bond No. G-1689 (Annex "B"
of the complaint);
(b) That the said surety was executed to guarantee the payment
of the promissory note (Annex "A" of the complaint); and
(c) That the guarantee thus made secures the performance of
the obligations of Filadelfo Rojas and Community Builders Co.,
Inc. as set forth or recited in the promissory note (Annex "A" of
the complaint).
It is asserted that since the answer of ALPHA "admits the allegations of paragraph
(3) of the complaint in so far as the same refers to its surety bond," then what was
admitted was not only the execution of the surety bond but also that the surety
bond was issued to secure the promissory note. Hence, the answer did not raise
any issue as to the relation of the security bond to the promissory note.
One basic rule in interpretation of pleadings is that "pleadings (should) be liberally
construed to do substantial justice." [Rule 6, Sec. 15] Constructions which result in
absurdity must also be avoided. If we construe paragraph 3 of the answer together
with paragraph 2 in which ALPHA denied knowledge of the debt contracted by

Rojas and Community Builders, which debt was evidenced by the promissory note,
it is clear that ALPHA could not have admit ted that the surety bond it issued
secured the payment of the debt. It would have been inconsistent for ALPHA to
claim in paragraph 2 that it was unaware of the debt, and then to admit in
paragraph 3 that the surety bond it issued was executed to secure the debt. In
fact, a reading of the suretyship contract readily shows that it was executed on
August 22, 1960 to secure the P 50,000 discounting line credit
accommodation granted by PCIB to Community Builders. At the time Surety Bond
G-1689 was executed, the promissory note for P 150,000 dated September 26,
1962 was not yet executed. The Court thus rules that paragraph 3 of the answer of
ALPHA merely admitted the execution of Surety Bond No. G-1689, but did not
admit, nay, denied, that said bond secured the debt of Rojas and Community
Builders. In view of the specific denial, the relation of the bond to the debt was
properly raised as an issue in the Answer.
We next consider the pre-trial order.
PCIB calls the attention of this Court to that portion of the pre-trial order which
reads:
The issue, therefore, is whether the defendants have already
paid the amount stated in the promissory note by virtue of the
assignment aforesaid.
and contends that since the trial court has so limited the issue, then ALPHA can no
longer raise the defense that the bond bears no relation to the promissory note.
The pertinent provision of the Rules of Court provides:
Sec. 4. Record of pre-trial results. After the pre-trial the court
shall make an order which recites the action taken at the
conference, the amendments allowed to the pleadings, and the
agreements made by the parties as to any of the matters
considered. Such order shall limit the issues for trial to those not
disposed of by admissions or agreements of counsel and when
entered controls the subsequent course of action, unless
modified before trial to prevent manifest injustice. (Emphasis
supplied.)
While the rule provides that the pre-trial order of the court "controls the
subsequent course of action," it is categorical that the issues for trial must be
limited to "those not, disposed of by admissions or agreements of counsel." In

other words, the court has no discretion to exclude from trial issues not resolved by
voluntary agreement between the parties.
The pre-trial order clearly states that ALPHA claimed that "it is not bound by the
surety bond for the reason that it was issued for less than the amount of the
plaintiff s claim and that the same was issued prior to the execution of the
promissory note." This particular issue not having been disposed of by admissions
or agreements during the pre-trial, it remained a proper subject of litigation. In
fact, this particular issue was raised by respondent ALPHA not only in its brief filed
with the Court of Appeals, but even before the trial court, in its Memorandum and
Motion for Reconsideration.
One other important aspect of this case compels the Court to affirm the decision of
the Court of Appeals insofar as it absolves ALPHA from any liability to PCIB. Even
as appellate courts do not normally consider those errors not properly assigned or
specified, the rule is not, without qualification. As the Court stated in Insular Life
Assurance Co., Ltd. Employees Association- NATU v. Insular Life Assurance Co.,
Ltd., et al [G.R. No. L-25291, March 10, 1977, 76 SCRA 50, 61-62]:
. . (T)he Supreme Court has ample authority to review and
resolve matters not assigned and specified as errors by either of
the parties in the appeal if it finds the consideration and
determination of the same essential and indispensable in order
to arrive at a just decision in the case. This Court, thus, has the
authority to waive the lack of proper assignment of errors if the
unassigned errors closely relate to errors properly pinpointed out
or if the unassigned errors refer to matters upon which the
determination of the questions raised by the errors properly
assigned depend.
The same also applies to issues not specifically raised by the
parties. The Supreme Court, likewise, has broad discretionary
powers, in the resolution of a controversy, to take into
consideration matters on record which the parties fail to submit
to the Court as specific questions for determination. Where the
issues raised also rest on other issues not specifically presented,
as long as the latter issues bear relevance and close relation to
the former and as long as they arise from matters on record, the
Court has authority to include them in its discussion of the
controversy as well as to pass upon them. In brief, in those cases
wherein questions not particularly raised by the parties surface
as necessary for the complete adjudication of the rights and
obligations of the parties and such questions fall within the
issues already framed by the parties, the interests of justice
dictate that the Court consider and resolve them.

This qualification applies to the instant case.

It is basic that liability on a bond is contractual in nature and is ordinarily restricted
to the obligation expressly assumed therein. The extent of a surety's liability is
determined only by the clause of the contract of suretyship. It cannot be extended
by implication, beyond the terms of the contract. [Zenith Insurance Corp. v. CA et
al., No. 57957, December 29, 1982, 119 SCRA 485.]
In the case at bar, Surety Bond No. G-1689 was executed to secure a discounting
line of credit accommodation granted by PCIB to Community Builders Co., Inc. in
the amount of P50.000.
PCIB contends that the loan evidenced by the promissory note signed by Filadelfo
Rojas, both in his personal capacity and as President of Community Builders, was
granted in line with the credit accommodation secured by the surety bond; hence,
ALPHA is liable for the debt.
Note however that by the express terms of Surety Bond No. G-1689, ALPHA bound
itself to pay the discounting line of Community Builders only which has a
personality distinct and separate from Rojas. The promissory note, on the other
hand, was signed both by Rojas and by Community Builders. Also, the amount of
the credit line which ALPHA agreed to secure was only P50,000; whereas, the
promissory note was for P150,000. Clearly therefore, the debt on which PCIB bases
its action is not within the purview of the Surety Bond No. G-1689. Thus, even
granting that Rojas and Community Builders offered Surety Bond No. G-1689 as
security for the P150,000 debt, ALPHA, which merely undertook to secure a
P50,000 credit line of Community Builders, cannot be held answerable for the debt.
WHEREFORE, the petition is hereby DENIED. The appealed decision is AFFIRMED.
SO ORDERED.
G.R. No. 156571

July 9, 2008

INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME

ASSURANCE CORPORATION,Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF
CUSTOMS, Respondent.
DECISION

BRION, J.:

WHEREFORE, premises considered, the Court RESOLVES directing:

Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules
of Court filed by Intra-Strata Assurance Corporation (Intra-Strata) and Philippine
Home Assurance Corporation (PhilHome), collectively referred to as "petitioners."

(1) the defendant Grand Textile Manufacturing Corporation to pay plaintiff,

the sum of P2,363,174.00, plus interests at the legal rate from the filing of
the Complaint until fully paid;

The petition seeks to set aside the decision dated November 26, 2002 of the Court
of Appeals1 (CA) that in turn affirmed the ruling of the Regional Trial Court (RTC),
Branch 20, Manila in Civil Case No. 83-15071.2 In its ruling, the RTC found the
petitioners liable as sureties for the customs duties, internal revenue taxes, and
other charges due on the importations made by the importer, Grand Textile
Manufacturing Corporation (Grand Textile).3

(2) the defendant Intra-Strata Assurance Corporation to pay plaintiff,

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

BACKGROUND FACTS

(3) the forfeiture of all the General Warehousing Bonds executed by IntraStrata and PhilHome; and

Grand Textile is a local manufacturing corporation. In 1974, it imported from

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

(4) all the defendants to pay the costs of suit.

SO ORDERED.
The CA fully affirmed the RTC decision in its decision dated November 26, 2002.
From this CA decision, the petitioners now come before this Court through a
petition for review on certiorari alleging that the CA decided the presented legal
questions in a way not in accord with the law and with the applicable
jurisprudence.
ASSIGNED ERRORS
The petitioners present the following points as the conclusions the CA should have
made:
1. that they were released from their obligations under their bonds when
Grand Textile withdrew the imported goods without payment of taxes,
duties, and other charges; and
2. that their non-involvement in the active handling of the warehoused
items from the time they were stored up to their withdrawals substantially
increased the risks they assumed under the bonds they issued, thereby
releasing them from liabilities under these bonds.8

In their arguments, they essentially pose the legal issue of whether the withdrawal
of the stored goods, wares, and merchandise without notice to them as sureties
released them from any liability for the duties, taxes, and charges they committed
to pay under the bonds they issued. They additionally posit that they should be
released from any liability because the Bureau of Customs, through the fault or
negligence of its employees, allowed the withdrawal of the goods without the
payment of the duties, taxes, and other charges due.
The respondent, through the Solicitor General, maintains the opposite view.
THE COURTS RULING
We find no merit in the petition and consequently affirm the CA decision.
Nature of the Suretys Obligations
Section 175 of the Insurance Code defines a contract of suretyship as an
agreement whereby a party called the surety guarantees the performance by
another party called the principal or obligor of an obligation or undertaking in favor
of another party called the obligee, and includes among its various species bonds
such as those issued pursuant to Section 1904 of the Code. 9 Significantly,
"pertinent provisions of the Civil Code of the Philippines shall be applied in a
suppletory character whenever necessary in interpreting the provisions of a
contract of suretyship."10By its very nature under the terms of the laws regulating
suretyship, the liability of the surety is joint and several but limited to the amount
of the bond, and its terms are determined strictly by the terms of the contract of
suretyship in relation to the principal contract between the obligor and the
obligee.11
The definition and characteristics of a suretyship bring into focus the fact that a
surety agreement is an accessory contract that introduces a third party element in
the fulfillment of the principal obligation that an obligor owes an obligee. In short,
there are effectively two (2) contracts involved when a surety agreement comes
into play a principal contract and an accessory contract of suretyship. Under the
accessory contract, the surety becomes directly, primarily, and equally bound with
the principal as the original promissor although he possesses no direct or personal
interest over the latters obligations and does not receive any benefit therefrom. 12
The Bonds Under Consideration
That the bonds under consideration are surety bonds (and hence are governed by
the above laws and rules) is not disputed; the petitioners merely assert that they
should not be liable for the reasons summarized above. Two elements, both

affecting the suretyship agreement, are material in the issues the petitioners pose.
The first is the effect of the law on the suretyship agreement; the terms of the
suretyship agreement constitute the second.
A feature of the petitioners bonds, not stated expressly in the bonds themselves
but one that is true in every contract, is that applicable laws form part of and are
read into the contract without need for any express reference. This feature
proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to
rule:
It is to be recognized that a large degree of autonomy is accorded the contracting
parties. Not that it is unfettered. They may, according to Article 1306 of the Civil
Code "establish such stipulations, clauses, terms, and conditions as they may
deem convenient, provided that they are not contrary to law, morals, good
customs, public order, or public policy." The law thus sets limits. It is a
fundamental requirement that the contract entered into must be in
accordance with, and not repugnant to, an applicable statute. Its terms
are embodied therein. The contracting parties need not repeat them.
They do not even have to be referred to. Every contract thus contains not
only what has been explicitly stipulated but also the statutory provisions
that have any bearing on the matter."13
Two of the applicable laws, principally pertaining to the importer, are Sections 101
and 1204 of the Tariff and Customs Code which provide that:
Sec 101. Imported Items Subject to Duty All articles when imported from any
foreign country into the Philippines shall be subject to duty upon such importation
even though previously exported from the Philippines, except as otherwise
specifically provided for in this Code or in clear laws.
xxxx
Sec. 1204. Liability of Importer for Duties Unless relieved by laws or regulations,
the liability for duties, taxes, fees, and other charges attaching on importation
constitutes a personal debt due from the importer to the government which can be
discharged only by payment in full of all duties, taxes, fees, and other charges
legally accruing. It also constitutes a lien upon the articles imported which may be
enforced which such articles are in custody or subject to the control of the
government.
The obligation to pay, principally by the importer, is shared by the latter with a
willing third party under a suretyship agreement under Section 1904 of the Code
which itself provides:

10

Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or

Warehousing Bond After articles declared in the entry of warehousing shall have
been examined and the duties, taxes, and other charges shall have been
determined, the Collector shall require from the importer, an irrevocable domestic
letter of credit, bank guarantee, or bond equivalent to the amount of such duties,
taxes, and other charges conditioned upon the withdrawal of the articles within the
period prescribed by Section 1908 of this Code and for payment of any duties,
taxes, and other charges to which the articles shall then be subject and upon
compliance with all legal requirements regarding their importation.
We point these out to stress the legal basis for the submission of the petitioners
bonds and the conditions attaching to these bonds. As heretofore mentioned, there
is, firstly, a principal obligation belonging to the importer-obligor as provided under
Section 101; secondly, there is an accessory obligation, assumed by the sureties
pursuant to Section 1904 which, by the nature of a surety agreement, directly,
primarily, and equally bind them to the obligee to pay the obligors obligation.
The second element to consider in a suretyship agreement relates to the terms of
the bonds themselves, under the rule that the terms of the suretyship are
determined by the suretyship contract itself.14 The General Warehousing Bond15 that
is at the core of the present dispute provides:

WHEREAS, the surety hereon agrees to accept all responsibility jointly and
severally for the acts of the principal done in accordance with the terms of this
bond.
NOW THEREFORE, the condition of this obligation is such that if within six (6)
months from the date of arrival of the importing vessel in any case, the goods,
wares, and merchandise shall be regularly and lawfully withdrawn from public
stores or bonded warehouse on payment of the legal customs duties, internal
revenue taxes, and other charges to which they shall then be subject; or if at any
time within six (6) months from the said date of arrival, or within nine (9) months if
the time is extended for a period of three (3) months, as provided in Section 1903
of the Tariff and Customs Code of the Philippines, said importation shall be so
withdrawn for consumption, then the above obligation shall be void, otherwise, to
remain in full force and effect.
Obligations hereunder may only be accepted during the calendar year 1974 and
the right to reserve by the corresponding Collector of Customs to refuse to accept
further liabilities under this general bond, whenever, in his opinion, conditions
warrant doing so.
IN WITNESS WHEREOF, we have signed our names and affixed our seals on this
20th day of September, 1974 at Makati, Rizal, Philippines.

KNOW ALL MEN BY THESE PRESENTS:

That I/we GRAND TEXTILE MANUFACTURING CORPORATION Km. 21, Marilao,
Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a
domestic corporation duly organized and existing under and by virtue of the laws
of the Philippines, as Surety, are held and firmly bound unto the Republic of the
Philippines, in the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine
Currency, to be paid to the Republic of the Philippines, for the payment whereof,
we bind ourselves, our heirs, executors, administrators and assigns, jointly and
severally, firmly by these presents:
WHEREAS, the above-bounden Principal will from time to time make application to
make entry for storing in customs-internal revenue bonded warehouse certain
goods, wares, and merchandise, subject to customs duties and special import tax
or internal revenue taxes or both;
WHEREAS, the above principal in making application for storing merchandise in
customs-internal revenue bonded warehouse as above stated, will file this in his
name as principal, which bond shall be approved by the Collector of Customs or his
Deputy; and

Considered in relation with the underlying laws that are deemed read into these
bonds, it is at once clear that the bonds shall subsist that is, "shall remain in full
force and effect" unless the imported articles are "regularly and lawfully
withdrawn. . .on payment of the legal customs duties, internal revenue taxes, and
other charges to which they shall be subject." Fully fleshed out, the obligation to
pay the duties, taxes, and other charges primarily rested on the principal Grand
Textile; it was allowed to warehouse the imported articles without need for prior
payment of the amounts due, conditioned on the filing of a bond that shall remain
in full force and effect until the payment of the duties, taxes, and charges due.
Under these terms, the fact that a withdrawal has been made and its
circumstances are not material to the sureties liability, except to signal both the
principals default and the elevation to a due and demandable status of the
sureties solidary obligation to pay. Under the bonds plain terms, this solidary
obligation subsists for as long as the amounts due on the importations have not
been paid. Thus, it is completely erroneous for the petitioners to say that they
were released from their obligations under their bond when Grand Textile withdrew
the imported goods without payment of taxes, duties, and charges. From a
commonsensical perspective, it may well be asked: why else would the law require
a surety when such surety would be bound only if the withdrawal would be regular
due to the payment of the required duties, taxes, and other charges?

11

We note in this regard the rule that a surety is released from its obligation when
there is a material alteration of the contract in connection with which the bond is
given, such as a change which imposes a new obligation on the promising party, or
which takes away some obligation already imposed, or one which changes the
legal effect of the original contract and not merely its form. A surety, however, is
not released by a change in the contract which does not have the effect of making
its obligation more onerous.16
We find under the facts of this case no significant or material alteration in the
principal contract between the government and the importer, nor in the obligation
that the petitioners assumed as sureties. Specifically, the petitioners never
assumed, nor were any additional obligation imposed, due to any modification of
the terms of importation and the obligations thereunder. The obligation, and one
that never varied, is on the part of the importer, to pay the customs duties,
taxes, and charges due on the importation, and on the part of the sureties, to be
solidarily bound to the payment of the amounts due on the imported goods upon
their withdrawal or upon expiration of the given terms. The petitioners lack of
consent to the withdrawal of the goods, if this is their complaint, is a matter
between them and the principal Grand Textile; it is a matter outside the concern of
government whose interest as creditor-obligee in the importation transaction is the
payment by the importer-obligor of the duties, taxes, and charges due before the
importation process is concluded. With respect to the sureties who are there as
third parties to ensure that the amounts due are paid, the creditor-obligee's active
concern is to enforce the sureties solidary obligation that has become due and
demandable. This matter is further and more fully explored below.
The Need for Notice to Bondsmen
To support the conclusion that they should be released from the bonds they issued,
the petitioners argue that upon the issuance and acceptance of the bonds, they
became direct parties to the bonded transaction entitled to participate and actively
intervene, as sureties, in the handling of the imported articles; that, as sureties,
they are entitled to notice of any act of the bond obligee and of the bond principal
that would affect the risks secured by the bond; and that otherwise, the door
becomes wide open for possible fraudulent conspiracy between the bond obligee
and principal to defraud the surety.17
In taking these positions, the petitioners appear to misconstrue the nature of a
surety relationship, particularly the fact that two types of relationships are
involved, that is, the underlying principal relationship between the creditor
(government) and the debtor (importer), and the accessory surety relationship
whereby the surety binds itself, for a consideration paid by the debtor, to be jointly
and solidarily liable to the creditor for the debtors default. The creditor in this
latter relationship accepts the suretys solidary undertaking to pay if the debtor
does not pay.18 Such acceptance, however, does not change in any material way

the creditors relationship with the principal debtor nor does it make the surety an
active party to the principal creditor-debtor relationship. The contract of surety
simply gives rise to an obligation on the part of the surety in relation with the
creditor and is a one-way relationship for the benefit of the latter. 19
In other words, the surety does not, by reason of the surety agreement, earn the
right to intervene in the principal creditor-debtor relationship; its role becomes
alive only upon the debtors default, at which time it can be directly held liable by
the creditor for payment as a solidary obligor. A surety contract is made principally
for the benefit of the creditor-obligee and this is ensured by the solidary nature of
the sureties undertaking.20 Under these terms, the surety is not entitled as a rule
to a separate notice of default,21 nor to the benefit of excussion,22 and may be sued
separately or together with the principal debtor.23 The words of this Court in
Palmares v. CA24 are worth noting:
Demand on the surety is not necessary before bringing the suit against them. On
this point, it may be worth mentioning that a surety is not even entitled, as a
matter of right, to be given notice of the principals default. Inasmuch as the
creditor owes no duty of active diligence to take care of the interest of the surety,
his mere failure to voluntarily give information to the surety of the default of the
principal cannot have the effect of discharging the surety. The surety is bound to
take notice of the principals default and to perform the obligation. He cannot
complain that the creditor has not notified him in the absence of a special
agreement to that effect in the contract of suretyship.
Significantly, nowhere in the petitioners bonds does it state that prior notice is
required to fix the sureties liabilities. Without such express requirement, the
creditors right to enforce payment cannot be denied as the petitioners became
bound as soon as Grand Textile, the principal debtor, defaulted. Thus, the filing of
the collection suit was sufficient notice to the sureties of their principals default.
The petitioners reliance on Visayan Surety and Insurance Corporation v.
Pascual25 and Aguasin v. Velasquez26does not appear to us to be well taken as these
cases do not squarely apply to the present case. These cases relate to bonds
issued as a requirement for the issuance of writs of replevin. The Rules of Court
expressly require that before damages can be claimed against such bonds, notice
must be given to the sureties to bind them to the award of damages. No such
requirement is evident in this case as neither the Tariff and Customs Code nor the
issued bonds require prior notice to sureties.
The petitioners argument focusing on the additional risks they incur if they cannot
intervene in the handling of the warehoused articles must perforce fail in light of
what we have said above regarding the nature of their obligation as sureties and
the relationships among the parties where a surety agreement exists. We add that

12

the petitioners have effectively waived as against the creditor (the government)
any such claim in light of the provision of the bond that "the surety hereon agrees
to accept all responsibility jointly and severally for the acts of the principal done in
accordance with the terms of this bond."27 Any such claim including those arising
from the withdrawal of the warehoused articles without the payment of the
requisite duties, taxes and charges is for the principal and the sureties to thresh
out between or among themselves.
Government is Not Bound by Estoppel
As its final point, the petitioners argue that they cannot be held liable for the
unpaid customs duties, taxes, and other charges because it is the Bureau of
Customs duty to ensure that the duties and taxes are paid before the imported
goods are released from its custody and they cannot be made to pay for the error
or negligence of the Bureaus employees in authorizing the unlawful and irregular
withdrawal of the goods.
It has long been a settled rule that the government is not bound by the errors
committed by its agents. Estoppel does not also lie against the government or any
of its agencies arising from unauthorized or illegal acts of public officers. 28 This is
particularly true in the collection of legitimate taxes due where the collection has
to be made whether or not there is error, complicity, or plain neglect on the part of
the collecting agents.29 In CIR v. CTA,30 we pointedly said:
It is axiomatic that the government cannot and must not be estopped particularly
in matters involving taxes. Taxes are the lifeblood of the nation through which the
government agencies continue to operate and with which the State effects its
functions for the welfare of its constituents. Thus, it should be collected without
unnecessary hindrance or delay.

LEGAL AND GENERAL ASSURANCE SOCIETY LTD., PROVINCIAL INSURANCE

PLC. QBL INSURANCE (UK) LTD., ROYAL INSURANCE CO. LTD., TRINITY
INSURANCE CO. LTD., GENERAL ACCIDENT FIRE AND LIFE ASSURANCE
CORP. LTD., COOPERATIVE INSURANCE SOCIETY and PEARL ASSURANCE
CO. LTD., petitioners,
vs.
COURT OF APPEALS, REGIONAL TRIAL COURT OF MANILA, BRANCH 51.
YUPANGCO COTTON MILLS. WORLDWIDE SURETY & INSURANCE CO.,
INC., respondents.

TORRES, JR., J.:

Just how far can our courts assert jurisdiction over the persons of foreign entities
being charged with contractual liabilities by residents of the Philippines?
Appealing from the Court of Appeals' October 11, 1990 Decision 1 in CA-G.R. No.
22005, petitioners claim that the trial court's jurisdiction does not extend to them, since they
are foreign reinsurance companies that are not doing business in the Philippines. Having
entered into reinsurance contracts abroad, petitioners are beyond the jurisdictional ambit of
our courts and cannot be served summons through extraterritorial service, as under Section
17, Rule 14 of the Rules of Court, nor through the Insurance Commissioner, under Section 14.
Private respondent Yupangco Cotton Mills contend on the other hand that petitioners are within
our courts' cognitive powers, having submitted voluntarily to their jurisdiction by filing motions
to dismiss 2 the private respondent's suit below.

lawphi1

We see no reason to deviate from this rule and we shall not do so now.
WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the
Decision of the Court of Appeals. Costs against the petitioners.
SO ORDERED.
G.R. No. 97642 August 29, 1997
AVON INSURANCE PLC. BRITISH RESERVE INSURANCE CO. LTD., CORNHILL
INSURANCE PLC. IMPERIO REINSURANCE CO. (UK) LTD., INSTITUTE DE
RESERGURROS DO BRAZIL, INSURANCE CORPORATION OF IRELAND PLC,

The antecedent facts, as found by the appellate court, are as follows:

Respondent Yupangco Cotton Mills filed a complaint against several
foreign reinsurance companies (among which are petitioners) to collect
their alleged percentage liability under contract treaties between the
foreign insurance companies and the international insurance broker C.J.
Boatright, acting as agent for respondent Worldwide Surety and Insurance
Company. Inasmuch as petitioners are not engaged in business in the
Philippines with no offices, places of business or agents in the Philippines,
the reinsurance treaties having been entered abroad, service of summons
upon motion of respondent Yupangco, was made upon petitioners through
the Office of the Insurance Commissioner. Petitioners, by counsel on
special appearance, seasonably filed motions to dismiss disputing the
jurisdiction of respondent Court and the extra-territorial service of
summons. Respondent Yupangco filed its opposition to the motions to
dismiss, petitioners filed their reply, and respondent Yupangco filed its
rejoinder. In an Order dated April 30, 1990, respondent Court denied the
motions to dismiss and directed petitioners to file their answer. On May

13

29, 1990, petitioners filed their notice of appeal. In an order dated June 4,
1990, respondent court denied due course to the appeal. 3
To this day, trial on the merits of the collection suit has not proceeded as in the
present petition, petitioners continue vigorously to dispute the trial court's
assumption of jurisdiction over them.
It will be remembered that in the plaintiff's complaint, 4 it was contended that on July 6,
1979 and on October 1, 1980. Yupangco Cotton Mills engaged to secure with Worldwide
Security and Insurance Co. Inc., several of its properties for the periods July 6, 1979 to July 6,
1980 as under Policy No. 20719 for a coverage of P100,000,000.00 and from October 1, 1980
to October 1, 1981, under Policy No. 25896, also for P100,000,000.00. Both contracts were
covered by reinsurance treaties between Worldwide Surety and Insurance and several foreign
reinsurance companies, including the petitioners. The reinsurance arrangements had been
made through international broker C.J. Boatwright and Co. Ltd., acting as agent of Worldwide
Surety and Insurance.

As fate would have it, on December 16, 1979 and May 2, 1981, within the
respective effectivity periods of Policies 20719 and 25896, the properties therein
insured were razed by fire, thereby giving rise to the obligation of the insurer to
indemnify the Yupangco Cotton Mills. Partial payments were made by Worldwide
Surety and Insurance and some of the reinsurance companies.
On May 2, 1983, Worldwide Surety and Insurance, in a Deed of Assignment,
acknowledged a remaining balance of P19,444,447.75 still due Yupangco Cotton
Mills, and assigned to the latter all reinsurance proceeds still collectible from all the
foreign reinsurance companies. Thus, in its interest as assignee and original
insured, Yupangco Cotton Mills instituted this collection suit against the petitioners.
Service of summons upon the petitioners was made by notification to the
Insurance Commissioner, pursuant to Section 14, Rule 14 of the Rules of
Court. 5
In a Petition for Certiorari filed with the Court of Appeals, petitioners submitted that
respondent Court has no jurisdiction over them, being all foreign corporations not
doing business in the Philippines with no office, place of business or agents in the
Philippines. The remedy of Certiorari was resorted to by the petitioners on the
premise that if petitioners had filed an answer to the complaint as ordered by the
respondent court, they would risk, abandoning the issue of jurisdiction. Moreover,
extra-territorial service of summons on petitioners is null and void because the
complaint for collection is not one affecting plaintiffs status and not relating to
property within the Philippines.

1. Petitioners were properly served with summons and whatever defect, if any, in
the service of summons were cured by their voluntary appearance in
court, via motion to dismiss.
2. Even assuming that petitioners have not yet voluntarily appeared as codefendants in the case below even after having filed the motions to dismiss
adverted to, still the situation does not deserve dismissal of the complaint as far as
they are concerned, since as held by this Court in Lingner Fisher GMBH vs. IAC,
125 SCRA 523;
A case should not be dismissed simply because an original summons was
wrongfully served. It should be difficult to conceive for example, that
when a defendant personally appears before a court complaining that he
had not been validly summoned, that the case filed against him should be
dismissed. An alias summons can be actually served on said defendant.
3. Being reinsurers of respondent Worldwide Surety and Insurance of the risk which
the latter assumed when it issued the fire insurance policies in dispute in favor of
respondent Yupangco, petitioners cannot now validly argue that they do not do
business in this country. At the very least, petitioners must be deemed to have
engaged in business in the Philippines no matter how isolated or singular such
business might be, even on the assumption that among the local domestic
insurance corporations of this country, it is only in favor of Worldwide Surety and
Insurance that they have ever reinsured any risk arising from any reinsurance
within the territory.
4. The issue of whether or not petitioners are doing business in the country is a
matter best referred to a trial on the merits of the case, and so should be
addressed there.
Maintaining its submission that they are beyond the jurisdiction of Philippine
Courts, petitioners are now before us, stating:
Petitioners, being foreign corporations, as found by the trial court, not
doing business in the Philippines with no office, place of business or
agents in the Philippines, are not subject to the jurisdiction of Philippine
courts.
The complaint for sum of money being a personal action not affecting
status or relating to property, extraterritorial service of summons on
petitioners all not doing business in the Philippines is null and void.

The Court of Appeals found the petition devoid of merit, stating that:

14

The appearance of counsel for petitioners being explicitly "by special

appearance without waiving objections to the jurisdiction over their
persons or the subject matter" and the motions to dismiss having
excluded non-jurisdictional grounds, there is no voluntary submission to
the jurisdiction of the trial court. 6
For its part, private respondent Yupangco counter-submits:
1. Foreign corporations, such as petitioners, not doing business in the
Philippines, can be sued in Philippine Courts, not withstanding petitioners'
claim to the contrary.
2. While the complaint before the Honorable Trial Court is for a sum of
money, not affecting status or relating to property, petitioners (then
defendants) can submit themselves voluntarily to the jurisdiction of
Philippine Courts, even if there is no extrajudicial (sic) service of summons
upon them.
3. The voluntary appearance of the petitioners (then defendants) before
the Honorable Trial Court amounted, in effect, to voluntary submission to
its jurisdiction over their persons. 7
In the decisions of the courts below, there is much left to speculation and
conjecture as to whether or not the petitioners were determined to be "doing
business in the Philippines" or not.
To qualify the petitioners' business of reinsurance within the Philippine forum,
resort must be made to the established principles in determining what is meant by
"doing business in the Philippines." In Communication Materials and Design,
Inc. et. al. vs. Court of Appeals, 8 it was observed that.
There is no exact rule or governing principle as to what constitutes doing
or engaging in or transacting business. Indeed, such case must be judged
in the light of its peculiar circumstances, upon its peculiar facts and upon
the language of the statute applicable. The true test, however, seems to
be whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized.
Article 44 of the Omnibus Investments Code of 1987 defines the phrase to
include:

soliciting orders, purchases, service contracts, opening

offices, whether called "liaison" offices or branches;
appointing representatives or distributors who are
domiciled in the Philippines or who in any calendar year
stay in the Philippines for a period or periods totaling
one hundred eighty (180) days or more; participating in
the management, supervision or control of any
domestic business firm, entity or corporation in the
Philippines, and any other act or acts that imply a
continuity or commercial dealings or arrangements and
contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the
business organization.
The term ordinarily implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise
of the functions normally incident to and in progressive prosecution of the purpose
and object of its organization. 9
A single act or transaction made in the Philippines, however, could qualify a foreign
corporation to be doing business in the Philippines, if such singular act is not
merely incidental or casual, but indicates the foreign corporation's intention to do
business in the Philippines. 10
There is no sufficient basis in the records which would merit the institution of this
collection suit in the Philippines. More specifically, there is nothing to substantiate
the private respondent's submission that the petitioners had engaged in business
activities in this country. This is not an instance where the erroneous service of
summons upon the defendant can be cured by the issuance and service of alias
summons, as in the absence of showing that petitioners had been doing business
in the country, they cannot be summoned to answer for the charges leveled
against them.
The Court is cognizant of the doctrine in Signetics Corp. vs. Court of Appeals 11 that
for the purpose of acquiring jurisdiction by way of summons on a defendant foreign
corporation, there is no need to prove first the fact that defendant is doing business in the
Philippines. The plaintiff only has to allege in the complaint that the defendant has an agent in
the Philippines for summons to be validly served thereto, even without prior evidence
advancing such factual allegation.

As it is, private respondent has made no allegation or demonstration of the

existence of petitioners' domestic agent, but avers simply that they are doing
business not only abroad but in the Philippines as well. It does not appear at all

15

that the petitioners had performed any act which would give the general public the
impression that it had been engaging, or intends to engage in its ordinary and
usual business undertakings in the country. The reinsurance treaties between the
petitioners and Worldwide Surety and Insurance were made through an
international insurance broker, and not through any entity or means remotely
connected with the Philippines. Moreover, there is authority to the effect that a
reinsurance company is not doing business in a certain state merely because the
property or lives which are insured by the original insurer company are located in
that state. 12 The reason for this is that a contract of reinsurance is generally a separate and
distinct arrangement from the original contract of insurance, whose contracted risk is insured
in the reinsurance agreement. 13 Hence, the original insured has generally no interest in the
contract of reinsurance.14

A foreign corporation, is one which owes its existence to the laws of another
state, 15 and generally, has no legal existence within the state in which it is foreign. In Marshall
Wells Co. vs. Elser, 16 it was held that corporations have no legal status beyond the bounds of
the sovereignty by which they are created. Nevertheless, it is widely accepted that foreign
corporations are, by reason of state comity, allowed to transact business in other states and to
sue in the courts of such fora. In the Philippines foreign corporations are allowed such
privileges, subject to certain restrictions, arising from the state's sovereign right of regulation.

Before a foreign corporation can transact business in the country, it must first
obtain a license to transact business here 17 and secure the proper authorizations under
existing law.

If a foreign corporation engages in business activities without the necessary

requirements, it opens itself to court actions against it, but it shall not be allowed
to maintain or intervene in an action, suit or proceeding for its own account in any
court or tribunal or agency in the Philippines. 18
The purpose of the law in requiring that foreign corporations doing business in the
country be licensed to do so, is to subject the foreign corporations doing business
in the Philippines to the jurisdiction of the courts, 19 otherwise, a foreign corporation
illegally doing business here because of its refusal or neglect to obtain the required license and
authority to do business may successfully though unfairly plead such neglect or illegal act so
as to avoid service and thereby impugn the jurisdiction of the local courts.

The same danger does not exist among foreign corporations that are indubitably
not doing business in the Philippines. Indeed, if a foreign corporation does not do
business here, there would be no reason for it to be subject to the State's
regulation. As we observed, in so far as the State is concerned, such foreign
corporation has no legal existence. Therefore, to subject such corporation to the
courts' jurisdiction would violate the essence of sovereignty.

In the alternative, private respondent submits that foreign corporations not doing
business in the Philippines are not exempt from suits leveled against them in
courts, citing the case of Facilities Management Corporation vs. Leonardo Dela
Osa, et. al. 20 where we ruled "that indeed, if a foreign corporation, not engaged in business in
the Philippines, is not barred from seeking redress from Courts in the Philippines, a fortiori, that
same corporation cannot claim exemption from being sued in Philippine Courts for acts done
against a person or persons in the Philippines."

We are not persuaded by the position taken by the private respondent. In Facilities
Management case, the principal issue presented was whether the petitioner had
been doing business in the Philippines, so that service of summons upon its agent
as under Section 14, Rule 14 of the Rules of Court can be made in order that the
Court of First Instance could assume jurisdiction over it. The Court ruled that the
petitioner was doing business in the Philippines, and that by serving summons
upon its resident agent, the trial court had effectively acquired jurisdiction. In that
case, the court made no prescription as the absolute suability of foreign
corporations not doing business in the country, but merely discounts the absolute
exemption of such foreign corporations from liabilities particularly arising from acts
done against a person or persons in the Philippines.
As we have found, there is no showing that petitioners had performed any act in
the country that would place it within the sphere of the court's jurisdiction. A
general allegation standing alone, that a party is doing business in the Philippines
does not make it so. A conclusion of fact or law cannot be derived from the
unsubstantiated assertions of parties, notwithstanding the demands of
convenience or dispatch in legal actions, otherwise, the Court would be guilty of
sorcery; extracting substance out of nothingness. In addition, the assertion that a
resident of the Philippines will be inconvenienced by an out-of-town suit against a
foreign entity, is irrelevant and unavailing to sustain the continuance of a local
action, for jurisdiction is not dependent upon the convenience or inconvenience of
a party. 21
It is also argued that having filed a motion to dismiss in the proceedings before the
trial court, petitioners have thus acquiesced to the court's jurisdiction, and they
cannot maintain the contrary at this juncture.
This argument is at the most, flimsy.
In civil cases, jurisdiction over the person of the defendant is acquired either by his
voluntary appearance in court and his submission to its authority or by service of
summons. 22
Fundamentally, the service of summons is intended to give official notice to the
defendant or respondent that an action has been commenced against it. The

16

defendant or respondent is thus put on guard as to the demands of the plaintiff as

stated in the complaint. 23 The service of summons upon the defendant becomes an
important element in the operation of a court's jurisdiction upon a party to a suit, as service of
summons upon the defendant is the means by which the court acquires jurisdiction over his
person. 24 Without service of summons, or when summons are improperly made, both the trial
and the judgment, being in violation of due process, are null and void, 25 unless the defendant
waives the service of summons by voluntarily appearing and answering the suit. 26

When a defendant voluntarily appears, he is deemed to have submitted himself to

the jurisdiction of the court. 27This is not, however, always the case. Admittedly, and
without subjecting himself to the court's jurisdiction, the defendant in an action can, by special
appearance object to the court's assumption on the ground of lack of jurisdiction. If he so
wishes to assert this defense, he must do so seasonably by motion for the purpose of objecting
to the jurisdiction of the court, otherwise, he shall be deemed to have submitted himself to
that jurisdiction. 28 In the case of foreign corporations, it has been held that they may seek
relief against the wrongful assumption of jurisdiction by local courts. In Time, Inc. vs. Reyes, 29it
was held that the action of a court in refusing to rule or deferring its ruling on a motion to
dismiss for lack or excess of jurisdiction is correctable by a writ of prohibition or certiorari sued
out in the appellate court even before trial on the merits is had. The same remedy is available
should the motion to dismiss be denied, and the court, over the foreign corporation's
objections, threatens to impose its jurisdiction upon the same.

If the defendant, besides setting up in a motion to dismiss his objection to the

jurisdiction of the court, alleges at the same time any other ground for dismissing
the action, or seeks an affirmative relief in the motion, 30 he is deemed to have

ACCORDINGLY, the decision appealed from dated October 11, 1990, is SET ASIDE
and the instant petition is hereby GRANTED. The respondent Regional Trial Court of
Manila, Branch 51 is declared without jurisdiction to take cognizance of Civil Case
No. 86-37932, and all its orders and issuances in connection therewith are hereby
ANNULLED and SET ASIDE. The respondent court is hereby ORDERED to DESIST
from maintaining further proceeding in the case aforestated.
SO ORDERED.

G.R. No. L-14373

January 30, 1960

GENERAL INSURANCE AND SURETY CORPORATION, petitioner,

vs.
NG HUA, respondent.
Jose P. Bengzon, Guido Advincula and Potenciano Villegas, Jr., petitioner.
Crispin D. Baizas for respondent.
BENGZON, J.:

submitted himself to the jurisdiction of the court.

In this instance, however, the petitioners from the time they filed their motions to
dismiss, their submissions have been consistently and unfailingly to object to the
trial court's assumption of jurisdiction, anchored on the fact that they are all
foreign corporations not doing business in the Philippines.
As we have consistently held, if the appearance of a party in a suit is precisely to
question the jurisdiction of the said tribunal over the person of the defendant, then
this appearance is not equivalent to service of summons, nor does it constitute an
acquiescence to the court's jurisdiction. 31 Thus, it cannot be argued that the petitioners
had abandoned their objections to the jurisdiction of the court, as their motions to dismiss in
the trial court, and all their subsequent posturings, were all in protest of the private
respondent's insistence on holding them to answer a charge in a forum where they believe
they are not subject to. Clearly, to continue the proceedings in a case such as those before Us
would just "be useless and a waste of time." 32

Suit to recover on a fire insurance policy. The insurer presented several defenses in
the Manila court of first instance. After trial, it was required to pay.
On appeal to the Courts of Appeal, the judgment was affirmed.
This is now a revision on certiorari, upon the insurer's insistence on two of its main
defenses: prescription and breach of warranty.
The principal of facts on which adjudication may rest are these:
On April 15, 1952, the defendant General Insurance and Surety Corporation issued
its insurance Policy No. 471, insuring against fire, for one year, the stock in trade of
the Central Pomade Factory owned by Ng Hua, the court insured. The next day, the
Pomade factory building burned, resulting in destruction by fire of the insured
properties. Ng Hua claimed indemnity from the insurer. The policy covered
damages up to P10,000.00; but after some negotiations and upon suggestion of
the Manila Adjustment Company, he reduced the claim of P5,000.00. Nevertheless,
the defendant insurer refused to pay for various reasons, namely (a) action was

17

not filed in time; (b) violation of warranty; (c) submission of fraudulent claim; and
(f) failure to pay the premium.
The aforesaid Policy No. 471 contains this stipulation on the back thereof;.
3. The insured shall give notice to the company of any insurance or
insurances already affected, or which may subsequently be effected,
covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or
endorsed on this Policy by or on behalf of the Company before the
occurrence of any loss or damage, all benefits under the policy shall be
forfeited. (Emphasis ours.)
The face of the policy bore the annotation: "Co-Insurance Declared NIL"
It is undenied that Ng Hua had obtained fire insurance on the same goods, for the
same period of time, in the amount of P20,000.00 from General Indemnity Co.
However, the Court of Appeals referring to the annotation and overruling the
defense, held that there was no violation of the above clause, inasmuch as "coinsurance exists when a condition of the policy requires the insured to bear ratable
proportion of the loss when the value of the insured property exceeds the face
value of the policy," hence there is no co-insurance here.
Discussion Undoubtedly, co-insurance exists under the condition described by
the appellate court. But that is one kind of co-insurance. It is not the only situation
where co-insurance exists. Other insurers of the same property against the same
hazard are sometimes referred as co-insurers and the ensuing combination as coinsurance.1 And considering the terms of the policy which required the insured to
declare other insurances, the statement in question must be deemed to be a
statement (warranty) binding on both insurer and insured, that there were no other
insurance on the property. Remember it runs "Co-Insurance declared"; emphasis
on the last word. If "Co-Insurance" means that the Court of Appeals says, the
annotation served no purpose. It would even be contrary to the policyitself, which
in its clause No. 17 made the insured a co-insurer for the excess of the value of the
property over the amount of the policy.

Furthermore, even if the annotations were overlooked, the defendant insurer would
still be free from liability because there is no question that the policy issued by
General Indemnity had not been stated in nor endorsed on Policy No. 471 of
defendant. And as stipulated in the above-quoted provisions of such policy "all
benefit under this policy shall be forfeited."2
To avoid the dissastrous effect of the misrepresentation or concealment of the
other insurance policy, Ng Hua alleges "actual knowledge" on the part of General
insurance of the fact that he had taken out additional insurance with General
Indemnity. He does not say when such knowledge was acquired or imparted. If
General Insurance know before issuing its policy or before the fire, such knowledge
might overcome the insurer's defense.3 However, the Court of Appeals found no
evidence of such knowledge. We have read the pages of the stenographic notes
cited by Ng Hua and we all gather is evidence of the existence of the Insurance
General Indemnity Company. As to knowledge of General Insurance before
issuance of its policy or the fire, there was none.
Indeed, this concealment and violation was expressly set up as a special defense in
the answer. Yet plaintiff did not, in avoidance, reply nor assert such knowledge.
And it is doubtful whether the evidence on the point would be admissible under the
pleadings. (See Rule 11, sec. 1.)
All the above considerations lead to the conclusion that the defendant insurer
successfully established its defense of warranty breach or concealment of the
other insurance and/or violation of the provision of the policy above-mentioned.
Having reached the conclusion, we deem it unnecessary to discuss the other
defenses.
Wherefore, the judgment under review will be revoked, and the defendant insurer
(herein petitioner) acquitted from all the liability under the policy. Costs against
respondent. So ordered.
Paras, C.J., Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion Reyes,
J.B.L., Endencia, and Barrera, JJ.,concur.

The annotation then, must be deemed to be a warranty that the property was not
insured by any other policy. Violation thereof entitles the insurer to rescind. (Sec.
69. Insurance Act) Such misrepresentation is fatal in the light of our views in Santa
Ana vs. Commercial Union Assurance Company, Ltd., 55 Phil., 329. The materiality
of non-disclosure of other insurance policies is not open to doubt.

18