SECOND DIVISION [G.R. No. 137775.

March 31, 2005]

FGU INSURANCE CORPORATION, petitioner, vs. THE COURT OF APPEALS, SAN MIGUEL CORPORATION, and ESTATE OF ANG GUI, represented by LUCIO, JULIAN, and JAIME, all surnamed ANG, and CO TO, respondents. [G.R. No. 140704. March 31, 2005]

ESTATE OF ANG GUI, Represented by LUCIO, JULIAN and JAIME, all surnamed ANG, and CO TO, petitioners, vs. THE HONORABLE COURT OF APPEALS, SAN MIGUEL CORP., and FGU INSURANCE CORP., respondents. DECISION CHICO-NAZARIO, J.: Before Us are two separate Petitions for review assailing the Decision[1] of the Court of Appeals in CA-G.R. CV No. 49624 entitled, San Miguel Corporation, Plaintiff-Appellee versus Estate of Ang Gui, represented by Lucio, Julian and Jaime, all surnamed Ang, and Co To, Defendants-Appellants, ThirdParty Plaintiffs versus FGU Insurance Corporation, Third-Party Defendant-Appellant, which affirmed in toto the decision[2] of the Regional Trial Court of Cebu City, Branch 22. The dispositive portion of the Court of Appeals decision reads: WHEREFORE, for all the foregoing, judgment is hereby rendered as follows: 1) Ordering defendants to pay plaintiff the sum of P1,346,197.00 and an interest of 6% per annum to be reckoned from the filing of this case on October 2, 1990; 2) Ordering defendants to pay plaintiff the sum of P25,000.00 for attorneys fees and an additional sum of P10,000.00 as litigation expenses; 3) With cost against defendants.

For the Third-Party Complaint: 1) Ordering third-party defendant FGU Insurance Company to pay and reimburse defendants the amount of P632,700.00.[3] The Facts Evidence shows that Anco Enterprises Company (ANCO), a partnership between Ang Gui and Co To, was engaged in the shipping business. It owned the M/T ANCO tugboat and the D/B Lucio barge which were operated as common carriers. Since the D/B Lucio had no engine of its own, it could not maneuver by itself and had to be towed by a tugboat for it to move from one place to another. On 23 September 1979, San Miguel Corporation (SMC) shipped from Mandaue City, Cebu, on board the D/B Lucio, for towage by M/T ANCO, the following cargoes: Bill of Lading No. Shipment Destination 1 25,000 cases Pale Pilsen Estancia, Iloilo 350 cases Cerveza Negra Estancia, Iloilo

2 15,000 cases Pale Pilsen San Jose, Antique 200 cases Cerveza Negra San Jose, Antique The consignee for the cargoes covered by Bill of Lading No. 1 was SMCs Beer Marketing Division (BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while the consignee for the cargoes covered by Bill of Lading No. 2 was SMCs BMD-San Jose Beer Sales Office, San Jose, Antique. The D/B Lucio was towed by the M/T ANCO all the way from Mandaue City to San Jose, Antique. The vessels arrived at San Jose, Antique, at about one oclock in the afternoon of 30 September 1979. The tugboat M/T ANCO left the barge immediately after reaching San Jose, Antique. When the barge and tugboat arrived at San Jose, Antique, in the afternoon of 30 September 1979, the clouds over the area were dark and the waves were already big. The arrastre workers unloading the cargoes of SMC on board the D/B Lucio began to complain about their difficulty in unloading the cargoes. SMCs District Sales Supervisor, Fernando Macabuag, requested ANCOs representative to transfer the barge to a safer place because the vessel might not be able to withstand the big waves. ANCOs representative did not heed the request because he was confident that the barge could withstand the waves. This, notwithstanding the fact that at that time, only the M/T ANCO was left at the wharf of San Jose, Antique, as all other vessels already left the wharf to seek shelter. With the waves growing bigger and bigger, only Ten Thousand Seven Hundred Ninety (10,790) cases of beer were discharged into the custody of the arrastre operator. At about ten to eleven oclock in the evening of 01 October 1979, the crew of D/B Lucio abandoned the vessel because the barges rope attached to the wharf was cut off by the big waves. At around midnight, the barge run aground and was broken and the cargoes of beer in the barge were swept away. As a result, ANCO failed to deliver to SMCs consignee Twenty-Nine Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. The value per case of Pale Pilsen was Forty-Five Pesos and Twenty Centavos (P45.20). The value of a case of Cerveza Negra was Forty-Seven Pesos and Ten Centavos (P47.10), hence, SMCs claim against ANCO amounted to One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00). As a consequence of the incident, SMC filed a complaint for Breach of Contract of Carriage and Damages against ANCO for the amount of One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00) plus interest, litigation expenses and Twenty-Five Percent (25%) of the total claim as attorneys fees. Upon Ang Guis death, ANCO, as a partnership, was dissolved hence, on 26 January 1993, SMC filed a second amended complaint which was admitted by the Court impleading the surviving partner, Co To and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang. The substituted defendants adopted the original answer with counterclaim of ANCO since the substantial allegations of the original complaint and the amended complaint are practically the same. ANCO admitted that the cases of beer Pale Pilsen and Cerveza Negra mentioned in the complaint were indeed loaded on the vessel belonging to ANCO. It claimed however that it had an agreement with SMC that ANCO would not be liable for any losses or damages resulting to the cargoes by reason of fortuitous event. Since the cases of beer Pale Pilsen and Cerveza Negra were lost by reason of a storm, a fortuitous event which battered and sunk the vessel in which they were loaded, they should not be held liable. ANCO further asserted that there was an agreement between them and SMC to insure the cargoes in order to recover indemnity in case of loss. Pursuant to that agreement, the cargoes to the extent of Twenty Thousand (20,000) cases was insured with FGU Insurance Corporation (FGU) for the total amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) per Marine Insurance Policy No. 29591. Subsequently, ANCO, with leave of court, filed a Third-Party Complaint against FGU, alleging that before the vessel of ANCO left for San Jose, Antique with the cargoes owned by SMC, the cargoes, to the extent of Twenty Thousand (20,000) cases, were insured with FGU for a total amount of Eight Hundred FiftyEight Thousand Five Hundred Pesos (P858,500.00) under Marine Insurance Policy No. 29591. ANCO further alleged that on or about 02 October 1979, by reason of very strong winds and heavy waves brought about by a passing typhoon, the vessel run aground near the vicinity of San Jose, Antique, as a result of which, the vessel was totally wrecked and its cargoes owned by SMC were lost and/or destroyed. According to ANCO, the loss of said cargoes occurred as a result of risks insured against in the insurance policy and during the existence and lifetime of said insurance policy. ANCO went on to assert that in the remote possibility that the court will order ANCO to pay SMCs claim, the third-party defendant corporation should be held liable to indemnify or reimburse ANCO whatever amounts, or damages, it may be required to pay to SMC.

In its answer to the Third-Party complaint, third-party defendant FGU admitted the existence of the Insurance Policy under Marine Cover Note No. 29591 but maintained that the alleged loss of the cargoes covered by the said insurance policy cannot be attributed directly or indirectly to any of the risks insured against in the said insurance policy. According to FGU, it is only liable under the policy to Third-party Plaintiff ANCO and/or Plaintiff SMC in case of any of the following: a) b) c) total loss of the entire shipment; loss of any case as a result of the sinking of the vessel; or loss as a result of the vessel being on fire.

Furthermore, FGU alleged that the Third-Party Plaintiff ANCO and Plaintiff SMC failed to exercise ordinary diligence or the diligence of a good father of the family in the care and supervision of the cargoes insured to prevent its loss and/or destruction. Third-Party defendant FGU prayed for the dismissal of the Third-Party Complaint and asked for actual, moral, and exemplary damages and attorneys fees.[1] The trial court found that while the cargoes were indeed lost due to fortuitous event, there was failure on ANCOs part, through their representatives, to observe the degree of diligence required that would exonerate them from liability. The trial court thus held the Estate of Ang Gui and Co To liable to SMC for the amount of the lost shipment. With respect to the Third-Party complaint, the court a quo found FGU liable to bear Fifty-Three Percent (53%) of the amount of the lost cargoes. According to the trial court: . . . Evidence is to the effect that the D/B Lucio, on which the cargo insured, run-aground and was broken and the beer cargoes on the said barge were swept away. It is the sense of this Court that the risk insured against was the cause of the loss. . . . Since the total cargo was 40,550 cases which had a total amount of P1,833,905.00 and the amount of the policy was only for P858,500.00, defendants as assured, therefore, were considered co-insurers of third-party defendant FGU Insurance Corporation to the extent of 975,405.00 value of the cargo. Consequently, inasmuch as there was partial loss of only P1,346,197.00, the assured shall bear 53% of the loss[4] [Emphasis ours] The appellate court affirmed in toto the decision of the lower court and denied the motion for reconsideration and the supplemental motion for reconsideration. Hence, the petitions. The Issues In G.R. No. 137775, the grounds for review raised by petitioner FGU can be summarized into two: 1) Whether or not respondent Court of Appeals committed grave abuse of discretion in holding FGU liable under the insurance contract considering the circumstances surrounding the loss of the cargoes; and 2) Whether or not the Court of Appeals committed an error of law in holding that the doctrine of res judicata applies in the instant case. In G.R. No. 140704, petitioner Estate of Ang Gui and Co To assail the decision of the appellate court based on the following assignments of error: 1) The Court of Appeals committed grave abuse of discretion in affirming the findings of the lower court that the negligence of the crewmembers of the D/B Lucio was the proximate cause of the loss of the cargoes; and 2) The respondent court acted with grave abuse of discretion when it ruled that the appeal was without merit despite the fact that said court had accepted the decision in Civil Case No. R-19341, as affirmed by the Court of Appeals and the Supreme Court, as res judicata. Ruling of the Court First, we shall endeavor to dispose of the common issue raised by both petitioners in their respective petitions for review, that is, whether or not the doctrine of res judicata applies in the instant case. It is ANCOs contention that the decision in Civil Case No. R-19341,[5] which was decided in its favor, constitutes res judicata with respect to the issues raised in the case at bar.

The contention is without merit. There can be no res judicata as between Civil Case No. R-19341 and the case at bar. In order for res judicata to be made applicable in a case, the following essential requisites must be present: 1) the former judgment must be final; 2) the former judgment must have been rendered by a court having jurisdiction over the subject matter and the parties; 3) the former judgment must be a judgment or order on the merits; and 4) there must be between the first and second action identity of parties, identity of subject matter, and identity of causes of action.[6] There is no question that the first three elements of res judicata as enumerated above are indeed satisfied by the decision in Civil Case No. R-19341. However, the doctrine is still inapplicable due to the absence of the last essential requisite of identity of parties, subject matter and causes of action. The parties in Civil Case No. R-19341 were ANCO as plaintiff and FGU as defendant while in the instant case, SMC is the plaintiff and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang and Co To as defendants, with the latter merely impleading FGU as third-party defendant. The subject matter of Civil Case No. R-19341 was the insurance contract entered into by ANCO, the owner of the vessel, with FGU covering the vessel D/B Lucio, while in the instant case, the subject matter of litigation is the loss of the cargoes of SMC, as shipper, loaded in the D/B Lucio and the resulting failure of ANCO to deliver to SMCs consignees the lost cargo. Otherwise stated, the controversy in the first case involved the rights and liabilities of the shipowner vis--vis that of the insurer, while the present case involves the rights and liabilities of the shipper vis--vis that of the shipowner. Specifically, Civil Case No. R-19341 was an action for Specific Performance and Damages based on FGU Marine Hull Insurance Policy No. VMFMH-13519 covering the vessel D/B Lucio, while the instant case is an action for Breach of Contract of Carriage and Damages filed by SMC against ANCO based on Bill of Lading No. 1 and No. 2, with defendant ANCO seeking reimbursement from FGU under Insurance Policy No. MA-58486, should the former be held liable to pay SMC. Moreover, the subject matter of the third-party complaint against FGU in this case is different from that in Civil Case No. R-19341. In the latter, ANCO was suing FGU for the insurance contract over the vessel while in the former, the third-party complaint arose from the insurance contract covering the cargoes on board the D/B Lucio. The doctrine of res judicata precludes the re-litigation of a particular fact or issue already passed upon by a court of competent jurisdiction in a former judgment, in another action between the same parties based on a different claim or cause of action. The judgment in the prior action operates as estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or judgment was rendered.[7] If a particular point or question is in issue in the second action, and the judgment will depend on the determination of that particular point or question, a former judgment between the same parties or their privies will be final and conclusive in the second if that same point or question was in issue and adjudicated in the first suit.[8] Since the case at bar arose from the same incident as that involved in Civil Case No. R-19341, only findings with respect to matters passed upon by the court in the former judgment are conclusive in the disposition of the instant case. A careful perusal of the decision in Civil Case No. R-19341 will reveal that the pivotal issues resolved by the lower court, as affirmed by both the Court of Appeals and the Supreme Court, can be summarized into three legal conclusions: 1) that the D/B Lucio before and during the voyage was seaworthy; 2) that there was proper notice of loss made by ANCO within the reglementary period; and 3) that the vessel D/B Lucio was a constructive total loss. Said decision, however, did not pass upon the issues raised in the instant case. Absent therein was any discussion regarding the liability of ANCO for the loss of the cargoes. Neither did the lower court pass upon the issue of the alleged negligence of the crewmembers of the D/B Lucio being the cause of the loss of the cargoes owned by SMC. Therefore, based on the foregoing discussion, we are reversing the findings of the Court of Appeals that there is res judicata. Anent ANCOs first assignment of error, i.e., the appellate court committed error in concluding that the negligence of ANCOs representatives was the proximate cause of the loss, said issue is a question of fact assailing the lower courts appreciation of evidence on the negligence or lack thereof of the crewmembers of the D/B Lucio. As a rule, findings of fact of lower courts, particularly when affirmed by the appellate court, are deemed final and conclusive. The Supreme Court cannot review such findings on appeal, especially when they are borne out by the records or are based on substantial evidence.[9] As held in the case of Donato v. Court of Appeals,[10] in this jurisdiction, it is a fundamental and settled rule that findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence, as well as to observe the demeanor of the witnesses while testifying in the case.[11]

It is not the function of this Court to analyze or weigh evidence all over again, unless there is a showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute palpable error or grave abuse of discretion.[12] A careful study of the records shows no cogent reason to fault the findings of the lower court, as sustained by the appellate court, that ANCOs representatives failed to exercise the extraordinary degree of diligence required by the law to exculpate them from liability for the loss of the cargoes. First, ANCO admitted that they failed to deliver to the designated consignee the Twenty Nine Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. Second, it is borne out in the testimony of the witnesses on record that the barge D/B Lucio had no engine of its own and could not maneuver by itself. Yet, the patron of ANCOs tugboat M/T ANCO left it to fend for itself notwithstanding the fact that as the two vessels arrived at the port of San Jose, Antique, signs of the impending storm were already manifest. As stated by the lower court, witness Mr. Anastacio Manilag testified that the captain or patron of the tugboat M/T ANCO left the barge D/B Lucio immediately after it reached San Jose, Antique, despite the fact that there were already big waves and the area was already dark. This is corroborated by defendants own witness, Mr. Fernando Macabueg.[13] The trial court continued: At that precise moment, since it is the duty of the defendant to exercise and observe extraordinary diligence in the vigilance over the cargo of the plaintiff, the patron or captain of M/T ANCO, representing the defendant could have placed D/B Lucio in a very safe location before they left knowing or sensing at that time the coming of a typhoon. The presence of big waves and dark clouds could have warned the patron or captain of M/T ANCO to insure the safety of D/ B Lucio including its cargo. D/B Lucio being a barge, without its engine, as the patron or captain of M/T ANCO knew, could not possibly maneuver by itself. Had the patron or captain of M/T ANCO, the representative of the defendants observed extraordinary diligence in placing the D/B Lucio in a safe place, the loss to the cargo of the plaintiff could not have occurred. In short, therefore, defendants through their representatives, failed to observe the degree of diligence required of them under the provision of Art. 1733 of the Civil Code of the Philippines.[14] Petitioners Estate of Ang Gui and Co To, in their Memorandum, asserted that the contention of respondents SMC and FGU that the crewmembers of D/B Lucio should have left port at the onset of the typhoon is like advising the fish to jump from the frying pan into the fire and an advice that borders on madness.[15] The argument does not persuade. The records show that the D/B Lucio was the only vessel left at San Jose, Antique, during the time in question. The other vessels were transferred and temporarily moved to Malandong, 5 kilometers from wharf where the barge remained.[16] Clearly, the transferred vessels were definitely safer in Malandong than at the port of San Jose, Antique, at that particular time, a fact which petitioners failed to dispute ANCOs arguments boil down to the claim that the loss of the cargoes was caused by the typhoon Sisang, a fortuitous event (caso fortuito), and there was no fault or negligence on their part. In fact, ANCO claims that their crewmembers exercised due diligence to prevent or minimize the loss of the cargoes but their efforts proved no match to the forces unleashed by the typhoon which, in petitioners own words was, by any yardstick, a natural calamity, a fortuitous event, an act of God, the consequences of which petitioners could not be held liable for.[17] The Civil Code provides: Art. 1733. Common carriers, from the nature of their business and for reasons of public policy are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. Such extraordinary diligence in vigilance over the goods is further expressed in Articles 1734, 1735, and 1745 Nos. 5, 6, and 7 . . . Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; . . . Art. 1739. In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after the occurrence of ood, storm, or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods . . . (Emphasis supplied) Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor from liability)[18] by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which though foreseen, were inevitable. It is therefore not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid.[19] In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was it unavoidable. In fact, the other vessels in the port of San Jose, Antique, managed to transfer to another place, a circumstance which prompted SMCs District Sales Supervisor to request that the D/B Lucio be likewise transferred, but to no avail. The D/B Lucio had no engine and could not maneuver by itself. Even if ANCOs representatives wanted to transfer it, they no longer had any means to do so as the tugboat M/T ANCO had already departed, leaving the barge to its own devices. The captain of the tugboat should have had the foresight not to leave the barge alone considering the pending storm. While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster, ANCO could not escape liability to respondent SMC. The records clearly show the failure of petitioners representatives to exercise the extraordinary degree of diligence mandated by law. To be exempted from responsibility, the natural disaster should have been the proximate and only cause of the loss.[20] There must have been no contributory negligence on the part of the common carrier. As held in the case of Limpangco Sons v. Yangco Steamship Co.:[21] . . . To be exempt from liability because of an act of God, the tug must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. For, although the immediate or proximate cause of the loss in any given instance may have been what is termed an act of God, yet, if the tug unnecessarily exposed the two to such accident by any culpable act or omission of its own, it is not excused.[22] Therefore, as correctly pointed out by the appellate court, there was blatant negligence on the part of M/T ANCOs crewmembers, first in leaving the engine-less barge D/B Lucio at the mercy of the storm without the assistance of the tugboat, and again in failing to heed the request of SMCs representatives to have the barge transferred to a safer place, as was done by the other vessels in the port; thus, making said blatant negligence the proximate cause of the loss of the cargoes. We now come to the issue of whether or not FGU can be held liable under the insurance policy to reimburse ANCO for the loss of the cargoes despite the findings of the respondent court that such loss was occasioned by the blatant negligence of the latters employees. One of the purposes for taking out insurance is to protect the insured against the consequences of his own negligence and that of his agents. Thus, it is a basic rule in insurance that the carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer.[23] This rule however presupposes that the loss has occurred due to causes which could not have been prevented by the insured, despite the exercise of due diligence. The question now is whether there is a certain degree of negligence on the part of the insured or his agents that will deprive him the right to recover under the insurance contract. We say there is. However, to what extent such negligence must go in order to exonerate the insurer from liability must be evaluated in light of the circumstances surrounding each case. When evidence show that the insureds negligence or recklessness is so gross as to be sufficient to constitute a willful act, the insurer must be exonerated. In the case of Standard Marine Ins. Co. v. Nome Beach L. & T. Co.,[24] the United States Supreme Court held that: The ordinary negligence of the insured and his agents has long been held as a part of the risk which the insurer takes upon himself, and the existence of which, where it is the proximate cause of the loss, does not absolve the insurer from

liability. But willful exposure, gross negligence, negligence amounting to misconduct, etc., have often been held to release the insurer from such liability.[25] [Emphasis ours] ... In the case of Williams v. New England Insurance Co., 3 Cliff. 244, Fed. Cas. No. 17,731, the owners of an insured vessel attempted to put her across the bar at Hatteras Inlet. She struck on the bar and was wrecked. The master knew that the depth of water on the bar was such as to make the attempted passage dangerous. Judge Clifford held that, under the circumstances, the loss was not within the protection of the policy, saying: Authorities to prove that persons insured cannot recover for a loss occasioned by their own wrongful acts are hardly necessary, as the proposition involves an elementary principle of universal application. Losses may be recovered by the insured, though remotely occasioned by the negligence or misconduct of the master or crew, if proximately caused by the perils insured against, because such mistakes and negligence are incident to navigation and constitute a part of the perils which those who engage in such adventures are obliged to incur; but it was never supposed that the insured could recover indemnity for a loss occasioned by his own wrongful act or by that of any agent for whose conduct he was responsible.[26] [Emphasis ours] From the above-mentioned decision, the United States Supreme Court has made a distinction between ordinary negligence and gross negligence or negligence amounting to misconduct and its effect on the insureds right to recover under the insurance contract. According to the Court, while mistake and negligence of the master or crew are incident to navigation and constitute a part of the perils that the insurer is obliged to incur, such negligence or recklessness must not be of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under the insurance contract. In the case at bar, both the trial court and the appellate court had concluded from the evidence that the crewmembers of both the D/B Lucio and the M/T ANCO were blatantly negligent. To wit: There was blatant negligence on the part of the employees of defendants-appellants when the patron (operator) of the tug boat immediately left the barge at the San Jose, Antique wharf despite the looming bad weather. Negligence was likewise exhibited by the defendants-appellants representative who did not heed Macabuags request that the barge be moved to a more secure place. The prudent thing to do, as was done by the other sea vessels at San Jose, Antique during the time in question, was to transfer the vessel to a safer wharf. The negligence of the defendants-appellants is proved by the fact that on 01 October 1979, the only simple vessel left at the wharf in San Jose was the D/B Lucio.[27] [Emphasis ours] As stated earlier, this Court does not find any reason to deviate from the conclusion drawn by the lower court, as sustained by the Court of Appeals, that ANCOs representatives had failed to exercise extraordinary diligence required of common carriers in the shipment of SMCs cargoes. Such blatant negligence being the proximate cause of the loss of the cargoes amounting to One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00) This Court, taking into account the circumstances present in the instant case, concludes that the blatant negligence of ANCOs employees is of such gross character that it amounts to a wrongful act which must exonerate FGU from liability under the insurance contract. WHEREFORE, premises considered, the Decision of the Court of Appeals dated 24 February 1999 is hereby AFFIRMED with MODIFICATION dismissing the third-party complaint. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur. Republic of the Philippines SUPREME COURT Baguio City SECOND DIVISION

G.R. No. 166245

April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner, vs. THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent. DECISION VELASCO, JR., J.: The Case Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance application be considered as approval of the application? The Facts On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased burial lots from it on installment basis would be insured by Philamlife. The amount of insurance coverage depended upon the existing balance of the purchased burial lots. The policy was to be effective for a period of one year, renewable on a yearly basis. The relevant provisions of the policy are: ELIGIBILITY. Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted to the Assured for the unpaid balance of his loan with the Assured, and is accepted for Life Insurance coverage by the Company on its effective date is eligible for insurance under the Policy. EVIDENCE OF INSURABILITY. No medical examination shall be required for amounts of insurance up to P50,000.00. However, a declaration of good health shall be required for all Lot Purchasers as part of the application. The Company reserves the right to require further evidence of insurability satisfactory to the Company in respect of the following: 1. Any amount of insurance in excess of P50,000.00. 2. Any lot purchaser who is more than 55 years of age. LIFE INSURANCE BENEFIT. The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid balance of his loan (including arrears up to but not exceeding 2 months) as reported by the Assured to the Company or the sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the Assured if the Lot Purchaser dies while insured under the Policy. EFFECTIVE DATE OF BENEFIT. The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.3 Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together with a copy of the application of each purchaser, and the amounts of the respective unpaid balances of all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982. One of those included in the

list as "new business" was a certain John Chuang. His balance of payments was PhP 100,000. On August 2, 1984, Chuang died. Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for Chuangs death. Attached to the claim were the following documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of Attending Physician; and (5) Assureds Certificate. In reply, Philamlife wrote Eternal a letter on November 12, 1984,6 requiring Eternal to submit the following documents relative to its insurance claim for Chuangs death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate (with form attached); (3) Application for Insurance accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account showing the unpaid balance of Chuang before his death. Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was received by Philamlife on November 15, 1984. After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on April 25, 1986.8 In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May 20, 1986,9 a portion of which reads: The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal Gardens Memorial Park in October 1982 for the total maximum insurable amount of P100,000.00 each. No application for Group Insurance was submitted in our office prior to his death on August 2, 1984. In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability provision, "a declaration of good health shall be required for all Lot Purchasers as party of the application." We cite further the provision on Effective Date of Coverage under the policy which states that "there shall be no insurance if the application is not approved by the Company." Since no application had been submitted by the Insured/ Assured, prior to his death, for our approval but was submitted instead on November 15, 1984, after his death, Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal Gardens being the Assured was a party to the Contract and was therefore aware of these pertinent provisions. With regard to our acceptance of premiums, these do not connote our approval per se of the insurance coverage but are held by us in trust for the payor until the prerequisites for insurance coverage shall have been met. We will however, return all the premiums which have been paid in behalf of John Uy Chuang. Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorneys fees. SO ORDERED. The RTC found that Eternal submitted Chuangs application for insurance which he accomplished before his death, as testified to by Eternals witness and evidenced by the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further ruled that due to Philamlifes inaction from the submission of the requirements of the group insurance on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the premiums during the same period, Philamlife was deemed to have approved Chuangs application. The RTC said that since the contract is a group life insurance, once proof of death is submitted, payment must follow. Philamlife appealed to the CA, which ruled, thus:

WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs. SO ORDERED.11 The CA based its Decision on the factual finding that Chuangs application was not enclosed in Eternals letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no application form, Chuang was not covered by Philamlifes insurance. Hence, we have this petition with the following grounds: The Honorable Court of Appeals has decided a question of substance, not therefore determined by this Honorable Court, or has decided it in a way not in accord with law or with the applicable jurisprudence, in holding that: I. The application for insurance was not duly submitted to respondent PhilamLife before the death of John Chuang; II. There was no valid insurance coverage; and III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996. The Courts Ruling As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the CA and first level courts, considering their findings of facts are conclusive and binding on this Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the [CA] went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.12 (Emphasis supplied.) In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review them. Eternal claims that the evidence that it presented before the trial court supports its contention that it submitted a copy of the insurance application of Chuang before his death. In Eternals letter dated December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of the insurance application which was signed by Chuang himself and executed before his death. On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that Eternal must present evidence showing that Philamlife received a copy of Chuangs insurance application. The evidence on record supports Eternals position. The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received, states that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such stamp of receipt has the effect of acknowledging receipt of the letter together with the attachments. Such receipt is an admission by Philamlife against its own interest.13 The burden of evidence has shifted to Philamlife, which

must prove that the letter did not contain Chuangs insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed to have received Chuangs insurance application. To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped as received, the contents of the letter are correct and accounted for. Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to inconsistencies is groundless. The trial court is in the best position to determine the reliability and credibility of the witnesses, because it has the opportunity to observe firsthand the witnesses demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court, unless some facts or circumstances of weight and substance have been overlooked, misapprehended, or misinterpreted,14 that, if considered, might affect the result of the case.15 An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no overlooked facts of substance and value. Philamlife primarily claims that Eternal did not even know where the original insurance application of Chuang was, as shown by the testimony of Edilberto Mendoza: Atty. Arevalo: Q Where is the original of the application form which is required in case of new coverage? [Mendoza:] A It is [a] standard operating procedure for the new client to fill up two copies of this form and the original of this is submitted to Philamlife together with the monthly remittances and the second copy is remained or retained with the marketing department of Eternal Gardens. Atty. Miranda: We move to strike out the answer as it is not responsive as counsel is merely asking for the location and does not [ask] for the number of copy. Atty. Arevalo: Q Where is the original? [Mendoza:] A As far as I remember I do not know where the original but when I submitted with that payment together with the new clients all the originals I see to it before I sign the transmittal letter the originals are attached therein.16 In other words, the witness admitted not knowing where the original insurance application was, but believed that the application was transmitted to Philamlife as an attachment to a transmittal letter. As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two insurance application forms were accomplished and the testimony of Mendoza on who actually filled out the application form, these are minor inconsistencies that do not affect the credibility of the witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the credibility of witnesses, and these may even serve to strengthen their credibility as these negate any suspicion that the testimonies have been rehearsed.17 We reiterated the above ruling in Merencillo v. People: Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions evidence as a whole or reflect on the witnesses honesty. The test is whether the testimonies agree on essential facts and whether the respective versions corroborate and substantially coincide with each other so as to make a consistent and coherent whole.18

In the present case, the number of copies of the insurance application that Chuang executed is not at issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternals witnesses. However, the question arises as to whether Philamlife assumed the risk of loss without approving the application. This question must be answered in the affirmative. As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that: EFFECTIVE DATE OF BENEFIT. The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company. An examination of the above provision would show ambiguity between its two sentences. The first sentence appears to state that the insurance coverage of the clients of Eternal already became effective upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve the insurance contract before the same can become effective. It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that: Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations.19 (Emphasis supplied.) In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above ruling, stating that: When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract, the insurer. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.20 Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10, 1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract. On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a partys purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance application must not work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The termination of the insurance contract by the insurer must be explicit and unambiguous. As a final note, to characterize the insurer and the insured as contracting parties on equal footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of experience in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts of adhesion containing technical terms and conditions of the industry, confusing if at all understandable to laypersons, that are imposed on those who wish to avail of insurance. As such, insurance contracts are imbued with public interest that must be considered whenever the rights and obligations of the insurer and

the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance companies must be obligated to act with haste upon insurance applications, to either deny or approve the same, or otherwise be bound to honor the application as a valid, binding, and effective insurance contract.21 WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED: (1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy of Chuang; (2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the time of extra-judicial demand by Eternal until Philamlifes receipt of the May 29, 1996 RTC Decision on June 17, 1996; (3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from June 17, 1996 until full payment of this award; and (4) To pay Eternal attorneys fees in the amount of PhP 10,000. No costs. SO ORDERED. Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur. THIRD DIVISION REPUBLIC OF THE PHILIPPINES, G.R. No. 158085 Represented by the COMMISSIONER OF INTERNAL REVENUE, Present: Petitioner, Panganiban, J., Chairman, Sandoval-Gutierrez - versus - Corona, Carpio Morales, and Garcia, JJ SUNLIFE ASSURANCE Promulgated: COMPANY OF CANADA, Respondent. October 14, 2005 x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x DECISION PANGANIBAN, J.: Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court that it is a bona de cooperative, respondent is entitled to exemption from the payment of taxes on life insurance premiums and documentary stamps. Not being governed by the Cooperative Code of the Philippines, it is not required to be registered

with the Cooperative Development Authority in order to avail itself of the tax exemptions. Signicantly, neither the Tax Code nor the Insurance Code mandates this administrative registration. The Case Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the January 23, 2003 Decision[2] and the April 21, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 69125. The dispositive portion of the Decision reads as follows: WHEREFORE, the petition for review is hereby DENIED.[4]

The Facts The antecedents, as narrated by the CA, are as follows: Sun Life is a mutual life insurance company organized and existing under the laws of Canada. It is registered and authorized by the Securities and Exchange Commission and the Insurance Commission to engage in business in the Philippines as a mutual life insurance company with principal office at Paseo de Roxas, Legaspi Village, Makati City. On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue] (CIR) its insurance premium tax return for the third quarter of 1997 and paid the premium tax in the amount of P31,485,834.51. For the period covering August 21 to December 18, 1997, petitioner filed with the CIR its [documentary stamp tax (DST)] declaration returns and paid the total amount of P30,000,000.00. On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its decision in Insular Life Assurance Co. Ltd. v. [CIR], which held that mutual life insurance companies are purely cooperative companies and are exempt from the payment of premium tax and DST. This pronouncement was later affirmed by this court in [CIR] v. Insular Life Assurance Company, Ltd. Sun Life surmised that[,] being a mutual life insurance company, it was likewise exempt from the payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with the CIR an administrative claim for tax credit of its alleged erroneously paid premium tax and DST for the aforestated tax periods. For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year period to file a claim for tax credit or refund dwindling away and about to expire, Sun Life filed with the CTA a petition for review on August 23, 1999. In its petition, it prayed for the issuance of a tax credit certificate in the amount of P61,485,834.51 representing P31,485,834.51 of erroneously paid premium tax for the third quarter of 1997 and P30,000[,000].00 of DST on policies of insurance from August 21 to December 18, 1997. Sun Life stood firm on its contention that it is a mutual life insurance company vested with all the characteristic features and elements of a cooperative company or association as defined in [S]ection 121 of the Tax Code. Primarily, the management and affairs of Sun Life were conducted by its members; secondly, it is operated with money collected from its members; and, lastly, it has for its purpose the mutual protection of its members and not for profit or gain. In its answer, the CIR, then respondent, raised as special and affirmative defenses the following: 7. Petitioners (Sun Lifes) alleged claim for refund is subject to administrative routinary investigation/ examination by respondents (CIRs) Bureau. 8. Petitioner must prove that it falls under the exception provided for under Section 121 (now 123) of the Tax Code to be exempted from premium tax and be entitled to the refund sought.

9. Claims for tax refund/credit are construed strictly against the claimants thereof as they are in the nature of exemption from payment of tax. 10. In an action for tax credit/refund, the burden is upon the taxpayer to establish its right thereto, and failure to sustain this burden is fatal to said claim x x x. 11. It is incumbent upon petitioner to show that it has complied with the provisions of Section 204[,] in relation to Section 229, both in the 1997 Tax Code. On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its earlier findings in Insular Life Assurance Company, Ltd. v. [CIR], which it found to be on all fours with the present action, the CTA ruled: The [CA] has already spoken. It ruled that a mutual life insurance company is a purely cooperative company[;] thus, exempted from the payment of premium and documentary stamp taxes. Petitioner Sun Life is without doubt a mutual life insurance company. x x x. xx xxx xxx x

Being similarly situated with Insular, Petitioner at bar is entitled to the same interpretation given by this Court in the earlier cases of The Insular Life Assurance Company, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the [CA] in the case entitled [CIR] vs. The Insular Life Assurance Company, Ltd., C.A. G.R. SP No. 46516, September 29, 1998. Petitioner Sun Life as a mutual life insurance company is[,] therefore[,] a cooperative company or association and is exempted from the payment of premium tax and [DST] on policies of insurance pursuant to Section 121 (now Section 123) and Section 199[1]) (now Section 199[a]) of the Tax Code. Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to have registered, foremost, with the Cooperative Development Authority before it could enjoy the exemptions from premium tax and DST extended to purely cooperative companies or associations under [S]ections 121 and 199 of the Tax Code. For its failure to register, it could not avail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life failed to prove that ownership of the company was vested in its members who are entitled to vote and elect the Board of Trustees among [them]. The CIR further claimed that change in the 1997 Tax Code subjecting mutual life insurance companies to the regular corporate income tax rate reflected the legislatures recognition that these companies must be earning profits. Notwithstanding these arguments, the CTA denied the CIRs motion for reconsideration. Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition on the sole ground that: The Tax Court erred in granting the refund[,] because respondent does not fall under the exception provided for under Section 121 (now 123) of the Tax Code to be exempted from premium tax and DST and be entitled to the refund.

The CIR repleads the arguments it raised with the CTA and proposes further that the [CA] decision in [CIR] v. Insular Life Assurance Company, Ltd. is not controlling and cannot constitute res judicata in the present action. At best, the pronouncements are merely persuasive as the decisions of the Supreme Court alone have a universal and mandatory effect.[5]

Ruling of the Court of Appeals In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly licensed to engage in mutual life insurance business in the Philippines. Thus, respondent was deemed exempt from premium and documentary stamp taxes, because its affairs are managed and conducted by its members with money collected from among themselves, solely for their own protection, and not for prot. Its members or policyholders constituted both insurer and insured who contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities were paid. The dividends it distributed to them were not prots, but returns of amounts that had been overcharged them for insurance. For having satisfactorily shown with substantial evidence that it had erroneously paid and seasonably led its claim for premium and documentary stamp taxes, respondent was entitled to a refund, the CA ruled. Hence, this Petition.[6] The Issues Petitioner raises the following issues for our consideration: I. Whether or not respondent is a purely cooperative company or association under Section 121 of the National Internal Revenue Code and a fraternal or beneficiary society, order or cooperative company on the lodge system or local cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit under Section 199 of the National Internal Revenue Code. II. Whether or not registration with the Cooperative Development Authority is a sine qua non requirement to be entitled to tax exemption. III. Whether or not respondent is exempted from payment of tax on life insurance premiums and documentary stamp tax.[7] We shall tackle the issues seriatim. The Courts Ruling The Petition has no merit. First Issue: Whether Respondent Is a Cooperative

 The Tax Code denes a cooperative as an association conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for prot.[8] Without a doubt, respondent is a cooperative engaged in a mutual life insurance business. First, it is managed by its members. Both the CA and the CTA found that the management and affairs of respondent were conducted by its member-policyholders.[9] A stock insurance company doing business in the Philippines may alter its organization and transform itself into a mutual insurance company.[10] Respondent has been mutualized or converted from a stock life insurance company to a nonstock mutual life insurance corporation[11] pursuant to Section 266 of the Insurance Code of 1978.[12] On the basis of its bylaws, its ownership has been vested in its member-policyholders who are each entitled to one vote;[13] and who, in turn, elect from among themselves the members of its board of trustees.[14] Being the governing body of a nonstock corporation, the board exercises corporate powers, lays down all corporate business policies, and assumes responsibility for the efciency of management.[15] Second, it is operated with money collected from its members. Since respondent is composed entirely of members who are also its policyholders, all premiums collected obviously come only from them.[16] The member-policyholders constitute both insurer and insured[17] who contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid.[18] The premiums[19] pooled into this fund are earmarked for the payment of their indemnity and benet claims. Third, it is licensed for the mutual protection of its members, not for the prot of anyone. As early as October 30, 1947, the director of commerce had already issued a license to respondent -- a corporation organized and existing under the laws of Canada -- to engage in business in the Philippines.[20] Pursuant to Section 225 of Canadas Insurance Companies Act, the Canadian minister of state (for nance and privatization) also declared in its Amending Letters Patent that respondent would be a mutual company effective June 1, 1992.[21] In the Philippines, the insurance commissioner also granted it annual Certicates of Authority to transact life insurance business, the most relevant of which were dated July 1, 1997 and July 1, 1998.[22] A mutual life insurance company is conducted for the benet of its member-policyholders,[23] who pay into its capital by way of premiums. To that extent, they are responsible for the payment of all its losses.[24] The cash paid in for premiums and the premium notes constitute their assets x x x.[25] In the event that the company itself fails before the terms of the policies expire, the member-policyholders do not acquire the status of creditors.[26] Rather, they simply become debtors for whatever premiums that they have originally agreed to pay the company, if they have not yet paid those amounts in full, for [m]utual companies x x x depend solely upon x x x premiums.[27] Only when the premiums will have accumulated to a sum larger than that required to pay for company losses will the memberpolicyholders be entitled to a pro rata division thereof as prots.[28] Contributing to its capital, the member-policyholders of a mutual company are obviously also its owners.[29] Sustaining a dual relationship inter se, they not only contribute to the payment of its losses, but are also entitled to a proportionate share[30] and participate alike[31] in its prots and surplus. Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual company be larger than might reasonably be expected to carry the insurance, in order to constitute a margin of safety. The table of mortality used will show an admittedly higher death rate than will probably prevail; the assumed interest rate on the investments of the company is made lower than is expected to be realized; and the provision for contingencies and expenses, made greater than would ordinarily be necessary.[32] This course of action is taken, because a mutual company has no capital stock and relies solely upon its premiums to meet unexpected losses, contingencies and expenses. Certainly, many factors are considered in calculating the insurance premium. Since they vary with the kind of insurance taken and with the group of policyholders insured, any excess in the amount anticipated by a mutual company

to cover the cost of providing for the insurance over its actual realized cost will also vary. If a member-policyholder receives an excess payment, then the apportionment must have been based upon a calculation of the actual cost of insurance that the company has provided for that particular member-policyholder. Accordingly, in apportioning divisible surpluses, any mutual company uses a contribution method that aims to distribute those surpluses among its member-policyholders, in the same proportion as they have contributed to the surpluses by their payments.[33] Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to apply them in order to reduce a subsequent premium, purchase additional insurance, or accelerate the payment period. Although the premium made at the beginning of a year is more than necessary to provide for the cost of carrying the insurance, the member-policyholder will nevertheless receive the benet of the overcharge by way of dividends, at the end of the year when the cost is actually ascertained. The declaration of a dividend upon a policy reduces pro tanto the cost of insurance to the holder of the policy. That is its purpose and effect.[34] A stipulated insurance premium cannot be increased, but may be lessened annually by so much as the experience of the preceding year has determined it to have been greater than the cost of carrying the insurance x x x.[35] The difference between that premium and the cost of carrying the risk of loss constitutes the so-called dividend which, however, is not in any real sense a dividend.[36] It is a technical term that is well understood in the insurance business to be widely different from that to which it is ordinarily attached. The so-called dividend that is received by member-policyholders is not a portion of prots set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation.[37] One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a prot or income. The quasi-appearance of prot will not change its character. It remains an overpayment, a benet to which the member-policyholder is equitably entitled.[38] Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own members. It does not operate for prot, but for the mutual benet of its member-policyholders. They receive their insurance at cost, while reasonably and properly guarding and maintaining the stability and solvency of the company.[39] The economic benets lter to the cooperative members. Either equally or proportionally, they are distributed among members in correlation with the resources of the association utilized.[40] It does not follow that because respondent is registered as a nonstock corporation and thus exists for a purpose other than prot, the company can no longer make any prots.[41] Earning prots is merely its secondary, not primary, purpose. In fact, it may not lawfully engage in any business activity for prot, for to do so would change or contradict its nature[42] as a non-prot entity.[43] It may, however, invest its corporate funds in order to earn additional income for paying its operating expenses and meeting benet claims. Any excess prot it obtains as an incident to its operations can only be used, whenever necessary or proper, for the furtherance of the purpose for which it was organized.[44] Second Issue: Whether CDA Registration Is Necessary Under the Tax Code although respondent is a cooperative, registration with the Cooperative Development Authority (CDA)[45] is not necessary in order for it to be exempt from the payment of both percentage taxes on insurance premiums, under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants, under Section 199. First, the Tax Code does not require registration with the CDA. No tax provision requires a mutual life insurance company to register with that agency in order to enjoy exemption from both percentage and documentary stamp taxes. A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the submission of the Certicate of Registration with the CDA,[46] before the issuance of a tax exemption certicate. That provision cannot prevail over the clear absence of an equivalent requirement under the Tax Code. One, as we will explain below, the

Circular does not apply to respondent, but only to cooperatives that need to be registered under the Cooperative Code. Two, it is a mere issuance directing all internal revenue ofcers to publicize a new tax legislation. Although the Circular does not derogate from their authority to implement the law, it cannot add a registration requirement,[47] when there is none under the law to begin with. Second, the provisions of the Cooperative Code of the Philippines[48] do not apply. Let us trace the Codes development in our history. As early as 1917, a cooperative company or association was already dened as one conducted by the members thereof with money collected from among themselves and solely for their own protection and not prot.[49] In 1990, it was further dened by the Cooperative Code as a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benets of the undertaking in accordance with universally accepted cooperative principles.[50] The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973, Presidential Decree (PD) No. 175 was signed into law by then President Ferdinand E. Marcos in order to strengthen the cooperative movement.[51] The promotion of cooperative development was one of the major programs of the New Society under his administration. It sought to improve the countrys trade and commerce by enhancing agricultural production, cottage industries, community development, and agrarian reform through cooperatives.[52] The whole cooperative system, with its vertical and horizontal linkages -- from the market cooperative of agricultural products to cooperative rural banks, consumer cooperatives and cooperative insurance -- was envisioned to offer considerable economic opportunities to people who joined cooperatives.[53] As an effective instrument in redistributing income and wealth,[54] cooperatives were promoted primarily to support the agrarian reform program of the government.[55] Notably, the cooperative under PD 175 referred only to an organization composed primarily of small producers and consumers who voluntarily joined to form a business enterprise that they themselves owned, controlled, and patronized.[56] The Bureau of Cooperatives Development -- under the Department of Local Government and Community Development (later Ministry of Agriculture)[57] -- had the authority to register, regulate and supervise only the following cooperatives: (1) barrio associations involved in the issuance of certicates of land transfer; (2) local or primary cooperatives composed of natural persons and/or barrio associations; (3) federations composed of cooperatives that may or may not perform business activities; and (4) unions of cooperatives that did not perform any business activities.[58] Respondent does not fall under any of the above-mentioned types of cooperatives required to be registered under PD 175. When the Cooperative Code was enacted years later, all cooperatives that were registered under PD 175 and previous laws were also deemed registered with the CDA.[59] Since respondent was not required to be registered under the old law on cooperatives, it followed that it was not required to be registered even under the new law. Furthermore, only cooperatives to be formed or organized under the Cooperative Code needed registration with the CDA.[60] Respondent already existed before the passage of the new law on cooperatives. It was not even required to organize under the Cooperative Code, not only because it performed a different set of functions, but also because it did not operate to serve the same objectives under the new law -- particularly on productivity, marketing and credit extension.[61] The insurance against losses of the members of a cooperative referred to in Article 6(7) of the Cooperative Code is not the same as the life insurance provided by respondent to member-policyholders. The former is a function of a service cooperative,[62] the latter is not. Cooperative insurance under the Code is limited in scope and local in character. It is not the same as mutual life insurance. We have already determined that respondent is a cooperative. The distinguishing feature of a cooperative enterprise[63] is the mutuality of cooperation among its member-policyholders united for that purpose.[64] So long as

respondent meets this essential feature, it does not even have to use[65] and carry the name of a cooperative to operate its mutual life insurance business. Gratia argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege merely because it failed to register. The nature of its operations is clear; its purpose welldened. Exemption when granted cannot prevail over administrative convenience. Third, not even the Insurance Code requires registration with the CDA. The provisions of this Code primarily govern insurance contracts; only if a particular matter in question is not specically provided for shall the provisions of the Civil Code on contracts and special laws govern.[66] True, the provisions of the Insurance Code relative to the organization and operation of an insurance company also apply to cooperative insurance entities organized under the Cooperative Code.[67] The latter law, however, does not apply to respondent, which already existed as a cooperative company engaged in mutual life insurance prior to the laws passage of that law. The statutes prevailing at the time of its organization and mutualization were the Insurance Code and the Corporation Code, which imposed no registration requirement with the CDA. Third Issue: Whether Respondent Is Exempted from Premium Taxes and DST Having determined that respondent is a cooperative that does not have to be registered with the CDA, we hold that it is entitled to exemption from both premium taxes and documentary stamp taxes (DST). The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative companies from the 5 percent percentage tax on insurance premiums. On the other hand, Section 199 also exempts from the DST, policies of insurance or annuities made or granted by cooperative companies. Being a cooperative, respondent is thus exempt from both types of taxes. It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of 10 percent imposed upon the gross investment income of mutual life insurance companies -- domestic[68] and foreign[69] -- the provisions of Section 121 and 199 remain unchanged.[70] Having been seasonably led and amply substantiated, the claim for exemption in the amount of P61,485,834.51, representing percentage taxes on insurance premiums and documentary stamp taxes on policies of insurance or annuities that were paid by respondent in 1997, is in order. Thus, the grant of a tax credit certicate to respondent as ordered by the appellate court was correct. WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are AFFIRMED. No pronouncement as to costs. SO ORDERED. ARTEMIO V. PANGANIBAN Associate Justice Chairman, Third Division Republic of the Philippines SUPREME COURT Manila G.R. No. L-43706 November 14, 1986

SECOND DIVISION

NATIONAL POWER CORPORATION, petitioner, vs. COURT OF APPEALS and PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents. Conrado Q. Crucillo for petitioner. Gregorio D. David for private respondent.

PARAS, J.: This is a petition for review on certiorari seeking to set aside: (a) the judgment of respondent Court of Appeals dated March 25, 1976 in CA-G.R. No. 50112-R, entitled National Power Corporation, PlaintiffAppellee vs. The Philippine American Insurance Company, Inc. Defendant-Appellant, which reversed the decision of the Court of First Instance of Manila in Civil Case No. 70811 entitled "National Power Corporation v. Far Eastern Electric, Inc., et al." and (b) respondent's Court's resolution dated April 19, 1976 denying petitioner National Power Corporation's Motion for Reconsideration (Petition, p. 13, Rollo). The undisputed facts of this case are as follows: The National Power Corporation (NPC) entered into a contract with the Far Eastern Electric, Inc. (FFEI) on December 26, 1962 for the erection of the Angat Balintawak 115-KW-3-Phase transmission lines for the Angat Hydroelectric Project. FEEI agreed to complete the work within 120 days from the signing of the contract, otherwise it would pay NPC P200.00 per calendar day as liquidated damages, while NPC agreed to pay the sum of P97,829.00 as consideration. On the other hand, Philippine American General Insurance Co., Inc. (Philamgen) issued a surety bond in the amount of P30,672.00 for the faithful performance of the undertaking by FEEI, as required. The condition of the bond reads: The liability of the PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC. under this bond will expire One (1) year from final Completion and Acceptance and said bond will be cancelled 30 days after its expiration, unless surety is notified of any existing obligation thereunder. (Exhibit 1-a) in correlation with the provisions of the construction contract between Petitioner and Far Eastern Electric, Inc. particularly the following provisions of the Specifications. to wit: 1. Par. 1B-2l Release of Bond 1B-21 Release of Bond The Contractor's performance bond will be released by the National Power Corporation at the expiration of one (1) year from the completion and final acceptance of the work, pursuant to the provisions of Act No. 3959, and subject to the General Conditions of this contract. (Page 49, Printed Record on Appeal); and 2. GP-19 of Specifications, which reads: (a) Should the Contractor fail to complete the construction of the work as herein specified and agreed upon, or if the work is abandoned, ... the Corporation shall have the power to take over the work by giving notice in writing to that effect to the Contractor and his sureties of its intention to take over the construction work. (b) ... It is expressly agreed that in the event the corporation takes over the work from the Contractor, the latter and his bondsmen shall continue to be liable under this contract for any expense in the completion of the work in excess of the contract price and the bond filed by the Contractor shall be answerable for the same and for any and all damages that the Corporation may suffer as a result thereof. (pp. 76-78, Printed Record on Appeal) FEEI started construction on December 26, 1962 but on May 30, 1963, both FEEI and Philamgen wrote NPC requesting the assistance of the latter to complete the project due to unavailability of the equipment of FEEI. The work was abandoned on June 26, 1963, leaving the construction unfinished. On July 19, 1963, in a joint

letter, Philamgen and FEEI informed NPC that FEEI was giving up the construction due to financial difficulties. On the same date, NPC wrote Philamgen informing it of the withdrawal of FEEI from the work and formally holding both FEEI and Philamgen liable for the cost of the work to be completed as of July 20, 1962 plus damages. The work was completed by NPC on September 30, 1963. On January 30, 1967 NPC notified Philamgen that FEEI had an outstanding obligation in the amount of P75,019.85, exclusive of interest and damages, and demanded the remittance of the amount of the surety bond the answer for the cost of completion of the work. In reply, Philamgen requested for a detailed statement of account, but after receipt of the same, Philamgen did not pay as demanded but contended instead that its liability under the bond has expired on September 20, 1964 and claimed that no notice of any obligation of the surety was made within 30 days after its expiration. (Record on Appeal, pp. 191-194; Rollo, pp. 62-64). NPC filed Civil Case No. 70811 for collection of the amount of P75,019.89 spent to complete the work abandoned; P144,000.00 as liquidated damages and P20,000.00 as attorney's fees. Only Philamgen answered while FEEI was declared in default. The trial court rendered judgment in favor of NPC, the dispositive portion of which reads: WHEREFORE, the defendant Far Eastern Electric, Inc., is ordered to pay the plaintiff the sum of P75,019.86 plus interest at the legal rate from September 21, 1967 until fully paid. Out of said amount, both defendants, Far Eastern Electric, Inc., and the Philippine American Insurance Company, Inc., are ordered to pay, jointly and severally, the amount of P30,672.00 covered by Surety Bond No. 26268, dated December 26, 1962, plus interest at the legal rate from September 21, 1967 until fully paid, Both defendants are also ordered to pay plaintiff the sum of P3,000.00 as attorney's fees and costs. On appeal by Philamgen, the Court of Appeals reversed the lower court's decision and dismissed the complaint. Hence this petition. Respondent Philamgen filed its comment on the petition on August 6, 1978 (Rollo, p. 62) in compliance with the resolution dated June 16, 1976 of the First Division of this Court (Rollo, p. 52) while petitioner NPC filed its Reply to the comment of respondent (Rollo, p. 76) as required in the resolution of this Court of August 16, 1976, (Rollo, p. 70). In the resolution of September 20, 1976, the petition for certiorari was given due course (Rollo, p. 85). Petitioner's brief was filed on November 27, 1976 (Rollo, p. 97) while Philamgen failed to file brief within the required period and this case was submitted for decision without respondent's brief in the resolution of this Court of February 25. 1977) Rollo, p. 103). In its brief, petitioner raised the following assignment of errors: I RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER SHOULD HAVE GIVEN NOTICE TO PRIVATE RESPONDENT PHILAMGEN OF ANY EXISTING OBLIGATION WITHIN 30 DAYS FROM EXPIRATION OF THE BOND TO HOLD SAID SURETY LIABLE THEREUNDER, DESPITE PETITIONER'S TAKING OVER OF THE WORK ABANDONED BY THE CONTRACTOR BEFORE ITS COMPLETION. II ASSUMING ARGUENDO THAT PETITIONER SHOULD STILL NOTIFY PRIVATE RESPONDENT PHILAMGEN OF ANY EXISTING OBLIGATION UNDER THE BOND DESPITE THE TAKE-OVER OF WORK BY PETITIONER, RESPONDENT COURT OF APPEALS NONETHELESS ERRED IN HOLDING THAT PETITIONER'S LETTER DATED JULY 19, 1963 (EXH. E) TO PRIVATE RESPONDENT WAS NOT SUFFICIENT COMPLIANCE WITH THE CONDITION OF THE BOND. III RESPONDENT COURT OF APPEALS ERRED IN ABSOLVING PRIVATE RESPONDENT PHILAMGEN FROM ITS LIABILITY UNDER THE BOND.

The decisive issue in this case is the correct interpretation and/or application of the condition of the bond relative to its expiration, in correlation with the provisions of the construction contract, the faithful performance of which, said bond was issued to secure. The bone of contention in this case is the compliance with the notice requirement as a condition in order to hold the surety liable under the bond. Petitioner claims that it has already complied with such requirement by virtue of its notice dated July 19, 1963 of abandonment of work by FEEI and of its takeover to finish the construction, at the same time formally holding both FEEI and Philamgen liable for the uncompleted work and damages. It further argued that the notice required in the bond within 30 days after its expiration of any existing obligation, is applicable only in case the contractor itself had completed the contract and not when the contractor failed to complete the work, from which arises the continued liability of the surety under its bond as expressly provided for in the contract. Petitioner's contention was sustained by the trial court. On the other hand, private respondent insists that petitioner's notice dated July 19, 1983 is not sufficient despite previous events that it had knowledge of FEEI's failure to comply with the contract and claims that it cannot be held liable under the bond without notice within thirty days from the expiration of the bond, that there is a subsisting obligation. Private respondent's contention is sustained by the Court of Appeals. The petition is impressed with merit. As correctly assessed by the trial court, the evidence on record shows that as early as May 30, 1963, Philamgen was duly informed of the failure of its principal to comply with its undertaking. In fact, said notice of failure was also signed by its Assistant Vice President. On July 19, 1963, when FEEI informed NPC that it was abandoning the construction job, the latter forthwith informed Philamgen of the fact on the same date. Moreover, on August 1, 1963, the fact that Philamgen was seasonably notified, was even bolstered by its request from NPC for information of the percentage completed by the bond principal prior to the relinquishment of the job to the latter and the reason for said relinquishment. (Record on Appeal, pp. 193-195). The 30-day notice adverted to in the surety bond applies to the completion of the work by the contractor. This completion by the contractor never materialized. The surety bond must be read in its entirety and together with the contract between NPC and the contractors. The provisions must be construed together to arrive at their true meaning. Certain stipulations cannot be segregated and then made to control. Furthermore, it is well settled that contracts of insurance are to be construed liberally in favor of the insured and strictly against the insurer. Thus ambiguity in the words of an insurance contract should be interpreted in favor of its beneficiary. (Serrano v. Court of Appeals, 130 SCRA 327, July 16, 1984). In the case at bar, it cannot be denied that the breach of contract in this case, that is, the abandonment of the unfinished work of the transmission line of the petitioner by the contractor Far Eastern Electric, Inc. was within the effective date of the contract and the surety bond. Such abandonment gave rise to the continuing liability of the bond as provided for in the contract which is deemed incorporated in the surety bond executed for its completion. To rule therefore that private respondent was not properly notified would be gross error. PREMISES CONSIDERED, the decision dated March 25, 1976 and the resolution dated April 19, 1976 of the Court of Appeals are hereby SET ASIDE, and a new one is hereby rendered reinstating the decision of the Court of First Instance of Manila in Civil Case No. 70811 entitled "National Power Corporation v. Far Eastern Electric, Inc., et al." SO ORDERED. Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. L-29723 July 14, 1988 ANTONIO ZARAGOZA, plaintiff-appellee, vs. MARIA ANGELA FIDELINO and/or "JOHN DOE," defendants MABINI INSURANCE & FIDELITY CO., INC., surety-appellant.

NARVASA, J.: Involved in this appeal is no more than the procedure to hold a surety hable upon a counter-bond posted by it for the release of an automobile seized from a defendant in a replevin action under a writ issued by the Trial Court at the plaintiffs instance. The suit for the replevy of the car was brought by Antonio Zaragoza in the Court of First Instance at Quezon City 1 against Ma. Angela Fidelino and/or John Doe. His complaint alleged that the car had been sold to Fidelino but the latter had failed to pay the price in the manner stipulated in their agreement. The car was taken from Fidelino's possession by the sheriff on the strength of a writ of delivery 2 but was promptly returned to her on orders of the Court when a surety bond for the car's releases 3 was posted in her behalf "by Mabini Insurance & Fidelity Co., Inc. The action resulted in a judgment 4 for the plaintiff the dispositive part of which reads as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering the latter to pay to the plaintiff the sum of P19,417.46, representing the balance of the purchase price of the car sold including interest thereon, collection charges, notarial fees and sheriffs fees and expenses in conn with the recovery of the vehicle sold; to pay liquidated damage in the amount of P6,471.84 equivalent to 33 1/3 % of the balance outstanding and to pay the costs of this suit. Within the reglementary period for taking an appeal, Zaragoza moved for the amendment of the decision so as to include the surety, Mabini Insurance & Fidelity Co., Inc., as a party solidarily liable with the defendant for the payment of the sums awarded in the judgment. 5 Despite having been duly furnished with copies of the motion and the notice of hearing, neither Fidelino nor the surety company filed any opposition to the motion, nor did either of them appear at the hearing thereof. 6 The Trial Court deemed the motion meritorious and granted it. Its Order of April 16, 1968 7 decreed the following: WHEREFORE, the motion is hereby granted, and the dispositive portion of the decision in this case is hereby amended to read as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering defendant Maria Angela Fidelino and her surety, the Mabini Insurance & Fidelity Co., Inc., to pay jointly and severally to the plaintiff the sum of P19,417.46, representing the balance of the purchase price of the car sold, including interests thereon, collection charges, notarial fees and sheriffs fees and expenses in connection with the recovery of the vehicle sold, liquidated damages in the amount of P6,471.84 equivalent to 33 1/3% of the balance outstanding and to pay the costs of this suit. No motion for reconsideration was filed or appeal taken by the defendant Fidelino as regards either the original or the amended decision. It was the surety which presented a motion for reconsideration, and upon its denial, appealed to this Court. 8 It ascribes to the Court a quo, as might be expected, reversible error in amending the judgment in the manner just described. It argues that the Lower Court never acquired jurisdiction over it since no summons was ever served on it, its filing of a counter-bond not being equivalent to voluntary submission to the Court's jurisdiction; Zaragoza failed to make a proper application with notice before finality of the decision as provided by Section 20, Rule 57 of the Rules of Court; and when the order amending the judgment was promulgated, the judgment had already become final, the running of the period of appeal not having been suspended by Zaragoza's motion to amend decision, 9 and so, the Court no longer had authority to amend it on April 16, 1968. The appellant surety deposits quite correctly, that the situation at bar is governed by Section 10, Rule 60, in relation to Section 20, Rule 57, of the Rules of Court. Section 10, Rule 60, provides as follows:

SEC. 10. Judgment to include recovery against sureties. The amount, if any, to be awarded to either party upon any bond filed by the other in accordance with the provisions of this rule, shag be claimed, ascertained, and granted under the same procedure as prescribed in section 20 of Rule 57. And Section 20, Rule 57 reads as follows: SEC. 20. Claim for damages on account of illegal attachment. If the judgment on the action be in favor of the party against whom attachment was issued, he may recover, upon the bond given or deposit made by the attaching creditor, any damages resulting from the attachment. Such damages may be awarded only upon application and after proper hearing, and shall be included in the final judgment. The application must be filed before the trial or before appeal is perfected or before the judgment becomes executory, with due notice to the attaching creditor and his surety or sureties, setting forth the facts showing his right to damages and the amount thereof xxx xxx xxx 10 It would seem at first blush that Section 20, Rule 57 above quoted is not relevant. Its title and first sentence speak [1] of an illegal attachment, and [2] of a judgment "in favor of the party against whom (said illegal) attachment was issued." In the case at bar, the writ of delivery was not illegal; and the judgment was for, not against, the party in whose favor the writ of delivery was issued. In other words, it would appear that for Section 20, Rule 57 to apply to the instant action," 11 the judgment should have been "in favor of" defendant Fidelino (the party "against whom" the writ of delivery was issued). This however was not the case. The judgment was in fact against, NOT in favor of Fidelino. It thus sums indeed that the first sentence of Section 20 precludes recovery of damages by a party against whom an attachment is issued and enforced if the judgment be adverse to him. This is not however correct. Although a party be adjudged liable to another, ff it be established that the attachment issued at the latter's instance was wrongful and the former had suffered injury thereby, recovery for damages may be had by the party thus prejudiced by the wrongful attachment, even if the judgment be adverse to him. Slight reflection will show the validity of this proposition. For it is entirely possible for a plaintiff to have a meritorious cause of action against a defendant but have no proper ground for a preliminary attachment. In such a case, if the plaintiff nevertheless applies for and somehow succeeds in obtaining an attachment, but is subsequently declared by final judgment as not entitled thereto, and the defendant shows that he has suffered damages by reason of the attachment, there can be no gainsaying that indemnification is justly due the latter. So has this Court already had occasion to rule, in Baron v. David, 51 Phil. 1, and Javellana v. D.O. Plaza Enterprises, 32 SCRA 26]. Be all this as it may, the second and third sentences of Section 20, Rule 57, in relation to Section 10, Rule 60, are unquestionably relevant to the matter of the surety's liability upon a counter-bond for the discharge of a writ of delivery in a replevin suit. 12 Under Section 10, Rule 60 (which makes reference "to either party upon any bond filed by the other in accordance with the provisions of this rule" [60]), the surety's liability for damages upon its counter-bond should "W claimed, ascertained, and granted under the same procedure as prescribed in section 20 of Rule 57; 13 and andd section 20 pertinently decrees that '(s)uch damages may be awarded only upon application and after proper hearing, and shall be included in the final judgment .. (which means that the (application must be filed before the trial or before appeal is perfected or before the judgment becomes executory, with due notice to the attaching creditor and his surety or sureties, setting forth the facts showing his right to damages and the amount thereof." Stated otherwise, to hold a surety on a counter-bond liable, what is entailed is (1) the filing of an application therefor with the Court having jurisdiction of the action; (2) the presentation thereof before the judgment becomes executory (or before the trial or before appeal is perfected); (3) the statement in said application of the facts showing the applicant's right to damages and the amount thereof, (4) the giving of due notice of the application to the attaching creditor and his surety or sureties; and (5) the holding of a proper hearing at which the attaching creditor and the sureties may be heard on the application. These requisites apply not only in cases of seizure or delivery under Rule 60, but also in cases of preliminary injunctions under Rule 58, 14 and receiverships under Rule 59. 15 It should be stressed, however, that enforcement of a surety's liability on a counter-bond given for the release of property seized under a writ of preliminary attachment is governed, not by said Section 20, but by another specifically and specially dealing with the matter; Section 17 of Rule 57, which reads as follows: SEC. 17. When execution returned unsatiated, recovery had upon bond. If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counter-bond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counter-bond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action."

The record shows that the appellant surety company bound itself "jointly and severally" with the defendant Fidelino "in the sum of PESOS FORTY EIGHT THOUSAND ONLY (P48,000.00), Philippine Currency, which is double the value of the property stated in the affidavit of the plaintiff, for the delivery thereof if such delivery is adjudged, or for the payment of such sum to him as may be recovered against the defendant and the costs of the action. 16 This being so, the appellant surety's liability attached upon the promulgation of the verdict against Fidelino. All that was necessary to enforce the judgment against it was, as aforestated, an application therefor with the Court, with due notice to the surety, and a proper hearing, i.e., that it be formally notified that it was in truth being made responsible for its co-principal's adjudicated prestation (in this case, the payment of the balance of the purchase price of the automobile which could no longer be found and therefore could not be ordered returned), 17 and an opportunity, at a hearing called for the purpose, to show to the Court why it should not be adjudged so responsible. A separate action was not necessary; it was in fact proscribed. 18 And again, the record shows substantial compliance with these basic requirements, obviously imposed in deference to due process. Appellant surety undoubtedly received copy of Zaragoza's Motion to Amend Decision. 19 That motion made clear its purposethat the decision "be amended, or an appropriate order be issued, to include .. (the surety) as a party jointly and severally liable with the defendant to the extent of the sums awarded in the decision to be paid to plaintiff'-as well as the basis thereof-the counter-bond filed by it by the explicit terms of which it bound itself "jointly and severally (with the defendant) .. for the payment of such sum to him (plaintiff) as may be recovered against the defendant and the cost of the action." The motion contained, at the foot thereof, a "notice that on Saturday, March 23, 1968, at 8:30 a.m., or as soon thereafter as the matter may be heard, the .. (plaintiffs counsel would) submit the foregoing motion for the consideration of the Court." And likewise indubitable is the fact that, as the Court a quo has observed, "neither .. Fidelinos counsel nor the surety company filed any opposition to said motion, nor did they appear in the hearing of the motion on March 23, 1968 .. (for which reason) the motion was deemed submitted for resolution." 20 The surety's omission to appear at the hearing despite notice of course constituted a waiver of the right to be heard on the matter. The surety's theory that never having been served with summons, it never came under the Lower Court's jurisdiction, is untenable. The terms of the counter-bond voluntarily filed by it in defendant's behalf leave no doubt of its assent to be bound by the Court's adjudgment of the defendant's liability, i.e., its acceptance of the Court's jurisdiction. For in that counterbond, it implicitly prayed for affirmative relief; the release of the seized car, in consideration of which it explicitly bound itself solidarily with said defendant to answer for the delivery of the car subject of the action "if such delivery is adjudged," i.e., commanded by the Court's judgment, or "for the payment of such sum as may be recovered against the defendant and the costs of the action," the reference to a possible future judgment against the defendant, and necessarily against itself, being certain and unmistakable. The filing of that bond was clearly an act of voluntary submission to the Court's authority, which is one of the modes for the acquisition of jurisdiction over a party. 21 The same theory as that espoused by appellant surety in this case was, in substance, passed upon and declared to be without merit in a 1962 decision of this Court, Dee v. Masloff. 22 There, a surety on a counterbond given to release property from receivership, also sought to avoid liability by asserting that it was not a party to the case, had never been made a party, and had not been notified of the trial. The Court overruled the contention, and upheld the propriety of the amendment of the judgment which ordered the appellant surety company to pay to the extent of its bond and jointly and severally with defendant the judgment obligation. The Court ruled that since such "amended judgment .. (had been) rendered after the appellant surety company as party jointly and severally liable with the defendant .. for the damages already awarded to the appellees, to which the appellant surety company filed its "Opposition" and "Rejoinder" to the "Reply to Opposition filed by the appellees, without putting in issue the reasonableness of the amount awarded for damages but confining itself to the defense in avoidance of liability on its bond that it was not a party to the case and never made a party therein and was not notified of the trial of the case, and that the appellees were guilty of laches, the requirement of hearing was fully satisfied or complied with; .. (in any case,) appellant surety company never prayed for an opportunity to present evidence in its behalf." The appellant surety's last argument that by the time the Court amended its decision, the decision had already become final, and therefore unalterable, is also untenable. The motion for amendment of the decision was unquestionably in the nature of a motion for reconsideration under Section 1 (c), Rule 37 of the Rules of Court which, having been filed within "the period for perfecting an appeal," had the effect of interrupting said period of appeal. 23 WHEREFORE, judgment is hereby rendered AFFIRMING in toto the Decision of the Court a quo dated February 12, 1968, as amended by the Order of April 16, 1968. Costs against the appellant surety.

Cruz, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-69450 November 22, 1988 EASTERN ASSURANCE & SURETY CORPORATION, petitioner, vs. INTERMEDIATE APPELLATE COURT and REPUBLIC OF THE PHILIPPINES (DEPT. OF AGRARIAN REFORM), respondents. Ferrer, Mariano, Sangalang & Gatdula for petitioner.

FELICIANO, J.: The Petition at bar seeks a review of the Decision 1 dated 11 December 1984 rendered by the then Intermediate Appellate Court, in AC-G.R. CV No. 67253. On 8 January 1976 , the Region 7 (Cebu) Office of respondent Department of Agrarian Reform ("DAR") put up for public bidding a job or project consisting of the repair of seven (7) units of (USAID) Willys Mitsubishi/ Eisenhower jeeps. Among the bidders was Motor City, an automotive repair, company, which latter on emerged as the winning bidder. The winning bid was accompanied by a Proposal Bond 2 required by the DAR of all bidders in the amount of P33,275.00 and issued by petitioner Eastern Assurance and Surety Corporation ("Eastern"), as surety, on behalf of Motor City, its principal. The Proposal Bond provided, in pertinent part: NOW, THEREFORE, the conditions of this obligation are such that if the above-bounden principal [i.e., Motor City] shall, in the event of his becoming a successful bidder in the above proposal: (1) fails to guarantee the true and faithful performance of the contract in case of award; (2) shall refuse to accept the same or (3) shall not answer for any delay and/or default in the execution of the contract as provided in the proposal; then the DEPARTMENT OF AGRARIAN REFORM shall be entitled to be indemnified of any loss or damage it may suffer by reason thereof not to exceed the sum of THIRTY THREE THOUSAND TWO HUNDRED SEVENTY FIVE ONLY (P33,275.00) PESOS, Philippine Currency, otherwise this obligation shall be void and without effect. (Emphasis supplied) On 31 January 1976, a Contract for Repair of Jeeps 3 was entered into between respondent DAR as owner and Motor City as contractor, the latter obligating itself thereunder as follows: 1. That for and/in consideration of the sum of THIRTY THOUSAND PESOS (P30,000.00) Philippine Currency, which the OWNER agrees to pay unto the CONTRACTOR, the said CONTRACTOR agrees and undertakes to repair the owner's seven (7) units of (USAID) Willys Mitsubishi/Eisenhower Jeeps, which are more particularly described as follows: Motor Number Chassis Number 1. MD-136864 1. 95696 2. MD-31015 2. 86038 3. MD-70750 3. 36201 4. MD-136846 4. 95670 5. JH4-34885 5. 15293 6. 4J-24985 6. 15215 7. 4J 54898 7. 16294 xxx xxx xxx 5. That the CONTRACTOR agrees to put up the amount of TEN THOUSAND PESOS (Pl0,000.00) as Performance Bond upon award of the bid;

xxx xxx xxx 8. That the CONTRACTOR agrees to finish the repairs on all seven (7) units within ninety (90) working days, counted from the day of the award of the bid, and should the CONTRACTOR fail to finish the repairs within the said period, he (CONTRACTOR) shall indemnify the OWNER the amount equivalent to 1% of the quoted lot price for each day of late delivery. xxx xxx xxx (Emphasis supplied) It turned out, however, that only six (6) out of the seven (7) aforementioned jeeps were repaired fully and delivered promptly to respondent DAR. The seventh unit, bearing Motor No. 70750 and Chassis No. 36201, continued to remain undelivered, despite the grant of several extensions in favor of and the issuance on 13 March 1978 of a final letter to Motor City, demanding that the latter complete the repair and effect delivery of the seventh vehicle. On 12 July 1978, respondent DAR commenced a suit 4 for specific performance and damages against Motor City. Included there as a co-defendant was petitioner Eastern which, it was alleged, "had posted the performance bond herewith attached as Annex 'B' undertaking to answer and guarantee the true and faithful compliance and performance of the [Contract for Repair of Jeeps]." In an Answer with Cross-Claim 5 petitioner Eastern (defendant below) denied having incurred any liability under the Proposal Bond, alleging that such bond "did not bind answering defendant as [the] same was a mere proposal and not an actual undertaking." That pleading also sought, by way of cross-claim, judgment ordering Motor City to indemnify Eastern in an amount equivalent to whatever the latter would be ordered by the court to pay the complainant plus twenty percent (20%)thereof as attorney's fees. Eastern submitted in support of its cross-claim an Indemnity Agreement, 6 executed in its favor by Antonio Puchadez, who had signed the document in his capacity as President and General Manager of Motor City as well as in his own personal capacity. On 15 February 1980, the trial court rendered a Decision 7, the dispositive portion of which read: THE FOREGOING CONSIDERED, judgment is hereby rendered in favor of the plaintiffs as follows: directing Motor City to deliver to the plaintiff one (1) unit of (USAID) Willys Mitsubishi/Eisenhower Jeep with Motor No. MD-70750 already repaired pursuant to the specifications in the "Contract for Repair of Jeeps;" directing Motor City to pay an indemnity equivalent to 1% of P30,000.00 for each day of late delivery (the period starts from February 1, 1976 until delivery of the unit); in case of default, the payment thereof to be assumed or to be liquidated by Eastern Assurance and Surety Corporation but not to exceed P33,275.00. If eventually Eastern Assurance and Surety Corporation should pay following default by Motor City, then the latter solidarily with Antonio Puchadez should reimburse Eastern Assurance Surety Corporation all the amounts paid by the latter to the plaintiff with 20% of the amount as attorney's fees. With costs against both Motor City and Eastern Assurance and Surety Corporation. SO ORDERED. On appeal, the ruling of the trial court was affirmed with a slight modification. The appellate court held that the one percent (1%) indemnity charge for late delivery stipulated under the repair contract, "shall be [computed] from March 3, 1978" and not 1 February 1976. The instant Petition for Review, in essence, raises only one (1) issue; whether or not petitioner Eastern may be held liable to respondent DAR for the contractual breach committed here by Motor City. The broadest argument of petitioner Eastern is that it incurred no liability under the Proposal Bond after the Contract for Repair of Jeeps had been entered into between the DAR and Motor City. Eastern is here relying upon the difference, in conceptual terms, between a proposal bond and a performance bond. A proposal or bid bond has for its purpose to assure the owner of the project of the good faith of the bidder and that the bidder will enter into a contract with the project owner should his proposal be accepted. A performance bond is, upon the other hand designed to afford the project owner security that the bidder, now the contractor, will faithfully comply with the requirements of the contract awarded to the contractor and make good damages sustained by the project owner in case of the contractor's failure to so perform. 8 Eastern's argument is,

however, clearly too broad to be helpful; for liability under a surety bond is determined not upon the basis of its abstract nature or its title or caption but rather in accordance with the particular terms and conditions set out in such bond. 9 It is thus necessary to look into the actual terms of the Proposal Bond in question. Thereunder, liability on the part of petitioner Eastern as surety would be incurred upon the happening of anyone of the following three (3) events: the failure or refusal of Motor City as principal (1) "to guarantee the true and faithful performance of the contract in case of an award; (2) "to accept the [award]; and (3) to "answer for any delay and/or default in the execution of the contract as provided in the proposal." There is no dispute that the first condition refers to failure to post a performance bond in the amount of P10,000.00; there is also no dispute that Eastern's principal did not in fact post any such performance bond. There should therefore be no question that there was a breach of condition No.1 of the Proposal Bond. It is urged by petitioner Eastern that the beneficiary of the bond, public respondent DAR, had waived the stipulation in the Repair Contract providing for the posting of such bond by entering into the contract with Motor City although the latter had not posted the P10,000.00 Performance Bond. We do not believe that the DAR had waived the breach of this condition. Certainly there was no express waiver. Implied waiver of a contractual stipulation for the giving of security or collateral is not favored and has to be clearly shown. There is also no dispute that the second condition was not breached for Motor City did accept the award of the contract and did enter into the Contract for Repair of Jeeps. In respect of the third condition, i.e., failure of Motor City to answer for delay or default "in the execution of the contract as provided in the proposal", petitioner Eastern contends that this provision refers merely to the execution, that is, the signing or conclusion of the Contract for Repair of Jeeps, and not to the performance or implementation or carrying out of the provisions of such contract. There are at least two (2) difficulties with this argument of Eastern. First, the ordinary or dictionary meaning of "to execute" a contract (and especially to "execute a contract as provided in the proposal") is or includes: ... 1: to put into effect: carry out fully and completely: PERFORM, EFFECT ... 3: to give effect to : do what is provided or required ... : perform the requirements of : perform the acts necessary to the effectiveness of ... 6 : COMPLETE ... : perform what is required to give validity to (as by signing and perhaps sealing and delivering) ... . 10 Thus, the term "execution" is understood ordinarily and literally as referring to both; ... 1 : the act or process of executing : PERFORMANCE, ACCOMPLISHMENT ... 3 ...c: [and] the act of signing, sealing, and delivering a legal instrument or giving it the forms required to make it valid ... . 11 Thus, the ordinary meaning of execution is not limited to the signing or concluding of a contract but includes as well the performance or implementation or accomplishment of the terms and conditions of such contract. Second, if one assumes, for purposes of analysis only, that petitioner Eastern's contention is correct, then the second condition in the Proposal Bond (refusal "to accept [the contract]") and the third condition (failure to "answer for any delay and/or default in the execution of the contract as provided in the proposal") must be taken to refer to the same thing or circumstance. But either the second or the third condition would then have to be regarded as superfluous and meaningless, a result that must be abjured in view of the principle of effectiveness in the interpretation of contracts. When viewed in its entirety, the Proposal Bond may be seen to be not merely a proposal (or bid) bond but also a performance bond. For it covers not merely the acceptance of the award and the conclusion of a contract but also the carrying out or performance of the provisions of the contract. We note also that the P10,000.00 Performance Bond explicitly required by paragraph 5 of the Contract for Repair of Jeeps is lower in face amount than the Proposal Bond which has a maximum value or face amount of P33,275.00. If petitioner Eastern's argument that its liability under the Proposal Bond ceased the moment the Repair Contract was entered into is correct, then paragraph 5 of that Contract would be reduced to nonsense: for it must be nonsensical to require a proposal bond in an amount 300% more than the amount of the required performance bond, if the proposal bond were to become functus oficio the moment the contract was legally entered into. Upon the other hand, the requirement of posting of a performance bond of P10,000.00 is quite understandable if it be understood as simply additional security for the carrying out of the terms of the contract, that is, additional to the Proposal Bond. 12 Finally, we note that the Proposal Bond is set out in a printed contract form of petitioner Eastern. The three (3) circumstances occurrence of which would trigger off the liability of Eastern under the bond, appear to be standard stipulations imposed by petitioner upon all persons seeking to secure proposal bonds from Eastern. To this extent, the Proposal Bond is a contract of adhesion, having been prepared solely by Eastern. Accordingly, any ambiguity or obscurity that may be found to infect the terms of the Proposal Bond, must be construed against Eastern. 13

In sum, we hold that petitioner Eastern's liability under the Proposal Bond accrued the moment the principal obligor, Motor City, failed to post the P10,000.00 Performance Bond and incurred in delay and eventually defaulted in the repair and delivery of the seventh jeep unit, part of the subject matter of the Contract for Repair of Jeeps with respondent DAR. WHEREFORE, the Petition for Review is DENIED for lack of merit. The Decision dated 11 December 1984 of the then Intermediate Appellate Court in A.C. G.R. CV 67523 is hereby AFFIRMED with the modification that the one percent (1%) indemnity charge per day of delay in delivery provided for in the Contract for Repair of Jeeps shall be computed from 13 March 1978 (not 3 March 1978), the date of last demand. Petitioner's liability for such indemnity charge shall not exceed the face amount of the Proposal Bond (P33,275.00). Costs against petitioner. Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 88050 January 30, 1992 STRONGHOLD INSURANCE COMPANY, INC., petitioner, vs. HON. COURT OF APPEALS and ADRIANO URTESUELA, respondents. T.J. Sumawang & Associates for petitioner. Linsangan Law Office for private respondent.

CRUZ, J.: The petitioner invokes due process to escape liability on a surety bond executed for the protection of a Filipino seaman. It is a familiar argument that will be denied, in light of the following findings. Acting on behalf of its foreign principal, Qatar National Fishing Co., Pan Asian Logistics and Trading, a domestic recruiting and placement agency, hired Adriano Urtesuela as captain of the vessel M/V Oryx for the stipulated period of twelve months. The required surety bond, in the amount of P50,000.00, was submitted by Pan Asian and Stronghold Insurance Co., Inc., the herein petitioner, to answer for the liabilities of the employer. Urtesuela assumed his duties on April 18, 1982, but three months later his services were terminated and he was repatriated to Manila. He thereupon filed a complaint against Pan Asian and his former employer with the Philippine Overseas Employment Administration for breach of contract and damages. In due time, the POEA rendered a decision in his favor for the amount of P6,374.94, representing his salaries for the unexpired portion of his contract and the cash value of his unused vacation leave, plus attorney's fees and costs, which the respondents were required to pay. The judgment eventually became final and executory, not having been appealed on time. Pursuant thereto, a writ of execution was issued against Pan Asian but could be enforced only against its cash bond of P10,000.00, the company having ceased to operate. Urtesuela then filed a complaint with the Insurance Commission against Stronghold on the basis of the aforementioned surety bond and prayed for the value thereof plus attorney's fees and litigation costs. Under the bond, the petitioner and Pan Asian undertook To answer for all liabilities which the Philippine Overseas Employment Administration may adjudge/impose against the Principal in connection with the recruitment of Filipino seamen.

It is understood that notice to the Principal is notice to the surety. (Exh. "I-2"). WHEREAS, the liability of the surety under this Bond shall in no case exceed the sum of PESOS: FIFTY THOUSAND ONLY (P50,000.00) Philippine Currency. After hearing, the Insurance Commission held that the complaint should be reformed because the provisions in the surety bond were not stipulations pour autrui to entitle Urtesuela to bring the suit himself. It held that the proper party was the POEA. 1 This ruling was reversed on appeal by the respondent court in its decision dated April 20, 1989. 2 It was there declared that, as the actual beneficiary of the surety bond, Urtesuela was competent to sue Stronghold, which as surety was solidarily liable with Pan Asian for the judgment rendered against the latter by the POEA. The petitioner asks for reversal of the Court of Appeals. It submits that the decision of the POEA is not binding upon it because it was not impleaded in the complaint; it was not notified thereof nor did it participate in the hearing; and it was not specifically directed to pay the damages awarded to the complainant. In support of its posture, the petitioner cites abundant jurisprudence, particularly Aguasin v. Velasquez, where the Court held:
3

If the surety is to be bound by his undertaking, it is essential according to Section 10 of Rule 62 in connection with Section 20 of Rule 59 of the Rules of Court that the damages be awarded upon application and after proper hearing and included in the judgment. As a corollary to these requirements, due notice to the plaintiff and his surety setting forth the facts showing his right to damages and the amount thereof under the bond is indispensable. This has to be so if the surety is not to be condemned or made to pay without due process of law. It is to be kept in mind that the surety in this case was not a party to the action and had no notice of or intervention in the trial. It seems elementary that before being condemned to pay, it was the elementary right of the surety to be heard and to be informed that the party seeking indemnity would hold it liable and was going to prove the grounds and extent of its liability. This case is different from those in which the surety, by law and/or by the terms of his contract, has promised to abide by the judgment against the principal and renounced the right to be sued or cited. The Court has gone over the decision and finds that the petitioner is "hoist by its own petard." For as the quoted excerpt itself says, the case is "different from those in which the surety, by law and/or by the terms of his contract, has promised to abide by the judgment against the principal and renounced the right to be sued or cited." In the surety bond, the petitioner unequivocally bound itself: To answer for all liabilities which the Philippine Overseas Employment Administration may adjudge/impose against the Principal in connection with the recruitment of Filipino seamen. Strictly interpreted, this would mean that the petitioner agreed to answer for whatever decision might be rendered against the principal, whether or not the surety was impleaded in the complaint and had the opportunity to defend itself. There is nothing in the stipulation calling for a direct judgment against the surety as a co-defendant in an action against the principal. On the contrary, the petitioner agreed "to answer for all liabilities" that "might be adjudged or imposed by the POEA against the Principal." But even if this interpretation were rejected, considering the well-known maxim that "the surety is a favorite of the law," the petitioner would still have to explain its other agreement that "notice to the Principal is notice to the surety." This was in fact another special stipulation typewritten on the printed form of the surety bond prepared by the petitioner. Under this commitment, the petitioner is deemed, by the implied notice, to have been given an opportunity to participate in the litigation and to present its side, if it so chose, to avoid liability. If it did not decide to intervene as a co-defendant (and perhaps also as cross-claimant against Pan Asian), it cannot be heard now to complain that it was denied due process. The petitioner contends, however, that the said stipulation is unconstitutional and contrary to public policy, because it is "a virtual waiver" of the right to be heard and "opens wide the door for fraud and collusion between the principal and the bond obligee" to the prejudice of the surety. Hence, disregarding the stipulation, the petitioner should be deemed as having received no notice at all of the complaint and therefore deprived of the opportunity to defend itself.

The Court cannot agree. The argument assumes that the right to a hearing is absolute and may not be waived in any case under the due process clause. This is not correct. As a matter of fact, the right to be heard is as often waived as it is invoked, and validly as long as the party is given an opportunity to be heard on his behalf. 4 The circumstance that the chance to be heard is not availed of does not disparage that opportunity and deprive the person of the right to due process. This Court has consistently held in cases too numerous to mention that due process is not violated where a person is not heard because he has chosen, for whatever reason, not to be heard. It should be obvious that if he opts to be silent where he has a right to speak, he cannot later be heard to complain that he was unduly silenced. Neither is public policy offended on the wicked ground of fraud and collusion imagined by the petitioner. For one thing, the speculation contravenes without proof the presumption of good faith and unreasonably imputes dishonest motives to the principal and the obligee. For another, it disregards the fiduciary relationship between the principal and the surety, which is the legal and also practical reason why the latter is willing to answer for the liabilities of the former. In a familiar parallel, notice to the lawyer is considered notice to the client he represents even if the latter is not actually notified. It has not been suspected that this arrangement might result in a confabulation between the counsel and the other party to the client's prejudice. At any rate, it is too late now for the petitioner to challenge the stipulation. If it believed then that it was onerous and illegal, what it should have done was object when its inclusion as a condition in the surety bond was required by the POEA. Even if the POEA had insisted on the condition, as now claimed, there was still nothing to prevent the petitioner from refusing altogether to issue the surety bond. The petitioner did neither of these. The fact is that, whether or not the petitioner objected, it in the end filed the surety bond with the suggested condition. The consequence of its submission is that it cannot now argue that it is not bound by that condition because it was coerced into accepting it. This Court has always been receptive to complaints against the denial of the right to be heard, which is the very foundation of a free society. This right is especially necessary in the court of justice, where cases are decided after the parties shall have been given an opportunity to present their respective positions, for evaluation by the impartial judge. Nevertheless, a party is not compelled to speak if it chooses to be silent. If it avails itself of the right to be heard, well and good; but if not, that is also its right. In the latter situation, however, it cannot later complain that, because it was not heard, it was deprived of due process. Worthy of consideration also is the private respondent's contention that he sought to enforce the petitioner's liability not in NSB Case No. 3810-82 as decided by the POEA, but in another forum. What he did was file an independent action for that purpose with the Insurance Commission on the basis of the surety bond which bound the petitioner to answer for whatever liabilities might be adjudged against Qatar National Fishing Co. by the POEA. In the proceedings before the Commission, the petitioner was given full opportunity (which it took) to present its side, in its answer with counterclaim to the complaint, in its testimony at the hearings, in its motion to dismiss the complaint, and in its 10-page memorandum. There is absolutely no question that in that proceeding, the petitioner was actually and even extensively heard. The surety bond required of recruitment agencies 5 is intended for the protection of our citizens who are engaged for overseas employment by foreign companies. The purpose is to insure that if the rights of these overseas workers are violated by their employers, recourse would still be available to them against the local companies that recruited them for the foreign principal. The foreign principal is outside the jurisdiction of our courts and would probably have no properties in this country against which an adverse judgment can be enforced. This difficulty is corrected by the bond, which can be proceeded against to satisfy that judgment. Given this purpose, and guided by the benign policy of social justice, we reject the technicalities raised by the petitioner against its established legal and even moral liability to the private respondent. These technicalities do not impair the rudiments of due process or the requirements of the law and must be rejected in deference to the constitutional imperative of justice for the worker. WHEREFORE, the petition is DENIED and the challenged decision of the Court of Appeals AFFIRMED in toto. The respondent court is directed to ENFORCE payment to the private respondent in full, and with all possible dispatch of the amount awarded to him by the POEA in its decision dated May 13, 1983. It is so ordered. Narvasa, C.J., Grio-Aquino and Medialdea, JJ., concur.

FIRST DIVISION

PRUDENTIAL GUARANTEE and ASSURANCE, INC., Petitioner,

G.R. Nos. 152505-06 Present: PUNO, C.J., Chairperson, SANDOVAL-GUTIERREZ, CORONA, *AZCUNA, and GARCIA, JJ. Promulgated: September 13, 2007

- versus -

EQUINOX LAND CORPORATION, Respondent. x ----------------------------------------------------------------------------------------x DECISION SANDOVAL-GUTIERREZ, J.:

cralawBefore us for resolution is the instant Petition for Review on Certiorari assailing the Decision[1] of the Court of Appeals (Third Division) dated November 23, 2001 in CA-G.R. SP No. 56491 and CA-G.R. SP No. 57335. cralawThe undisputed facts of the case, as established by the Construction Industry Arbitration Commission (CIAC) and affirmed by the Court of Appeals, are: cralawSometime in 1996, Equinox Land Corporation (Equinox), respondent, decided to construct five (5) additional floors to its existing building, the Eastgate Centre, located at 169 EDSA, Mandaluyong City. It then sent invitations to bid to various building contractors. Four (4) building contractors, including JMarc Construction & Development Corporation (JMarc), responded.

cralawFinding the bid of JMarc to be the most advantageous, Equinox offered the construction project to it. On February 22, 1997, JMarc accepted the offer. Two days later, Equinox formally awarded to JMarc the contract to build the extension for a consideration of P37,000,000.00. cralawOn February 24, 1997, JMarc submitted to Equinox two (2) bonds, namely: (1) a surety bond issued by Prudential Guarantee and Assurance, Inc. (Prudential), herein petitioner, in the amount of P9,250,000.00 to guarantee the unliquidated portion of the advance payment payable to JMarc; and (2) a performance bond likewise issued by Prudential in the amount of P7,400,000.00 to guarantee JMarcs faithful performance of its obligations under the construction agreement. cralawOn March 17, 1997, Equinox and JMarc signed the contract and related documents. Under the terms of the contract, JMarc would supply all the labor, materials, tools, equipment, and supervision required to complete the project. In accordance with the terms of the contract, Equinox paid JMarc a downpayment of P9,250,000.00 equivalent to 25% of the contract price. cralawJMarc did not adhere to the terms of the contract. It failed to submit the required monthly progress billings for the months of March and April 1997. Its workers neglected to cover the drainpipes, hence, they were clogged by wet cement.This delayed the work on the project. cralawOn May 23, 1997, JMarc requested an unscheduled cash advance of P300,000.00 from Equinox, explaining it had encountered cash problems. Equinox granted JMarcs request to prevent delay. cralawOn May 31, 1997, JMarc submitted its first progress billing showing that it had accomplished only 7.3825% of the construction work estimated at P2,731,535.00. After deducting the advanced payments, the net amount payable to JMarc was only P1,285,959.12. Of this amount, Equinox paid JMarc only P697,005.12 because the former paid EXAN P588,954.00 for concrete mix. cralawShortly after Equinox paid JMarc based on its first progress billing, the latter again requested an advanced payment of P150,000.00. Again Equinox paid JMarc this amount. Eventually, Equinox found that the amount owing to JMarcs laborers was only P121,000.00, not P150,000.00. cralawIn June 1997, EXAN refused to deliver concrete mix to the project site due to JMarcs recurring failure to pay on time. Faced with a looming delay in the project schedule, Equinox acceded to EXANs request that payments for the concrete mix should be remitted to it directly. cralawOn June 30, 1997, JMarc submitted its second progress billing showing that it accomplished only 16.0435% of the project after 4 months of construction work. Based on the contract and its own schedule, JMarc should have accomplished at least 37.70%. cralawFaced with the problem of delay, Equinox formally gave JMarc one final chance to take remedial steps in order to finish the project on time. However, JMarc failed to undertake any corrective measure. Consequently, on July 10, 1997, Equinox terminated its contract with JMarc and took over the project. On the same date, Equinox sent Prudential a letter claiming relief from JMarcs violations of the contract. cralawOn July 11, 1997, the work on the project stopped. The personnel of both Equinox and JMarc jointly conducted an inventory of all materials, tools, equipment, and supplies at the construction site. They also measured and recorded the amount of work actually accomplished. As of July 11, 1997, JMarc accomplished only 19.0573% of the work or a shortage of 21.565% in violation of the contract. cralawThe cost of JMarcs accomplishment was only P7,051,201.00. In other words, Equinox overpaid JMarc in the sum of P3,974,300.25 inclusive of the 10% retention on the first

progress billing amounting to P273,152.50.In addition, Equinox also paid the wages of JMarcs laborers, the billings for unpaid supplies, and the amounts owing to subcontractors of JMarc in the total sum of P664,998.09. cralawOn August 25, 1997, Equinox filed with the Regional Trial Court (RTC), Branch 214, MandaluyongCity a complaint for sum of money and damages against JMarc and Prudential. Equinox prayed that JMarc be ordered to reimburse the amounts corresponding to its (Equinox) advanced payments and unliquidated portion of its downpayment; and to pay damages. Equinox also prayed that Prudential be ordered to pay its liability under the bonds. cralawIn its answer, JMarc alleged that Equinox has no valid ground for terminating their contract. For its part, Prudential denied Equinoxs claims and instituted a cross-claim against JMarc for any judgment that might be rendered against its bonds. cralawDuring the hearing, Prudential filed a motion to dismiss the complaint on the ground that pursuant to Executive Order No. 1008, it is the CIAC which has jurisdiction over it. cralaw cralawOn February 12, 1999, the trial court granted Prudentials motion and dismissed the case. cralawOn May 19, 1999, Equinox filed with the CIAC a request for arbitration, docketed as CIAC Case No. 17-99. Prudential submitted a position paper contending that the CIAC has no jurisdiction over it since it is not a privy to the construction contract between Equinox and JMarc; and that its surety and performance bonds are not construction agreements, thus, any action thereon lies exclusively with the proper court. cralawOn December 21, 1999, the CIAC rendered its Decision in favor of Equinox and against JMarc and Prudential, thus: AWARD cralawAfter considering the evidence and the arguments of the parties, we find that: 1. JMarc has been duly notified of the filing and pendency of the arbitration proceeding commenced by Equinox against JMarc and that CIAC has acquired jurisdiction over JMarc; 2. The construction Contract was validly terminated by Equinox due to JMarcs failure to provide a timely supply of adequate labor, materials, tools, equipment, and technical services and to remedy its inability to comply with the construction schedule; 3. Equinox is not entitled to claim liquidated damages, although under the circumstances, in the absence of adequate proof of actual and compensatory damages, we award to Equinox nominal or temperate damages in the amount of P500,000.00; 4. The percentage of accomplishment of JMarc at the time of the termination of the Contract was 19.0573% of the work valued at P7,051,201.00. This amount should be credited to JMarc. On the other hand, Equinox [i] had paid JMarc 25% of the contract price as down or advance payment, [ii] had paid JMarc its first progress billing, [iii] had made advances for payroll of the workers, and for unpaid supplies and the works of JMarcs subcontractors, all in the total sum of P11,690,483.34. Deducting the value of JMarcs accomplishment from these advances and payment, there is due from JMarc to Equinox the amount of P4,639,285.34. We hold JMarc liable to pay Equinox this amount of P4,639,285.34.

cralaw cralawThereupon, Prudential filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 56491. Prudential alleged that the CIAC erred in ruling that it is bound by the terms of the construction contract between Equinox and JMarc and that it is solidarily liable with JMarc under its bonds. cralawEquinox filed a motion for reconsideration on the ground that there is an error in the computation of its claim for unliquidated damages; and that it is entitled to an award of liquidated damages. cralawOn February 2, 2000, the CIAC amended its Award by reducing the total liability of JMarc to Equinox to P4,060,780.21, plus attorneys fees of P100,000 or P4,160,780.21, and holding that Prudentials liability to Equinox on the surety and performance bonds should not exceed the said amount of P4,160,780.21, payable by JMarc and Prudential jointly and severally.

5. If JMarc had billed Equinox for its accomplishment as of July 11, 1997, 25% of the P7,051,201.00 would have been recouped as partial payment of the advanced or down payment. This would have resulted in reducing Prudentials liability on the Surety Bond from P8,250,000.00 to P7,487,199.80. We, therefore, find that Prudential is liable to Equinox on its Surety Bond the amount of P7,487,199.80; 6. Prudential is furthermore liable on its Performance Bond for the following amounts: the advances made by Equinox on behalf of JMarc to the workers, suppliers, and subcontractors amounting to P664,985.09, the nominal damages of P500,000.00 and attorneys fees of P100,000.00 or a total amount of P1,264,985.00; 7. All other claims and counterclaims are denied; 8. JMarc shall pay the cost of arbitration and shall indemnify Equinox the total amount paid by Equinox as expenses of arbitration; 9. The total liability of JMarc to Equinox is determined to be P5,139,285.34 plus attorneys fees of P100,000.00. The suretys liability cannot exceed that of the principal debtor [Art. 2054, Civil Code}. We hold that, notwithstanding our finding in Nos. 5 and 6 of this Award, Prudential is liable to Equinox on the Surety Bond and Performance Bond an amount not to exceed P5,239,285.34. The cost of arbitration shall be paid by JMarc alone. The amount of P5,239,285.34 shall be paid by respondent JMarc and respondent Prudential, jointly and severally, with interest at six percent [6%] per annum from promulgation of this award. This amount, including accrued interest, shall earn interest at the rate of 12% per annum from the time this decision becomes final and executory until the entire amount is fully paid or judgment fully satisfied. The expenses of arbitration, which shall be paid by JMarc alone, shall likewise earn interest at 6% per annum from the date of promulgation of the award, and 12% from the date the award becomes final until this amount including accrued interest is fully paid. cralaw cralawSO ORDERED.

cralawDissatisfied, Equinox filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 57335. This case was consolidated with CA-G.R. SP No. 56491 filed by Prudential. cralawOn November 23, 2001, the Court of Appeals rendered its Decision in CA-G.R. SP No. 57335 and CA-G.R. SP No. 56491, the dispositive portion of which reads: WHEREFORE, the Amended Decision dated February 2, 2000 is AFFIRMED with MODIFICATION in paragraph 4 in the Award by holding JMarc liable for unliquidated damages to Equinox in the amount of P5,358,167.09 and in paragraph 9 thereof by increasing the total liability of JMarc to Equinox to P5,958,167.09 (in view of the additional award of P500,000.00 as nominal and temperate damages and P100,000.00 in attorneys fees), and AFFIRMED in all other respects. cralawSO ORDERED. cralawPrudential seasonably filed a motion for reconsideration but it was denied by the Court of Appeals. cralawThe issue raised before us is whether the Court of Appeals erred in(1) upholding the jurisdiction of the CIAC over the case; and (2) finding Prudential solidarily liable with JMarc for damages. cralawOn the first issue, basic is the rule that administrative agencies are tribunals of limited jurisdiction and as such, can only wield such powers as are specifically granted to them by their enabling statutes.[2] Section 4 of Executive Order No. 1008,[3] provides: SEC. 4. Jurisdiction. The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof. These disputes may involve government or private contracts. For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to voluntary arbitration. cralawThe jurisdiction of the CIAC may include but is not limited to violation of specifications for materials and workmanship, violation of the terms of agreement, interpretation and/or application of contractual time and delays, maintenance and defects, payment, default of employer or contractor and changes in contract cost. cralawExcluded from the coverage of the law are disputes arising from employer-employee relationships which continue to be covered by the Labor Code of the Philippines. cralawIn David v. Construction Industry and Arbitration Commission,[4] we ruled that Section 4 vests upon the CIAC original and exclusive jurisdiction over disputes arising from or connected with construction contracts entered into by parties who have agreed to submit their case for voluntary arbitration. cralawAs earlier mentioned, when Equinox lodged with the RTC its complaint for a sum of money against JMarc and Prudential, the latter filed a motion to dismiss on the ground of lack of jurisdiction, contending that since the case involves a construction dispute, jurisdiction lies with CIAC. Prudentials motion was granted. However, after the CIAC assumed jurisdiction over the case, Prudential again moved for its dismissal, alleging that it is not a party to the

construction contract between Equinox and JMarc; and that the surety and performance bonds it issued are not construction agreements. cralawAfter having voluntarily invoked before the RTC the jurisdiction of CIAC, Prudential is estopped to question its jurisdiction. As we held in Lapanday Agricultural & Development Corporation v. Estita,[5] the active participation of a party in a case pending against him before a court or a quasi-judicial body is tantamount to a recognition of that courts or quasi-judicial bodys jurisdiction and a willingness to abide by the resolution of the case and will bar said party from later on impugning the courts or quasi-judicial bodys jurisdiction.cralaw cralawMoreover, in its Reply to Equinoxs Opposition to the Motion to Dismiss before the RTC, Prudential, citing Philippine National Bank v. Pineda[6] and Finman General Assurance Corporation v. Salik,[7] argued that as a surety, it is considered under the law to be the same party as the obligor in relation to whatever is adjudged regarding the latters obligation.Therefore, it is the CIAC which has jurisdiction over the case involving a construction contract between Equinox and JMarc. Such an admission by Prudential binds it and it cannot now claim otherwise. cralawAnent the second issue, it is not disputed that Prudential entered into a suretyship contract with JMarc. Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called the suretyship, 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[8], as amended. Corollarily, Article 2047 of the Civil Code provides that suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor for the purpose of fulfilling an obligation. cralawIn Castellvi de Higgins and Higgins v. Seliner,[9] we held that while a surety and a guarantor are alike in that each promises to answer for the debt or default of another, the surety assumes liability as a regular party to the undertaking and hence its obligation is primary. cralawIn Security Pacific Assurance Corporation v. Tria-Infante,[10] we reiterated the rule that while a contract of surety is secondary only to a valid principal obligation, the suretys liability to the creditor is said to be direct, primary, and absolute. In other words, the surety is directly and equally bound with the principal. Thus, Prudential is barred from disclaiming that its liability with JMarc is solidary. cralawWHEREFORE, we DENY the petition. The assailed Decision of the Court of Appeals (Third Division) dated November 23, 2001 in CA-G.R. SP No. 56491 and CAG.R. SP No. 57355 is AFFIRMED in toto. Costs against petitioner. cralawSO ORDERED. ANGELINA SANDOVAL-GUTIERREZ Associate Justice

WE CONCUR:

SECOND DIVISION [G.R. No. 156571, July 09, 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.: 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." The petition seeks to set aside the decision dated November 26, 2002 of the Court of Appeals[1] (CA) that in turn affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in Civil Case No. 83-15071. [2] In its ruling, the RTC found the petitioners liable as sureties for the customs duties, internal revenue taxes, and other charges due on the importations made by the importer, Grand Textile Manufacturing Corporation (Grand Textile).
[3]

BACKGROUND FACTS Grand Textile is a local manufacturing corporation. In 1974, it imported from different countries various articles such as dyestuffs, spare parts for textile machinery, polyester filament yarn, textile auxiliary chemicals, trans open type reciprocating compressor, and trevira filament. Subsequent to the importation, these articles were transferred to Customs Bonded Warehouse No. 462. As computed by the Bureau of Customs, the customs duties, internal revenue taxes, and other charges due on the importations amounted to P2,363,147.00. To secure the payment of these obligations pursuant to Section 1904 of the Tariff and Customs Code ( Code),[4] Intra- Strata and PhilHome each issued general warehousing bonds in favor of the Bureau of Customs. These bonds, the terms of which are fully quoted below, commonly provide that the goods shall be withdrawn from the bonded warehouse "on payment of the legal customs duties, internal revenue, and other charges to which they shall then be subject."[5] Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand Textile withdrew the imported goods from storage.[6] The Bureau of Customs demanded payment of the amounts due from Grand Textile as importer, and from 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] WHEREFORE, premises considered, the Court RESOLVES directing: -1 the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of P2,363,174.00, plus interests at the legal rate from the filing of the Complaint until fully paid; -2 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;

-3

the forfeiture of all the General Warehousing Bonds executed by Intra- Strata and PhilHome; and all the defendants to pay the costs of suit.

-4

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 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 COURT'S RULING We find no merit in the petition and consequently affirm the CA decision. Nature of the Surety's 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."[10] By 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 latter's obligations and does not receive any benefit therefrom.[12] The Bonds Under Consideration 2.

That the bonds under consideration are surety bonds (and hence are governed by the above laws and rules) is not disputed; the petitioners merely assert that they should not be liable for the reasons summarized above. Two elements, both affecting the suretyship agreement, are material in the issues the petitioners pose. The first is the effect of the law on the suretyship agreement; the terms of the suretyship agreement constitute the second. A feature of the petitioners' bonds, not stated expressly in the bonds themselves but one that is true in every contract, is that applicable laws form part of and are read into the contract without need for any express reference. This feature proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to rule: It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that it is unfettered. They may, according to Article 1306 of the Civil Code "establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy." The law thus sets limits. It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodied therein. The contracting parties need not repeat them. They do not even have to be referred to. Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter."[13] Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and Customs Code which provide that: Sec 101. Imported Items Subject to Duty - All articles when imported from any foreign country into the Philippines shall be subject to duty upon such importation even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in clear laws. xxxx Sec. 1204. Liability of Importer for Duties - Unless relieved by laws or regulations, the liability for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the control of the government. The obligation to pay, principally by the importer, is shared by the latter with a willing third party under a suretyship agreement under Section 1904 of the Code which itself provides: Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond After articles declared in the entry of warehousing shall have been examined and the duties, taxes, and other charges shall have been determined, the Collector shall require from the importer, an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, and other charges to which the articles shall then be subject and upon compliance with all legal requirements regarding their importation. We point these out to stress the legal basis for the submission of the petitioners' bonds and the conditions attaching to these bonds. As heretofore mentioned, there is, firstly, a principal obligation belonging to the importer-obligor as provided under Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a surety agreement, directly, primarily, and equally bind them to the obligee to pay the obligor's 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 Bond [15] that is at the core of the present dispute provides: KNOW ALL MEN BY THESE PRESENTS: That I/we GRAND TEXTILE MANUFACTURING CORPORATION - Km. 21, Marilao, Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, as Surety, are held

and firmly bound unto the Republic of the Philippines, in the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the Philippines, for the payment whereof, we bind ourselves, our heirs, executors, administrators and assigns, jointly and severally, firmly by these presents: WHEREAS, the above-bounden Principal will from time to time make application to make entry for storing in customs-internal revenue bonded warehouse certain goods, wares, and merchandise, subject to customs duties and special import tax or internal revenue taxes or both; WHEREAS, the above principal in making application for storing merchandise in customsinternal revenue bonded warehouse as above stated, will file this in his name as principal, which bond shall be approved by the Collector of Customs or his Deputy; and WHEREAS, the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond. NOW THEREFORE, the condition of this obligation is such that if within six (6) months from the date of arrival of the importing vessel in any case, the goods, wares, and merchandise shall be regularly and lawfully withdrawn from public stores or bonded warehouse on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall then be subject; or if at any time within six (6) months from the said date of arrival, or within nine (9) months if the time is extended for a period of three (3) months, as provided in Section 1903 of the Tariff and Customs Code of the Philippines, said importation shall be so withdrawn for consumption, then the above obligation shall be void, otherwise, to remain in full force and effect. Obligations hereunder may only be accepted during the calendar year 1974 and the right to reserve by the corresponding Collector of Customs to refuse to accept further liabilities under this general bond, whenever, in his opinion, conditions warrant doing so. IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 20th day of September, 1974 at Makati, Rizal, Philippines. Considered in relation with the underlying laws that are deemed read into these bonds, it is at once clear that the bonds shall subsist - that is, "shall remain in full force and effect" unless the imported articles are "regularly and lawfully withdrawn. . .on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall be subject...." Fully fleshed out, the obligation to pay the duties, taxes, and other charges primarily rested on the principal Grand Textile; it was allowed to warehouse the imported articles without need for prior payment of the amounts due, conditioned on the filing of a bond that shall remain in full force and effect until the payment of the duties, taxes, and charges due. Under these terms, the fact that a withdrawal has been made and its circumstances are not material to the sureties' liability, except to signal both the principal's 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? 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 creditorobligee 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 creditorobligee'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 debtor's default. The creditor in this latter relationship accepts the surety's solidary undertaking to pay if the debtor does not pay.[18] Such acceptance, however, does not change in any material way the creditor's 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 debtor's 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. CA[24] 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 principal's 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 principal's 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 creditor's 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 principal's default.

The petitioners' reliance on Visayan Surety and Insurance Corporation v. Pascual[25] and Aguasin v. Velasquez[26] does not appear to us to be well taken as these cases do not squarely apply to the present case. These cases relate to bonds issued as a requirement for the issuance of writs of replevin. The Rules of Court expressly require that before damages can be claimed against such bonds, notice must be given to the sureties to bind them to the award of damages. No such requirement is evident in this case as neither the Tariff and Customs Code nor the issued bonds require prior notice to sureties. The petitioners' argument focusing on the additional risks they incur if they cannot intervene in the handling of the warehoused articles must perforce fail in light of what we have said above regarding the nature of their obligation as sureties and the relationships among the parties where a surety agreement exists. We add that the petitioners have effectively waived as against the creditor (the government) any such claim in light of the provision of the bond that "the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond."[27] Any such claim including those arising from the withdrawal of the warehoused articles without the payment of the requisite duties, taxes and charges is for the principal and the sureties to thresh out between or among themselves. Government is Not Bound by Estoppel As its final point, the petitioners argue that they cannot be held liable for the unpaid customs duties, taxes, and other charges because it is the Bureau of Customs' duty to ensure that the duties and taxes are paid before the imported goods are released from its custody and they cannot be made to pay for the error or negligence of the Bureau's 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. 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. Quisumbing, (Chairperson), Tinga, Reyes, and Leonardo-De Castro,. JJ., concur. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION A.M. No. 21901-96 June 27, 1978 REPARATIONS COMMISSION, plaintiff-appellants, vs. UNIVERSAL DEEP-SEA FISHING CORPORATION and MANILA SURETY AND FIDELITY CO., INC., defendant-appellants.

MANILA SURETY & FIDELITY CO., INC., third-party plaintiff-appellee, vs. PABLO S. SARMIENTO, third-party defendant-appellant.

CONCEPCION JR., J.: Appeal of the defendant Universal Deep-Sea Fishing Corporation, defendant and third-party plaintiff Manila Surety and Fidelity Co., Inc., and third-party defendant Pablo Sarmiento from the decision of the Court of First Instance of Manila, the dispositive portion of which reads as follows: WHEREFORE, judgment is rendered as follows: 1. The defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to pay the plaintiff the sum of P100,242.04 in the first cause of action, P141,343.45 in the second cause of action and P54,500.00 in the third cause of action, all with interest at the rate of 6% per annum from August 10, 1962, the date of the filing of the complaint, until fully paid; 2. Defendant Manila Surety & Fidelity Co., Inc., is hereby sentenced to pay the plaintiff, jointly and severally with defendant Universal Deep-Sea Fishing Corporation, the sum of P53,643.00 in the first cause of action, P68,777.77 in the second cause of action and P54,508.00 in the third cause of action; 3. Defendant Universal Deep-Sea Fishing Corporation and Pablo Sarmiento are hereby sentenced to pay, jointly and severally, the Manila Surety & Fidelity Co., Inc., the sum of P53,643.00 and P68,777.77 with interest thereon at the rate of 12% per annum from August 10, 1962 until fully paid plus P2,000.00 as attorney's fees; 4. Defendant Universal Deep-Sea Fishing Corporation is hereby sentenced to pay the Manila Surety & Fidelity Co., Inc., the sum of P54,508.00 with interest thereon at the rate of 12% per annum from August 10, 1962, until fully paid; 5. Defendant Universal Deep-Sea Fishing Corporation shall pay the costs. 1 It is not disputed that the Universal Deep-Sea Fishing Corporation, hereinafter referred to as UNIVERSAL for short. was awarded six (6) trawl boats by the. Reparations Commission as end-user of reparations goods. These fishing boats, christened the M/S UNIFISH 1, M/S UNIFISH 2. M/S UNIFISH 3. M/S UNIFISH 4, M/S UNIFISH 5, and M/S UNIFISH 6. were delivered to UNIVERSAL two at a time, f.o.b. Japanese port. The M/S UNIFISH 1 and M/S UNIFISH 2, with an aggregate purchase price of P536,428.44, were delivered to UNIVERSAL on November 20,1958, and the contract of Conditional Purchase and Sale of Reparations Goods, executed by and between the parties on February 12, 1960, provided among others, that "the first installment representing 10% of the amount or FIFTY THREE THOUSAND SIX HUNDRED FORTY TWO PESOS AND EIGHTY FOUR CENTAVOS (P53,642.84) shall be paid within 24 months from the date of complete delivery thereof, the balance shall be paid in the manner herein stated as shown in the Schedule of Payments, 2 ... to wit: TOTAL F.O.B. COST P536,428.44 AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COST) P53,642.84 DUE DATE OF 1st INSTALLMENT May 8, 1961 TERM: Ten (10) EQUAL YEARLY INSTALLMENTS RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM

No. of Installments

Date Due

Amount

1 2 3 4 5 6 7 8 9 10

May 8, 1962 May 8, 1963 May 8, 1964 May 8, 1965 May 8, 1966 May 8, 1967 May 8, 1968 May 8, 1969 May 8, 1970 May 8, 1971

P56,597.20 P56,597.20 P56,597.20 P56,597.20 P56,597.2 P56,597.20 P56,597.20 P56,597.20 P56,597.20 P56,597.20

To guarantee the faithful compliance with the obligations under said contract, a performance bond in the amount of P53,643.00, with UNIVERSAL as principal and the Manila Surety & Fidelity Co., Inc., as surety, was executed in favor of the Reparations Commission. 3 A Corresponding indemnity agreement was executed to indemnify the surety company for any damage, loss charges, etc., which it may sustain or incur as a consequence of having become a surety upon the performance bond. 4 The M/S UNIFISH 3 and M/S UNIFISH 4, with a total purchase price of P687,777.76 were delivered to UNIVERSAL on April 20, 1959 and the Contract of Conditional Purchase and Sale Reparations Goods, dated November 25, 1959, 5 provided that "the first installment representing 10% of the amount or SIXTY-EIGHT THOUSAND SEVEN HUNDRED SEVENTY-SEVEN PESOS AND SEVENTY-SEVEN CENTAVOS shall be paid within 24 months from the date of complete delivery thereof, the balance shall be paid in the manner herein stated as shown in the Schedule of Payments, . . . , to wit: TOTAL F.O.B. COSTS P687,777.76 AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) P68,777.77 DUE DATE OF 1st INSTALLMENT July, 1961 TERM: Ten (10) EQUAL YEARLY INSTALLMENTS RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM

No. of Installments

Due Date July, 1962 July, 1963 July, 1964 July, 1965 July, 1966 July, 1967 July, 1968 July, 1969 July, 1970 July, 1971

Amount P72,565.68 P72,565.68 P72,565.68 P72,565.68 P72,565.68 P72,565.68 P72,565.68 P72,565.68 P72,565.68 P72,565.68

1 2 3 4 5 6 7 8 9 10

A performance bond in the amount of P68,777.77, issued by the Manila Surety & Fidelity Co., Inc., was also submitted to guarantee the faithful compliance with the obligations set forth in the contract, 6 and indemnity agreement was executed in favor of the surety company in consideration of the said bond. 7 The delivery of the M/S UNIFISH 5 and M/S UNIFISH 6 is covered by a contract for the Utilization of Reparations Goods (M/S "UNIFISH 5" and M/S "UNIFISH 6") executed by the parties on February 12, 1960, 8 and the Schedule of Payments attached thereto, provided, as follows: AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) P54,500.00 DUE DATE OF 1st INSTALLMENT Oct. 17, 1961 TERM: TEN (10) EQUAL YEARLY INSTALLMENTS RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM

No. of Installments

Date Due

Amount

1 2 3 4 5 6 7 8 9 10

Oct. 17, 1962 Oct. 17, 1963 Oct. 17, 1964 Oct. 17, 1965 Oct. 17, 1966 Oct. 17, 1967 Oct. 17, 1968 Oct. 17, 1969 Oct. 17, 1970 Oct. 17, 1971

P57,501.57 P57,501.57 P57,501.57 P57,501.57 P57,501.57 P57,501.57 P57,501.57 P57,501.57 P57,501.57

P57,501.57 9

A performance bond in judgment, amount of P54,500.00 issued by judgment, Manila Surety & Fidelity Co., Inc., 10 was submitted, and an indemnity agreement was executed by UNIVERSAL in favor of judgment, surety company. 11 On August 10, 1962, judgment, Reparations Commission instituted judgment, present action against UNIVERSAL and judgment, surety company to recover various amounts of money due under these contracts. In answer, UNIVERSAL claimed that judgment, amounts of money sought to be collected are not yet due and demandable. The surety company also contended that judgment, action is premature, but set up a cross-claim against UNIVERSAL for reimbursement of whatever amount of money it may have to pay judgment, plaintiff by reason of judgment, complaint, including interest, and for judgment, collection of accumulated and unpaid premiums on judgment, bonds with interest thereon. With leave of courts first obtained, judgment, surety company filed a third-party complaint against Pablo S. Sarmiento, one of the indemnitors in judgment, indemnity agreements. The third-party defendant Pablo S. Sarmiento denied personal liability claiming that he signed judgment, indemnity agreements in question in his capacity as acting general manager of UNIVERSAL. After appropriate proceedings and upon judgment, preceding facts, judgment, trial court rendered judgment, judgment hereinbefore stated. hence, this appeal. (1) The principal issue for resolution is whether or not judgment, first installments under judgment, three (3) contracts of conditional purchase and sale of reparations goods were already due and demandable when judgment, complaint was filed. UNIVERSAL contends that there is an obscurity in judgment, terms of judgment, contracts in question which were caused by the plaintiff as to judgment, amounts and due dates of judgment, first installments which should have been first fixed before a creditor can demand its payment from judgment, debtor. To be explicit. counsel points to judgment, Schedule of Payment attached to, and forming a part of, the contract for judgment, purchase and sale of judgment, M/S UNIFISH 1 and M/S UNIFISH 2 which states that judgment, amount of first installment is P53,642.84 and judgment, due date of its payment

is May 8, 1961. However, judgment, amount of the first of succeeding itemized installments is P56,597.20 and judgment, due date is May 8, 1962. In the case of the M/S UNIFISH 3 and M/S UNIFISH 4, the first installments are P68,777.77 and due in July, 1961 and P72,565.68 and due in July 1962, respectively. In the contract for the purchase and sale of the M/S UNIFISH 5 and M/S UNIFISH 6, the amounts indicated as first installments are P54,500.00 and P57,501.57, and the due dates of payment are October 17, 1961 and October 17, 1962, respectively. The terms of the contracts for the purchase and sale of the reparations vessels, however, are very clear and leave no doubt as to the intent of the contracting parties. Thus, in the contract concerning the M/S UNIFISH 1 and M/S UNIFISH 2, the parties expressly agreed that the first installment representing 10% of the purchase price or P53,642.84 shall be paid within 24 months from the date of complete delivery of the vessel or on May 8, 1961, and the balance to be paid in ten (10) equal yearly installments. The amount of P56,597.20 due on May 8, 1962, which is also claimed to be a "first installment," is but the first of the ten (10) equal yearly installments of balance of judgment, purchase price. In judgment, case of Reparations Commission vs. Northern Lines, Inc. et al., 12 where judgment, Schedule of Payments, likewise on RCLEGAL DEPT FORM NO. 1, also allegedly indicated two (2) due dates for judgment, payment of judgment, first installment, judgment, Court said: (a) The major premise in appellants' process of reasoning is that the first installments due on April 25, 1963, and May 26, 1963, are 'first installments. although they are not so designated in judgment, schedule appended to each of judgment, contracts between judgment, parties. Appellant's, moreover, assume that judgment, 'first' installment is included in judgment, ten (10) equal yearly installments' mentioned subsequently to said 'first' installment. In feet, however, only one installment is labeled as 'first' in each one of said schedules, and that is judgment, installment due on 'April 25, 1962' - as regards M/S Don Salvador or Magsaysay - and that due on 'May 26, 1962'- as regards M/S Don Amando or Estancia. The schedules do not describe judgment, 'ten (10) equal yearly installments' following the one characterized therein as 'first' meaning 'number,' not order or sequence, of installments and the numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 written before each of said 'ten (10) equal yearly installments following the 'first' to accrue after the due date of said 'first' installment. Just the same, the parties have not so described (as 'first') in the schedules forming part of their contracts the installments numbered '1' in the list contained in each. Moreover, considering that the words 'TERMS: Ten (10) EQUAL YEARLY INSTALLMENTS,' appear after the lines reading: 'AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COSTS) P174,761.42' and DUE DATE OF 1st INSTALLMENT April 25, 1962 (or May 26, 1962) and that, subsequently to said 'TERM: Ten (10) EQUAL YEARLY INSTALLMENTS,' there is a list of ten (10) equal yearly installments, it is clear that the latter do not include the one designated as 'first' installment. xxx xxx xxx (b) The pertinent part of Section 12 of Rep. Act No. 1789, pursuant to which the vessels in question were sold to the Buyer reads: . . . Capital goods . . . disposed of to private parties as provided for in subsection (a) of Section two hereof shall be sold on a cash or credit basis, under rules and regulations as may be determined by the Commission. Sales on a credit basis shall be payable in installments: Provided, That judgment, first installment shall be paid within twenty-four months after complete delivery of judgment, capital goods and judgment, balance within a period not exceeding ten years, . . . plus judgment, service provided for in section ten thereof; Provided further, That judgment, unpaid balance of judgment, price thereof shall bear interest at judgment, rate of not more than three percent per annum. . . . . It should be noted that, pursuant to judgment, schedules attached to judgment, contracts with judgment, Buyer, judgment, 'complete delivery' of judgment, vessels took place on April 25, and May 26, 1960, respectively, so that judgment, the 24 months taxed by law for judgment, payment of judgment, 'First installment expired on April 25, 1962 and May 26,1962, which are judgment, very dates stated in judgment, aforementioned schedules for judgment, payment of judgment, respective '1st' installments. What is more, in view of said legal provision, judgment, Commission had no authority to agree that the 1st installment shall be paid on any later date, and judgment, Buyer must have been aware of this fact. Hence, judgment, parties could not have intended judgment, first installments to become due on April 25, and May 26, 1963 It is, likewise, obvious - particularly when considered in relation to judgment, provision above quoted - that judgment, 'ten (10) equal yearly installments.' mentioned in the schedules, refer to the 'balance' of the price to be paid by the buyer, after deducting judgment, 'first' installment, so hat, altogether, there would be 'eleven' installments, namely, the first , which would be the 10% of the F.O.B. cost of the vessel as agreed upon between 'The Governments of the Philippines and Japan and 'ten (10) yearly installments,' representing the balance of "he amount due to he Commission from judgment, Buyer, including tile interest thereon.

Viewing judgment, contracts between judgment, parties in judgment, light of the foregoing exposition, judgment, first installment on judgment, M/S UNIFISH 1 and M/S UNIFISH 2 of judgment, amount of P53,642.84 was due on May 8, 1961, while judgment, first installments on judgment, M/S UNIFISH 3 and M/ S UNIFISH 4, and judgment, M/S UNIFISH 5 and M/S UNIFISH 6 in judgment, amounts of P68,777.77 and P54,500.00 were due on July 31, 1961 and October 17, 1961, respectively. Accordingly judgment, obligation of UNIVERSAL to pay judgment, first installments on the purchase price of judgment, six (6) reparations vessels was already due and demandable when the present action was commenced on August 10, 1962. Also due and demanded from UNIVERSAL were the first of the ten (10) equal yearly installments on the balance of the purchase price of the M/S UNIFISH I and M/S UNIFISH 2 in the amount of P56,597.20 and P72,565.68 on judgment, M/S UNIFISH 3 and M/S UNIFISH 4. The first accrued on May 8, 1962, while judgment, second fell due on July 31, 1962. (2) The claim of judgment, surety company to the effect that the trial court erred in not awarding it the amount of P7,251.42, as premium is the performance bonds, is well taken. The payment of premiums on the bonds to the surety company had been expressly undertaken by UNIVERSAL in the indemnity agreements executed by it in favor of judgment, surety company. The premium is judgment, consideration for furnishing judgment, bonds and judgment, obligation to pay judgment, same subsists for as long as judgment, liability of judgment, surety shall exist. 13 Hence, UNIVERSAL should pay judgment, amount of P7,251.42 to judgment, surety company. (3) The surety company also claims that judgment, trial court erred in not applying judgment, amount of P10,000.00, paid as down payment by UNIVERSAL to judgment, Reparations Commission, to judgment, guaranteed indebtedness. According to judgment, surety company, under Article 1254 of judgment, Civil rode, where there is no imputation of payment made by either judgment, debtor or creditor, The debt which is the most onerous to the debtor shall be deemed to have been satisfied, so that the amount of P10,000.00 paid by UNIVERSAL as down payment on the purchase of the, M/S UNIFISH 1 and M/S UNIFISH 2 should be applied to the guaranteed portion of the debt, this releasing part of the liability hence the obligation of 'The surety company shall be only P43,643.00, instead of P53,643.00. The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to a person owing several debts of judgment, same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular, 14 which in this case is the full and faithful compliance with the terms of the contract of conditional purchase and sale of reparations goods, The obligation included the payment, not only of the first installment in the amount of P53,643.00, but also of the ten (10) equal yearly installments of P56,597.20 per annum. The amount of P10,000.00 was, indeed, deducted from judgment, amount of P53,643.00, but then judgment, first of judgment, ten (10) equal yearly installments had also accrued, hence, no error was committed in holding judgment, surety company to judgment, full extent of its undertaking. (4) Finally, We find no merit in judgment, claim of judgment, third-party defendant Pablo S. Sarmiento that he is not personally liable having merely executed judgment, indemnity agreements 15 in his capacity as acting general manager of UNIVERSAL. Pablo S. Sarmiento appears to have signed the indemnity agreement twice the first, in this capacity as acting general manager of UNIVERSAL, and the second, in his individual capacity. The indemnity agreements in question state the following. among others: In consideration of judgment, responsibility undertaken by judgment, Company, for judgment, original bond, and for any renewal, extension or substitution thereof, judgment, undersigned, jointly and severally, bind themselves in favor of judgment, said COMPANY in judgment, following terms: xxx xxx xxx Dated at City of Manila this - - - - day of July l969. 600 Cottage 3, UNIVERSAL DEEP-SEA FISHING CORP. Aguinaldo Com- BY: pound, Echague, s/PABLO S. SARMIENTO Manila t/PABLO S. SARMIENTO Signature s/PABLO S. SARMIENTO Address t/PABLO S. SARMIENTO Signature

Besides, the "acknowledgment" stated that "Pablo S. Sarmiento for himself and on behalf of Universal DeepSea Fishing Corporation" personally appeared before the notary and acknowledged that judgment, document is his own free and voluntary act and deed. WHEREFORE, judgment, judgment appealed from is hereby affirmed with judgment, modification that judgment, UNIVERSAL Deep-Sea Fishing Corporation is further ordered to pay judgment, Manila Surety & Fidelity Co., Inc., judgment, amount of P7,251.42 for judgment, premiums and documentary stamps on judgment, performance bonds. Appellants shall pay proportionate costs. SO ORDERED. Antonio, Aquino, Santos, and Guerrero, JJ., concur. Fernando and Barredo, JJ., took no part. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 107062 February 21, 1994 PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner, vs. THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents. Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner. A.M. Sison, Jr. & Associates for private respondent.

NOCON, J.: Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a favorable decision from the Regional Trial Court and then again in the Court of Appeals. 1 These are non-appearance during the pre-trial despite due notice, and non-payment of docket fees upon filing of its third-party complaint. Just how strict should these rules be applied is a crucial issue in this present dispute. Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively. On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner. Within the reglementary period, two successive motions were filed by petitioner praying for a total of thirty (30) days extention within which to file a responsible pleading. In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus, excussion is necessary. After the issues had been joined, the case was set for pre-trial conference on September 29, 1988. the petitioner received its notice on September 9, 1988, while the notice addressed to its counsel was returned to the trial court with the notation "Return to Sender, Unclaimed." 2

On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while both the representative of respondent and its counsel were present. The counsel for petitioner manifested that he was unable to contract the Vice-President for operations of petitioner, although his client intended to file a third party complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3 On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint" with the ThirdParty Complaint attached. On this same day, in the presence of the representative for both petitioner and respondent and their counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the Third Party Complaint and ordered service of summons on third party defendants. 4 On scheduled conference in December, petitioner and its counsel did not appear notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to February 1, 1989. However, when the case was called for pre-trial conference on February 1, 1989, petitioner was again nor presented by its officer or its counsel, despite being duly notified. Hence, upon motion of respondent, petitioner was considered as in default and respondent was allowed to present evidence ex-parte, which was calendared on February 24, 1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 16, 1989. 7 On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Interworld Assurance Corporation to pay the amount of P1,500,000.00 representing the principal of the amount due, plus legal interest thereon from April 7, 1988, until date of payment; and P20,000.00 as and for attorney's fees. 8 Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been denied it elevated its case to the Court of Appeals which however, affirmed the decision of the trial court as well as the latter's order denying petitioner's motion for reconsideration. Before us, petitioner assigns as errors the following: I. The respondent Court of Appeals gravely erred in declaring that the case was already ripe for pre-trial conference when the trial court set it for the holding thereof. II. The respondent Court of Appeals gravely erred in affirming the decision of the trial court by relying on the ruling laid down by this Honorable Court in the case of Manchester Development Corporation v. Court of Appeals, 149 SCRA 562, and disregarding the doctrine laid down in the case of Sun Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274. III. The respondent Court of Appeals gravely erred in declaring that it would be useless and a waste of time to remand the case for further proceedings as defendant-appellant has no meritorious defense. We do not find any reversible error in the conclusion reached by the court a quo. Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last pleading, which was supposed to be the third-party defendant's answer has not been filed, the case is not yet ripe for pre-trial. This argument must fail on three points. First, the trial court asserted, and we agree, that no answer to the third party complaint is forthcoming as petitioner never initiated the service of summons on the third party defendant. The court further said: . . . Defendant's claim that it was not aware of the Order admitting the third-party complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides: Completeness of service . . . Service by registered mail is complete upon actual receipt by the addressee, but if he fails to claim his mail from the post office within five (5) days from the date of first notice of the postmaster, service shall take effect at the expiration of such time. 9 Moreover, we observed that all copies of notices and orders issued by the court for petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to, he would appear in court despite supposed lack of notice.

Second, in the regular course of events, the third-party defendant's answer would have been regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just disregard the court's order to be present during the pre-trial and give a flimsy excuse, such as that the answer has yet to be filed. The pre-trial is mandatory in any action, the main objective being to simplify, abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character the Rules oblige not only the lawyers but the parties as well to appear for this purpose before the Court 10 and when a party fails to appear at a pre-trial conference he may be non-suited or considered as in default. 11 Records show that even at the very start, petitioner could have been declared as in default since it was not properly presented during the first scheduled pre-trial on September 29, 1988. Nothing in the record is attached which would show that petitioner's counsel had a special authority to act in behalf of his client other than as its lawyer. We have said that in those instances where a party may not himself be present at the pre-trial, and another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in substitution of the client's person, it is imperative for that representative or the lawyer to have "special authority" to enter into agreements which otherwise only the client has the capacity to make. 12 Third, the court of Appeals properly considered the third-party complaint as a mere scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the court a quo: A third-party complaint is one of the pleadings for which Clerks of court of Regional Trial Courts are mandated to collect docket fees pursuant to Section 5, Rule 141 of the Rules of Court. The record is bereft of any showing tha(t) the appellant paid the corresponding docket fees on its third-party complaint. Unless and until the corresponding docket fees are paid, the trial court would not acquire jurisdiction over the third-party complaint (Manchester Development Corporation vs. Court of Appeals, 149 SCRA 562). The third-party complaint was thus reduced to a mere scrap of paper not worthy of the trial court's attention. Hence, the trial court can and correctly set the case for pre-trial on the basis of the complaint, the answer and the answer to the counterclaim. 13 It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential pronouncements on the effect of non-payment of docket fees. 16 In previous cases, we have consistently ruled that the court cannot acquire jurisdiction over the subject matter of a case, unless the docket fees are paid. Moreover, the principle laid down in Manchester could have very well been applied in Sun Insurance. We then said: The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA 562 (1987)] could very well be applied in the present case. The pattern and the intent to defraud the government of the docket fee due it is obvious not only in the filing of the original complaint but also in the filing of the second amended complaint. xxx xxx xxx In the present case, a more liberal interpretation of the rules is called for considering that, unlike Manchester, private respondent demonstrated his willingness to abide by the rules by paying the additional docket fees as required. The promulgation of the decision in Manchester must have had that sobering influence on private respondent who thus paid the additional docket fee as ordered by the respondent court. It triggered his change of stance by manifesting his willingness to pay such additional docket fees as may be ordered. 17 Thus, we laid down the rules as follows: 1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or nature of the action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee within a reasonable time, but in no case beyond the applicable prescriptive or reglamentary period.

2. The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may also allow payment of said fee within a prescriptive or reglementary period. 3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and payment of the prescribed filing fee, but subsequently, the judgment awards a claim nor specified in the pleading, or if specified the same has not been left for determination by the court, the additional filing fee therefor shall constitute a lien on the judgment. It shall be the responsibility of the clerk of court or his duly authorized deputy to enforce said lien and assess and collect the additional fee. 18 It should be remembered that both in Manchester and Sun Insurance plaintiffs therein paid docket fees upon filing of their respective pleadings, although the amount tendered were found to be insufficient considering the amounts of the reliefs sought in their complaints. In the present case, petitioner did not and never attempted to pay the requisite docket fee. Neither is there any showing that petitioner even manifested to be given time to pay the requisite docket fee, as in fact it was not present during the scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce, it is as if the third-party complaint was never filed. Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal which were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet authorized by the insurance Commission to issue such bonds. The Insurance Code states that: Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. . . . (emphasis added) The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability, petitioner further asserts that the above provision is not applicable because the respondent allegedly had not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found by the trial court and which are on record. In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original action. 19 Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the respondent, reveals the following: Q. What are the conditions and terms of sales you extended to Sagum General Merchandise? A. First, we required him to submit to us Surety Bond to guaranty payment of the spare parts to be purchased. Then we sell to them on 90 days credit. Also, we required them to issue post-dated checks. Q. Did Sagum General merchandise comply with your surety bond requirement? A. Yes. They submitted to us and which we have accepted two surety bonds. Q Will you please present to us the aforesaid surety bonds? A. Interworld Assurance Corp. Surety Bond No. 0029 for P500,000 dated July 24, 1987 and Interworld Assurance Corp. Surety Bond No. 0037 for P1,000.000 dated October 7, 1987. 20 Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices addressed to Sagum General Merchandise proving that parts were purchased, delivered and received. On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond when it did is an admission of fraud committed against respondent. No person can claim benefit from the wrong he himself

committed. A representation made is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. 22 WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the petition before them and affirming the decision of the trial court and its order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is DISMISSED for lack of merit. SO ORDERED. Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.