G.R. No. 130886 - January 29, 2004 - COMMONWEALTH INSURANCE CORPORATION, Petitioner, v. COURT OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION, Respondents.
[G.R. No. 130886 : January
COMMONWEALTH INSURANCE CORPORATION, Petitioner, v. COURT OF APPEALS and RIZAL COMMERCIAL BANKING
D E C I S I O N
Before us is a petition for review on certiorari assailing the Decision1 of the Court of Appeals (CA),
promulgated on May 16, 1997 in CA-G.R. CV No.
which modified the decision dated March 5, 1993 of the Regional Trial Court of
Makati (Branch 64); and the Resolution3 dated September 25, 1997, denying petitioners motion for reconsideration.
The facts of the case as summarized by the Court of Appeals are
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation
(RCBC) granted two export loan lines, one, for
P2,500,000.00 to Jigs
Manufacturing Corporation (JIGS) and, the other, for P1,000,000.00 to
Elba Industries, Inc. (ELBA). JIGS and ELBA which are sister corporations both
drew from their respective credit lines, the former in the amount of P2,499,992.00
and the latter for P998,033.37 plus P478,985.05 from the
case-to-case basis and trust receipts. These loans were evidenced by promissory
notes (Exhibits A to L, inclusive JIGS; Exhibits V to BB, inclusive
ELBA) and secured by surety bonds (Exhibits M to Q inclusive JIGS;
Exhibits CC to FF, inclusive ELBA) executed by defendant-appellee
Commonwealth Insurance Company (CIC).
Specifically, the surety bonds issued by appellee CIC in favor of
appellant RCBC to secure the obligations of JIGS totaled
while that securing ELBAs obligation was P1,570,000.00. Hence, the
total face value of the surety bonds issued by appellee CIC was P4,464,128.00.
JIGS and ELBA defaulted in the payment of their respective loans.
On October 30, 1984, appellant RCBC made a written demand (Exhibit N) on
appellee CIC to pay JIGs account to the full extend (sic) of the suretyship. A
similar demand (Exhibit O) was made on December 17, 1984 for appellee CIC to
pay ELBAs account to the full extend (sic) of the suretyship. In response to
those demands, appellee CIC made several payments from February 25, 1985 to
February 10, 1988 in the total amount of
P2,000,000.00. There having
been a substantial balance unpaid, appellant RCBC made a final demand for
payment (Exhibit P) on July 7, 1988 upon appellee CIC but the latter ignored
it. Thus, appellant RCBC filed the Complaint for a Sum of Money on September
19, 1988 against appellee CIC.4
The trial court rendered a decision dated March 5, 1993, the
dispositive portion of which reads as follows:
WHEREFORE, premises considered, in the light of the above facts,
arguments, discussion, and more important, the law and jurisprudence, the Court
finds the defendants Commonwealth Insurance Co. and defaulted third party
defendants Jigs Manufacturing Corporation, Elba Industries and Iluminada de
Guzman solidarily liable to pay herein plaintiff Rizal Commercial Banking
Corporation the sum of Two
Hundred Sixty-Four Thousand One Hundred Twenty-Eight Pesos (P2,464,128.00),
pay the plaintiff attorneys fees of P10,000.00 and to pay the costs of suit.
IT IS SO ORDERED.5
Not satisfied with the trial courts decision, RCBC filed a
motion for reconsideration praying that in addition to the principal sum of
defendant CIC be held liable to pay interests thereon from date of demand at
the rate of 12% per annum until the same is fully paid. However, the trial
court denied the motion.
RCBC then appealed to the Court of Appeals.
On May 16, 1997, the CA rendered the herein assailed decision,
Being solidarily bound, a suretys obligation is primary so that
according to Art. 1216 of the Civil Code, he can be sued alone for the entire
obligation. However, one very important characteristic of this contract is the
fact that a suretys liability shall be limited to the amount of the bond (Sec.
176, Insurance Code). This does not mean however that even if he defaults in
the performance of his obligation, the extend (sic) of his liability remains to
be the amount of the bond. If he pays his obligation at maturity upon demand,
then, he cannot be made to pay more than the amount of the bond. But if he
fails or refuses without justifiable cause to pay his obligation upon a valid
demand so that he is in mora solvendi (Art. 1169, CC),
then he must pay damages
or interest in consequence thereof according to Art. 1170. Even if this
interest is in excess of the amount of the bond, the defaulting surety is
liable according to settled jurisprudence.
Appellant RCBC contends that when appellee CIC failed to pay the
obligation upon extrajudicial demand, it incurred in delay in consequence of
which it became liable to pay legal interest. The obligation to pay such
interest does not arise from the contract of suretyship but from law as a
result of delay or mora. Such an interest is not, therefore, covered by the
limitation of appellees liability expressed in the contract. Appellee CIC
refutes this argument stating that since the surety bonds expressly state that
its liability shall in no case exceed the amount stated therein, then that
stipulation controls. Therefore, it cannot be made to assume an obligation more
than what it secured to pay.
The contention of appellant RCBC is correct because it is supported
by Arts. 1169 and 1170 of the Civil Code and the case of Asia Surety &
Insurance Co., Inc. and Manila Surety & Fidelity Co. supra. On the
other hand, the position of appellee CIC which upholds the appealed decision is
untenable. The best way to show the untenability of this argument is to give
this hypothetical case situation: Surety issued a bond for P1 million to secure
a Debtors obligation of P1 million to Creditor. Debtor defaults and Creditor
demands payment from Surety. If the theory of appellee and the lower court is
correct, then the Surety may just as well not pay and use the P1 million in the
meantime. It can choose to pay only after several years after all, his
liability can never exceed P1 million. That would be absurd and the law could
not have intended it.6 (Emphasis supplied)
and disposed of the case as follows:
WHEREFORE, the appealed Decision is MODIFIED in the manner
The appellee Commonwealth Insurance Company shall pay the appellant
Rizal Commercial Banking Corporation:
1. On the account of JIGS,
P2,894,128.00 ONLY with 12% legal
interest per annum from October 30, 1984 minus payments made by the latter to
the former after that date; and on the account of ELBA, P1,570,000.00
ONLY with 12% legal interest per annum from December 17, 1984 minus payments
made by the latter to the former after that day; respecting in both accounts
the applications of payment made by appellant RCBC on appellee CICs payments;
2. Defendant-appellee Commonwealth Insurance Company shall pay
plaintiff-appellant RIZAL COMMERCIAL BANKING CORP. and (sic) attorneys fee of
and cost of this suit;
3. The third-party defendants JIGS MANUFACTURING CORPORATION, ELBA
INDUSTRIES and ILUMINADA N. DE GUZMAN shall respectively indemnify COMMONWEALTH
INSURANCE CORPORATION for whatever it had paid and shall pay to RIZAL
COMMERCIAL BANKING CORPORATION of their respective individual obligations
pursuant to this decision.
CIC filed a motion for reconsideration but the CA denied the
Hence, herein petition by CIC raising a single assignment of
error, to wit:
Respondent Court of Appeals grievously erred in ordering petitioner
to pay respondent RCBC the amount of the surety bonds plus legal interest of
12% per annum minus payments made by the petitioner.8
The sole issue is whether or not petitioner should be held liable
to pay legal interest over and above its principal obligation under the surety
bonds issued by it.
Petitioner argues that it should not be made to pay interest
because its issuance of the surety bonds was made on the condition that its
liability shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioners argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co.9 and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc.10,
and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc. 11, we have sustained the principle that if a surety upon demand fails to pay, he
can be held liable for interest, even if in thus paying, its liability becomes
more than the principal obligation. The increased liability is not because of
the contract but because of the default and the necessity of judicial
Petitioners liability under the suretyship contract is different
from its liability under the law. There is no question that as a surety,
petitioner should not be made to pay more than its assumed obligation under the
surety bonds.13 However, it is clear from the above-cited jurisprudence that petitioners
liability for the payment of interest is not by reason of the suretyship
agreement itself but because of the delay in the payment of its obligation
under the said agreement.
Petitioner admits having incurred in delay.
Nonetheless, it insists that mere delay does
not warrant the payment of interest.
Citing Section 244 of the Insurance Code,14 petitioner submits that under the said provision of law, interest shall accrue
only when the delay or refusal to pay is unreasonable; that the delay in the
payment of its obligation is not unreasonable because such delay was brought
about by negotiations being made with RCBC for the amicable settlement of the
We are not convinced.
It is not disputed that out of the principal sum of
petitioner was only able to pay P2,000,000.00. Letters demanding the
payment of the respective obligations of JIGS and ELBA were initially sent by
RCBC to petitioner on October 30, 198415 and December 17, 1984.16 Petitioner made payments on an installment basis spanning a period of almost
three years, i.e., from February 25, 1985 until February 10, 1988.
On July 7, 1988, or after a period of almost
five months from its last payment, RCBC, thru its legal counsel, sent a final
letter of demand asking petitioner to pay the remaining balance of its
obligation including interest.17 Petitioner failed to pay.
As of the
date of the filing of the complaint on September 19, 1988, petitioner was even
unable to pay the remaining balance of P2,464,128.00 out of the principal
amount it owes RCBC.
Petitioners contention that what prevented it from paying its
obligation to RCBC is the fact that the latter insisted on imposing interest
and penalties over and above the principal sum it seeks to recover is not
plausible. Considering that petitioner admits its obligation to pay the
principal amount, then it should have paid the remaining balance of
notwithstanding any disagreements with RCBC regarding the payment of interest.
The fact that the negotiations for the settlement of petitioners obligation
did not push through does not excuse it from paying the principal sum due to
The issue of petitioners payment of interest is a matter that is
totally different from its obligation to pay the principal amount covered by
the surety bonds it issued. Petitioner offered no valid excuse for not paying
the balance of its principal obligation when demanded by RCBC. Its failure to
pay is, therefore, unreasonable. Thus, we find no error in the appellate
courts ruling that petitioner is liable to pay interest.
As to the rate of interest, we do not agree with petitioners
contention that the rate should be 6% per annum. The appellate court is correct
in imposing 12% interest.
It is in
accordance with our ruling in Eastern Shipping Lines, Inc. vs. Court of
Appeals,18 wherein we have established certain guidelines in awarding interest in the
concept of actual and compensatory damages, to wit:
I.When an obligation,
regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining
the measure of recoverable damages.
particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as
obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e. from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2.When an obligation, not
constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3.When the judgment of
the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.19 (Emphasis supplied)
In the present case, there is no dispute that petitioners
obligation consists of a loan or forbearance of money. No interest has been
agreed upon in writing between petitioner and respondent.
Applying the above-quoted rule to the present
case, the Court of Appeals correctly imposed the rate of interest at 12% per
annum to be computed from the time the extra-judicial demand was made. This is
in accordance with the provisions of Article 116920 of the Civil Code and of the settled rule that where there has been an
extra-judicial demand before action for performance was filed, interest on the
amount due begins to run not from the date of the filing of the complaint but
from the date of such extra-judicial demand.21 RCBCs extra-judicial demand for the payment of JIGS obligation was made on
October 30, 1984; while the extra-judicial demand for the payment of ELBAs
obligation was made on December 17, 1984.
On the other hand, the complaint for a sum of money was filed by RCBC
with the trial court only on September 19, 1988.
WHEREFORE, the instant
petition is DENIED and the
assailed Decision and Resolution of the Court of Appeals are AFFIRMED in toto.
Puno, (Chairman), Quisumbing, Callejo, Sr., and Tinga, JJ., concur.
1 Penned by Justice Hilarion L. Aquino, concurred in by Justices Eubulo G.
Verzola and Portia Alio-Hormachuelos.
2 Entitled, Rizal Commercial Banking Corporation, plaintiff-appellant, v. Commonwealth Insurance Company,
defendant-Appellee, Commonwealth, third-party plaintiff, v. Jigs Manufacturing Corp., et al., third-party defendants.
5 Original Records, p. 334.
9 43 Phil. 852, 859 (1922).
10 100 Phil. 679, 681-682 (1957).
11 354 SCRA 285, 289 (2001).
13 Section 176, Insurance Code.
14 Sec. 244. In case of any litigation for the enforcement of any policy or
contract of insurance, it shall be the duty of the Commissioner or the Court,
as the case may be, to make a finding as to whether the payment of the claim of
the insured has been unreasonably denied or withheld; and in the affirmative
case, the insurance company shall be adjudged to pay damages which shall
consist of attorneys fees and other expenses incurred by the insured person by
reason of such unreasonable denial or withholding of payment plus interest of
twice the ceiling prescribed by the Monetary Board of the amount of the claim
due the insured, from the date following the time prescribed in section two
hundred forty-two or in section two hundred forty-three, as the case may be,
until the claim is fully satisfied; Provided, That the failure to pay
any such claim within the time prescribed in said sections shall be considered
prima facie evidence of unreasonable delay in payment.
15 Exhibit N, Original Records, p. 33.
16 Exhibit O, Original Records, p. 34.
17 Exhibit P, Original Records, p. 35.
20 Article 1169.
Those obliged to deliver
or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
21 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines,
1991 Reprint, Vol. IV, p. 103; Padilla, Civil Code Annotated, 1987 Edition,
Vol. IV, p. 61.
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