November 2005 - Philippine Supreme Court Decisions/Resolutions
G.R. No. 139290 - Trade and Investment Development Corporation of the Philippines v. Roblett Industrial Construction Corporation, et al.
[G.R. NO. 139290 November 11, 2005]
TRADE & INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES (Formerly Philippine Export & Foreign Loan Guarantee Corporation, Petitioner, v. ROBLETT INDUSTRIAL CONSTRUCTION CORPORATION, ROBERTO G. ABIERA, LETICIA ABIERA, and PARAMOUNT INSURANCE CORPORATION, Respondents.
D E C I S I O N
The central issue in this case is whether respondent Paramount Insurance Corporation (Paramount) is liable as surety to petitioner Philippine Export and Foreign
Loan Guarantee Corporation1 (Philguarantee), under a surety bond (Surety Bond) dated 12 March 1984. This Surety Bond was one of a series of undertakings involving several parties, occasioned by the bid of respondent Roblett Industrial Construction Corporation (Roblett) for a Kuwaiti government contract. The assailed ruling of the Court of Appeals (CA) discharged Paramount from its liability on the Surety Bond. Yet Paramount's liability is established under the terms of the Surety Bond. We reverse.
The facts, as culled from the records, follow.
As the general contractor of the Kuwait National Petroleum Company (KNPC), Braun Transworld Corporation opened for bidding in 1984 a subcontract for the supply of skilled and semi-skilled workers for the Mina Abdulla Refinery Modernization Project in the State of Kuwait. Among the interested bidders was respondent Roblett. To qualify as a bidder, Roblett was required to post a bid bond equivalent to 1% of its total proposed tender price or Kiwaiti Dinar (KD) 159,781.05.
Consequently, Roblett applied with the Bank of Kuwait and the Middle East (BKME) for a letter of guarantee to cover the said amount. BKME consented to the request on the condition that Roblett would obtain a counterguarantee to secure the letter of guarantee.
Roblett then requested from petitioner Philguarantee that the latter issue a counterguarantee in favor of BKME to fulfill the condition required by BKME. Petitioner consented and issued Letter Guarantee No. 84-035F2 on 13 March 1984 in an amount not to exceed KD 159,781.05 effective 19 March 1984 and expiring on 4 October 1984. However, the issuance of this counterguarantee was further conditioned upon the execution by Roblett and its Chairman and Treasurer3, of a Deed of Undertaking4 (Deed) in favor of petitioner.Under the terms of the Deed, Roblett bound itself to keep petitioner free and harmless from any damage or liability which may arise out of the issuance of its bid bond guarantee and to give their irrevocable consent and approval to any and all extensions of the period of the guarantee.
Furthermore, the Deed required that the counterguarantee be secured by "a surety bond or other acceptable liquid instrument (i.e., money market placements, certificates of deposit, CBCI's and other government securities) equivalent to 100% of the guarantee accommodation." Should the instrument be in the form of a surety bond, "the same must be issued by an insurance company acceptable to Philguarantee and must be coterminus with the guarantee to be issued."5
To comply with petitioner's requirement of a counterguarantee, Roblett obtained from Paramount, Surety Bond No. G - (16)48896 in the amount of
P11,775,611.35, the peso equivalent of petitioner's guarantee accommodation. The term of the Surety Bond was coterminous with petitioner's counterguarantee. The Surety Bond, which forms the crux of the present petition, reads in part:
That we, ROBLETT INDUSTRIAL CONSTRUCTION CORPORATION, as principal, and PARAMOUNT INSURANCE CORPORATION, as surety, are held and firmly bound unto Philippine Export and Foreign Loan Guarantee Corporation (PHILGUARANTEE) in the sum of
P11,775,611.35, Philippine Currency, for the payment of which, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents.
WHEREAS, PHILGUARANTEE approved principal's request for the issuance of bidder's bond the validity date of which extends up to October 4, 1984, in the amount of KUWAITI DINAR: ONE HUNDRED FIFTY NINE THOUSAND SEVEN HUNDRED EIGHTY ONE & 05/100 (KD159,781.05), in favor of the Bank of Kuwait and the Middle East, in relation to principal's project in Refinery Modernization/Mina Abdualla, Kuwait.
WHEREAS, in approving the aforementioned guarantee, PHILGUARANTEE required the principal to give a good and sufficient bond in the amount of
P11,775,611.35 as security for the prompt payment by principal to PHILGUARANTEE of whatever damages or liabilities PHILGUARANTEE may incur by virtue of its guarantee.
NOW, THEREFORE, if the Principal shall well and truly pay or reimburse PHILGUARANTEE for whatever damages or liabilities it may have incurred under and by virtue of its guarantee, then this obligation shall be null and void, otherwise, it shall remain in full force and effect.
The Expiry Date of this Surety Bond shall be co-terminus with the expiry date of the Guarantee referred to in the first Whereas Clause hereof, and said bond will be considered automatically cancelled ninety-one (91) days after its expiration.
However, should the Surety and Principal receive a written notice from PHILGUARANTEE stating that PHILGUARANTEE has been called upon by _(Bank of Kuwait and the Middle East)_ to extend the validity of the guarantee, the Surety hereby agrees that it will either pay PHILGUARANTEE the full amount outstanding under this Surety Bond, or extend this Surety Bond to a new maturity date specified by PHILGUARANTEE.
Surety further agrees to pay PHILGUARANTEE, interest at the rate of 18% per annum, on the amount paid by PHILGUARANTEE by virtue of _(LG No. 84-035F)_ and which is covered by this Surety Bond, from date of receipt by surety of PHILGUARANTEE's first demand letter up to the date of actual payment.7
In turn, Paramount required Roblett and its President, Baltazar F. Benlot, to execute an Indemnity Agreement8 in its favorto answer for whatever damages and liabilities it may suffer by virtue of its Surety Bond. This was accomplished on 12 March 1984, the same date the Surety Bond was issued.
Upon receipt of Paramount's bond on 13 March 1984, petitioner issued its letter guarantee to BKME effective 19 March 1984. Upon receipt thereof on 14 March 1984, BKME in turn, issued its bid bond by way of Letter of Guarantee No. LGKUW 840700309 in favor of KNPC, undertaking to pay the amount of the bid bond in behalf of Roblett at KNPC's first written request.
Roblett somehow had anticipated that it would be declared the winning bidder, and on that expectation, it made necessary preparations. Roblett wrote petitioner on 19 May 1984, requesting the issuance of another counterguarantee in favor of BKME to enable the latter to assure the issuance of the performance bond ostensibly to be required under the subcontract.10
In reply11 four days later, petitioner expressed its willingness to issue the counterguarantee for the performance bond subject to the usual requirements, among which is the Central Bank approval. Roblett then requested the Central Bank for the approval of the new counterguarantee.
As it expected, Roblett was awarded the subcontract on 27 June 1984, being the lowest bidder. The Subcontract Agreement12 was executed by Roblett and KNPC on 5 July 1984, the terms of which required Roblett to post within fourteen (14) days or until 19 July 1984, a performance bond in the amount corresponding to 10% of the monetary value of the subcontract, or US$4,576,900.00 or its equivalent in Kuwait Dinar.
Roblett's request for approval of the performance bond was already pending with the Central Bank at the time Roblett was formally awarded the bid. Yet, on 23 July 1984, the Central Bank wrote Roblett disapproving its application. The Central Bank considered the financial arrangements unacceptable in view of BKME's requirement that the Central Bank place a dollar time deposit in the amount of the performance bond as cash collateral.13 As a result, Roblett was not able to post the required performance bond.
Roblett was thus deemed by KNPC to have breached the subcontract. This development would bear a domino effect on the several undertakings executed by Roblett and its guarantors. First, BKME's bid bond was confiscated by KNPC even though such guarantee was constituted to secure Roblett's bid proposal. Next, BKME called on petitioner's counterguarantee on 29 July 1984.14 As petitioner's guarantee had been called upon, came its own turn to call upon its own guarantors, Roblett and Paramount. Petitioner first turned to Roblett for restitution.
In a letter15 dated 8 August 1984, petitioner informed Roblett of the demand by BKME calling in full the counterguarantee.
Roblett then made several repayment proposals to petitioner. In the meantime, Roblett twice applied for the extension of Paramount's surety bond from 4 October 1984 to 4 December 1984, thence to 5 March 1985.
Significantly, Paramount approved the extensions requested by Roblett.16
On 12 December 1984, petitioner paid the sum of KD 159,781.05 to BKME .
On 19 December 1984, petitioner through its then Vice-President, Jesus M. Tañedo, notified Paramount of the advance payment it had made to BKME in the amount of
P11,775,611.35, the peso equivalent of KD 159,781.05, as well as of Roblett's proposal to repay petitioner, and it requested confirmation by Paramount of its liability for Roblett's account. Said letter17 reads in part, to wit:
We hereby serve notice that PHILGUARANTEE advanced the peso equivalent of KD159,781.050 on 12 December 1984 and is also committed to advance the peso value of the KD 5,885.448 interest upon receipt of the Central Bank's authority to remit the interest payment.
Roblett has submitted a proposal to repay PHILGUARANTEE'S advance within a period of three (3) years with the condition that PIC shall continue to be liable to PHILGUARANTEE under the captioned surety bond. At present, we are still evaluating Roblett's proposal and as an adjunct to this process, it is imperative that we obtain PIC's continuing commitment.
In view of the foregoing premises therefore, please acknowledge/confirm PIC's liability for the advances that PHILGUARANTEE has made and will have to make for Roblett's account and PIC's commitment to repay such advances with interest thereon at 18% per annum upon demand by PHILGUARANTEE. (Emphasis supplied.)
In a letter18 dated 1 March 1985, Paramount confirmed its commitment under the Surety Bond to guarantee Roblett's repayment proposal. However, Paramount expressed its preference to issue a new bond to secure said repayment scheme. Said letter reads in part:
This is to confirm our commitment to undertake and guarantee the repayment proposal of our bounden principal, Roblett Industrial Construction Corporation under PIC Surety Bond No. G(16)4889 covering
P11,775,611.35, securing the KD 159,781.05 Bid Bond issued by Bank of Kuwait and the Middle East.
We understand that you have advanced the said peso equivalent, hence, your request for the conversion of our bond from Bidder's to Guaranty Payment. In our opinion, it is more appropriate for us to issue a separate guaranty payment bond to answer for the loan. We believe that it is against the bonding principles to guarantee two separate undertakings in one bond.
Please let us hear from you as to when you would like us to issue the bond.
On even date and without any indication of having received Paramount's letter, petitioner advised Paramount that it has advanced the peso equivalent of the amount of the bid bond plus interest thereon pursuant to the call of BKME on its counterguarantee, thereby serving upon Paramount its formal notice of demand against the latter's surety bond. Petitioner's letter19 reads in part:
We wish to advise you that on 12 December 1984 and 10 January 1985, PHILGUARANTEE advanced the peso equivalent of KD163,598.05 representing the principal (KD159,781.05) and interest (KD3,816.99) for the period from 06 August 1984 to 31 October 1984 of the called bid bond issued by the Bank of Kuwait and the Middle East.
Please consider this letter, therefore, as our formal notice of demand against your captioned bond. An interest of 18% per annum is charged on any unpaid amount of our claim. (Emphasis supplied)ςrαlαωlιbrαrÿ
Ten days later, or on 11 March 1985, petitioner again wrote Paramount, as follows:
We acknowledge receipt of your letter dated 01 March 1985 confirming your commitment to fully guarantee the repayment proposal of RICC covering PHILGUARANTEE'S advances relative to the bid bond guarantee which was called by the Bank of Kuwait and the Middle East. Until the above arrangement, however, is in place and your firm has issued the new bond, our demand on the captioned bond remains outstanding together with 18% interest.
We shall advise you the terms of the new bond and when to issue after clarifying some details in PICC's repayment plan.20
This apparently was the last time Paramount heard from petitioner for a long while. Four (4) years of negotiations between Roblett and petitioner on the repayment proposals proved fruitless. Then, petitioner sent Roblett a letter21 dated 8 March 1990 reminding the latter of its outstanding account and further informing it that petitioner shall take legal action in connection therewith.
Thereafter, petitioner filed a complaint22 against both Roblett and Paramount with the Regional Trial Court (RTC) of Makati on 5 June 1990. Petitioner sought payment from Roblett of the amount of
P29,804,831.03 representing the total amounts advanced by petitioner for the guaranteed obligation of Roblett, inclusive of interest at the rate of 16% per annum and penalty charges at the rate of 16% per annum computed as of 16 March 1990 pursuant to the Deed. Petitioner also sought payment from Paramount as surety to the extent of the amount under the Surety Bond which is P11,775,611.35 of the P29,804,831.03 owed by Roblett, plus interest of 18% per annum computed from its receipt of petitioner's first demand letter until actual payment. Petitioner also sought payment of 10% of the total amount as attorney's fees pursuant to the Deed.
In its Answer,23 Paramount filed a counterclaim for attorney's fees and costs of suit against petitioner, as well as a crossclaim against Roblett pursuant to the Indemnity Agreement. It also filed third-party complaints24 against several defendants who were later declared in default.25
Both Roblett and Paramount denied they were liable to petitioner. On Roblett's part, it argued that petitioner's issuance of the counterguarantee was subject to the Central Bank's approval, a suspensive condition the non-fulfillment of which did not give rise to an obligation between the parties. It further contended that since the condition depended entirely on the will of a third person, the Central Bank, which cannot be compelled to carry it out, its obligation under the contract is deemed complied with if it does all that is in its power and it is then incumbent on the other party to comply with the terms of the contract. It added that BKME's requirement for Central Bank to put up a dollar deposit was beyond its control and contemplation, thus invoking Art. 1267 of the Civil Code26 as ground for releasing them from the obligation.
On the other hand, Paramount contended that Roblett's obligations under the subcontract were to be covered by the performance bond. It characterized the bond it had issued as a bidder's bond and not a performance bond which did not guarantee Roblett's performance on the subcontract with KNPC. Even assuming that it was liable on its bond, Paramount argued that no call was timely made thereon during the original period of the bond. It opined that although the claim made against the same was within the extended period of the effectivity of the bond, the extensions were obtained by petitioner and Roblett through misrepresentation and material concealment of facts. It claimed that it was never informed of the award of the subcontract to Roblett, its subsequent breach thereof, and BKME's previous call on the counterguarantee, thereby rendering the extensions invalid. Had it known of the foregoing developments, it claimed it would not have agreed to the extensions.
Paramount also insisted that Roblett entered into a repayment/restructuring agreement with petitioner without its consent. Said agreement allegedly amounted to a material novation of the principal obligation, thereby releasing Paramount from any liability under its bond.
After trial, the trial court found the complaint meritorious and rendered its decision27 on 10 September 1993, finding all the respondents liable to petitioner. The dispositive portion of the decision reads, thus:
"Premises considered, judgment is rendered as follows:
a) ordering defendants Roblett, the Abieras and Paramount jointly and severally liable to pay plaintiff the amount of
P11,775,611.25 plus legal interest from 05 June 1990 until fully paid;
b) ordering defendants Roblett and the Abieras jointly and severally liable to pay plaintiff the amount of
P18,029,219.78 plus legal interest from 5 June 1990 until fully paid;
c) ordering defendants Roblett, the Abierras and Paramount jointly and severally liable to pay plaintiff
P100,000.00 as attorney's fees and the costs of this suit;
d) ordering Roblett and Benlot jointly and severally to reimburse Paramount the full amount it paid plaintiff including all interests, attorney's fees and the costs; andcralawlibrary
e) ordering third party defendants Eurasia and Cutaran to pay liable to pay the amount of
P6,211,162.20 representing unremitted premiums plus legal interest from 3 September 1991 until fully paid and the amount of P25,000 as reasonable attorney's fees. The filing fee which third party plaintiff failed to pay shall constitute a lien on the judgment amount."28
From this decision, Paramount and Roblett appealed via ordinary appeal under Rule 41 of the Rules of Court.29
On 30 June 1999, the Court of Appeals rendered its Decision30 affirming the trial court's judgment except in three respects.
Contrary to the RTC's conclusion, the Court of Appeals ruled that Paramount's bond expired on 4 October 1984 without any claim having been made thereon. The Court of Appeals found that the two extensions referred to by petitioner were invalid. The appellate court also ruled that it was petitioner which failed to refute Paramount's charges of concealment and fraudulent misrepresentation on petitioner's part, thereby bolstering Paramount's position that material facts were indeed concealed from it, thus rendering the extensions invalid. The appellate court concluded that formal demand was made by petitioner only on 5 March 1985 which was beyond the effectivity of Paramount's Surety Bond.
Second, the appellate court ruled that the trial court failed to justify its award of attorney's fees in the body of its decision, making the same improper. It also stressed the policy against putting a premium on the right to litigate and accordingly deleted the award of attorney's fees against all defendants, including third-party defendants.
Third, the appellate court clarified the legal interest awarded by the trial court to be at the rate of 6% per annum to distinguish it from legal interest on loan at 12% per annum.
Hence, this petition.
It is well to note that since only petitioner appealed the Decision of the appellate court, the same has become final and executory as to Roblett and the other parties to the case, save for Paramount, and in that respect it shall not be disturbed by this Court. Thus, the issues herein, as raised by petitioner, may be summarized as follows: (a) whether or not respondent Paramount is liable to petitioner under its Surety Bond; (b) whether the stipulated interest rate of 16% per annum under the Deed should be applied on the advances made by petitioner to BKME instead of 6% per annum as ordered by the appellate court; (c) whether or not the respondents are liable to pay the penalty charge of 16% per annum as stipulated in the Deed; and (d) whether or not petitioner is entitled to attorney's fees.
We first consider Paramount's liability on the Surety Bond. Both the trial court and the appellate court ruled that what Paramount issued was a surety bond and by the terms thereof, it bound itself as surety to pay petitioner whatever damages or liabilities the latter may incur by virtue of the counterguarantee.
Anent the first issue, Paramount again contends that the bond it issued was in the nature of a bidder's bond and not a performance bond. Since Roblett's obligations under the subcontract should have been covered by a performance bond, Paramount's bidder's bond cannot be called upon to answer for Roblett's default under the subcontract. And assuming that Paramount was liable, no claim was made against it during the effectivity of the Surety Bond.
There is persistent reliance by Paramount on the conceptual difference between a bidder's bond and a performance bond. It argues that when the subcontract was awarded to and was entered into by Roblett, its liability on the Surety Bond, which was actually a bidder's bond, already ceased.
We are not persuaded.
In Eastern Assurance & Surety Corporation v. Intermediate Appellate Court,31 this Court had occasion to distinguish between a proposal or bid bond and a performance bond. Thus, we held:
A proposal or bid bond has for its purpose to assure the owner of the project 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.
However, we find this distinction ultimately irrelevant in the case at bar. A perusal of the Surety Bond reveals that Paramount bound itself jointly and severally with Roblett to pay petitioner to the extent of
P11,775,611.35 whatever damages and liabilities the latter may incur by virtue of its guarantee. This liability on the part of Paramount obtains upon the occurrence of one condition: that petitioner's counterguarantee be called upon by BKME. What is actually secured by Paramount's bond is not Roblett's bid with KNPC, but rather the guarantee put up by petitioner to secure BKME's bidder's bond. Paramount's Surety Bond guarantees indemnification to petitioner for whatever it may pay by virtue of its counterguarantee. Time and again, we have ruled that the liability of a surety is determined strictly on the basis of the terms and conditions set out in the surety agreement.32 Hence, we need not look beyond the contract to determine the nature and scope of Paramount's undertaking.
There is no doubt that the event insured against by the Surety Bond, the call on petitioner's guarantee by BKME, occurred on 29 July 1984 well within the effectivity of the Surety Bond. There is also no dispute that petitioner informed Roblett of BKME's call on 8 August 1984, likewise within the lifetime of the Surety Bond. But still to be resolved are whether Paramount was properly notified of this call by petitioner and whether a timely demand was made against the Surety Bond.
Undoubtedly, the exercise involves an examination of facts which is normally beyond the ambit of the Court's functions under Rule 45 of the Revised Rules of Court for it is a well-settled rule that this Court is not a trier of facts and the findings of facts of the Court of Appeals are conclusive and binding on the Court. However, it is equally well-settled that this rule admits of exceptions,33 such as when the findings of facts of the appellate court are contrary to those of the trial court's. Obviously, the exception is present given the diverse rulings of the RTC and the Court of Appeals as to Paramount's liability.
According to Paramount, petitioner concealed the fact of BKME's call on its guarantee and instead sought an extension of the effectivity of the Surety Bond in its letter dated 19 December 1984. While Paramount acceded to this request of petitioner, the former characterizes such reply as "innocen[t]."
In the Court's view, the letter dated 19 December 1984 sufficiently apprised Paramount that a call had been made on petitioner's guarantee. It is noteworthy to restate the pertinent parts thereof:
We hereby serve notice that PHILGUARANTEE advanced the peso equivalent of KD159,781.050 on 12 December 1984 and is also committed to advance the peso value of the KD5,885.448 interest upon receipt of the Central Bank's authority to remit the interest payment.
Roblett has submitted a proposal to repay PHILGUARANTEE's advance within a period of three (3) years with the condition that PIC shall continue to be liable to PHILGUARANTEE under the captioned surety bond. At present, we are still evaluating Roblett's proposal and as an adjunct to this process, it is imperative that we obtain PIC's continuing commitment.
In view of the foregoing premises therefore, please acknowledge/confirm PIC's liability for the advances that PHILGUARANTEE has made and will have to make for Roblett's account and PIC's commitment to repay such advances with interest thereon at 18% per annum upon demand by PHILGUARANTEE.34
It is clear that the letter sufficiently notifies Paramount that petitioner was called upon by BKME to answer to its counterguarantee on the bid bond, for then why else would petitioner advance the exact amount of the bid bond to BKME? Certainly, it was unnecessary for petitioner to put the exact words therein in order for Paramount, an insurance company experienced in these transactions, to understand that a call had in fact been made.
The letter of 19 December 1984 was not only sufficient written notice to Paramount of BKME's call on petitioner's guarantee, it was made by petitioner before the expiration of the Surety Bond as well. Again, we refer to the terms of the Bond:
The Expiry Date of this Surety Bond shall be co-terminus with the expiry date of the Guarantee referred to in the first Whereas Clause thereof and said bond will be considered automatically cancelled ninety-one (91) days after its expiration.35
The original expiry date of the Surety Bond as provided in the first Whereas Clause was 4 October 1984. BKME's call on petitioner's counterguarantee was made on 29 July 1984. Petitioner informed Roblett of BKME's call as early as 8 August 1984. Thus, the event that Paramount guaranteed against as surety had already occurred before the expiration of the Surety Bond.
Note that petitioner notified Paramount of BKME's call on 19 December 1984, which according to Paramount, was beyond the Bond's expiry date. Yet it is clear from the terms of the Agreement that the Bond is not automatically cancelled simultaneously with the expiration of the term. Instead, a 91-day period from the date of the expiration of the term is allotted before the bond can be deemed cancelled.
There is a purposive distinction between the lifetime of the guarantee period and the lifetime of the bond itself. The former governs as to the event insured against, which must occur within the term of the bond. On the other hand, the lifetime of the bond itself, which extends to 91 days from the expiration of the term, affords the opportunity for the insured to make the necessary notice and or call on the bond. Such an arrangement is especially useful for circumstances such as when the event insured against occurs just days prior to the expiration of the term. The surety cannot reasonably be expected to be notified of such an event on the same day, or even days after the occurrence of the event. The 91-day period offers ample opportunity for the insured to notify the insurer of any possible claims on the bond. Thus, the above stipulation is clear that petitioner had 91 days from 4 October 1984 within which to claim against the Surety Bond before the same is automatically cancelled. This, petitioner accomplished, since its notice of payment was made only seventy-six (76) days from 4 October 1984.
It is thus that Paramount's obligations as a surety had become due and demandable, as the Surety Bond had become enforceable against it upon the occurrence of the conditions stated therein. What then are these obligations of Paramount?cralawlibrary
Under the terms of the Surety Bond, Paramount bound itself to perform either of two obligations upon receipt of petitioner's notice. The first one is to pay petitioner the full amount of the Bond. The second is to extend the Bond to a new maturity date specified by petitioner.
However, in its reply to petitioner dated 1 March 1984 Paramount proposed instead a third option not provided for in the Surety Bond to issue a new bond to answer for the repayment scheme of Roblett. Said letter reads in part, thus:
We understand that you have advanced the said peso equivalent, hence, your request for the conversion of our bond from Bidder's to Guaranty Payment. In our opinion, it is more appropriate for us to issue a separate guaranty payment bond to answer for the loan. We believe that it is against the bonding principles to guarantee two separate undertakings in one bond.
Please let us hear from you as to when you would like us to issue the bond.36
It is clear that Paramount, while acknowledging its liability under the Surety Bond, considered it more appropriate on its part to issue a new bond in view of the repayment proposal of Roblett, which would naturally contain terms different from the original surety agreement. Such an option may not have been provided for in the contract, but at its end, petitioner was, at the very least, amenable to this option. Nonetheless, it advised Paramount to wait for the negotiated terms before issuing the new bond. This is evident from its reply to Paramount dated 11 March 1985, to wit:
We acknowledge receipt of your letter dated 01 March 1985 confirming your commitment to fully guarantee the repayment proposal of RICC covering PHILGUARANTEE's advances relative to the bid bond guarantee which was called by the Bank of Kuwait and the Middle East. Until the above arrangement, however, is in place and your firm has issued the new bond, our demand on the captioned bond remains outstanding together with 18% interest.
We shall advise you the terms of the new bond and when to issue after clarifying some details in PICC's repayment plan.37
Still, it appears that petitioner never advised Paramount of the terms of the new bond. This was simply because Roblett's proposals did not materialize; thus, no terms were agreed upon for the issuance of a new bond.
It must be emphasized that pursuant to the Surety Bond, Paramount agreed, upon call of its Bond, to "either pay Philguarantee the full amount outstanding under this Surety Bond, or extend this Surety Bond to a new maturity date specified by Philguarantee." Paramount was not afforded the discretion to choose which among those two obligations to perform. At the same time, the second option the extension of the Bond to a new maturity date could only become viable should petitioner provide for a new maturity date. Since petitioner did not provide a new maturity date for the Bond, the obligation left for Paramount was to pay the full amount outstanding thereunder.
It is clear in petitioner's letter that its demand on Paramount subsisted "until the above arrangement, however, is in place and your firm has issued the new bond. '"38 Thus, Paramount cannot complain that four long years had passed before petitioner finally demanded payment from it.
As a surety, Paramount is liable to petitioner solidarily with Roblett. In Jeanette D. Molino v. Security Diners International Corporation,39 we held:
A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.40
As solidary debtors, it is not necessary that Roblett failed to pay before Paramount could be made liable. It is enough that petitioner demanded payment from Paramount for liability to attach. Article 1216 of the Civil Code provides:
The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.
Is there merit in Paramount's contention that it was acquitted of its obligations as a surety on account of alleged material novation when Roblett entered into a repayment/restructuring agreement with petitioner without its consent? We hold otherwise.
There is no proof that a new contract was ever perfected between the two parties. At best, only negotiations were had for Roblett to reimburse the advances made by petitioner to BKME. The testimony of petitioner's Vice-President, Jesus M. Tañedo, on cross-examination by Paramount's counsel, is enlightening, viz:
Q: Now, also among the documents which you identified was the letter dated December 19, 1984 addressed to defendant Paramount previously marked as Exh. "O". Do you recall that letter?cralawlibrary
A: Yes, sir.
Q: In the second paragraph of this letter, you state and I quote, "Roblett has submitted a proposal to repay Philguarantee's advance within a period of three (3) years with the condition that PIC shall continue to be liable to Philguarantee under the captioned surety bond". Now this proposal to be paid, was this a written proposal?cralawlibrary
A: I cannot recall right now, sir.
. . . .
Q: Your referral here therefore to a proposal does this proposal have specific terms and conditions?cralawlibrary
A: If I may describe the situation prevailing at that time. As soon as the bond was called, there was an effort, Your Honor, to talk or to negotiate to the Kuwaite [sic] Government to refund the money which Philguarantee had paid to Kuwait, citing favorable relations between two (2) countries, PNOC was a large buyer of Kuwaite [sic] oil so that effort was on going, also Roblett officials (sic) regularly getting in touch with us updating what was going on. The scenario, Your Honor, was that they say, our first alternative of paying Petitioner is to be able to get the money back from the Kuwaite [sic] Government and give it back to you and if that option does not work out, we pay Philguarantee over a period of three (3) years from earnings from our overseas projects but they could not at that time, to my best recollection, formalize that because they did not have the contract itself, it would have been a hollow proposal for them to be able to say this amortization would be coming from this contract. To the best of my recollection, they were making these verbal assurances that they will pay but they could not pin it down yet at that time because the contracts were not existent yet at that time.
. . . .
Q: Now, I noticed that after the letter of March 11, 1985, the next communication relating to the matter comes almost 5 years later in the letter dated March 8, 1990. Do you agree to that?cralawlibrary
A: Between Philguarantee and Roblett, yes.
Q: In the third paragraph of this letter which states and I quote, "Please note that more than four (4) years had passed since we started with the rehabilitation exercise of your firm. The start of your repayment proposal has been deferred a number of times and Philguarantee is not in a position to wait endlessly for Roblett's promised settlement." Do you confirm what is contained in this letter?cralawlibrary
A: Yes, sir.
Q: With this statement that the start of the repayment proposal has been deferred a number of time (sic), are we correct in taking this to mean that this refers to a specific proposal for a term of payment?cralawlibrary
A: No, sir. The negotiations or discussions for restructuring even at this point in time were still discussions, the whole frustration of Philguarantee's part was that, we have given the firm so much time for four (4) years but the firm had not yet been able to come up with substantial projects to be able to repay Philguarantee even at this point in time, the firm kept on presenting us with cash loan projections but they were all academic because there were no projects, there were no contracts to back up this projection.
. . . .
Q: And when you state here that you were merely clarifying, "some details" this seems to imply that there were already some terms and conditions which you were already agreed (sic) is that correct?cralawlibrary
A: Imply, yes, sir.
Q: What were those terms and conditions that were already hear (sic) to you as unacceptable (sic) mode of your payment by defendant Roblett?cralawlibrary
A: They were specific projects, sub-contract of Roblett fairly substantial which if they won, under certain substantial (sic) they would be able to repay.41
Clearly, no definite agreement arose out of the negotiations between Roblett and petitioner so that there could not have been any new contract which can be considered to have substituted the original one between them. Hence, there could be no material novation to speak of.
There being a valid claim made by petitioner during the original lifetime of the Surety Bond, Paramount cannot escape liability thereon. It is therefore unnecessary to delve into the validity of the subsequent extensions of the period of the Surety Bond.
Next, the issue on the applicable rate of interest on the advances made by petitioner to BKME.
In its award, the trial court adjudged the interest to be paid on top of the principal obligations of respondents to be the legal interest without specifying any rate. In its assailed decision, the appellate court clarified the legal interest to be 6% per annum to distinguish it from 12% per annum on loans. Petitioner now questions the same and argues that the rate of interest awarded should have been 16% per annum as provided under the Deed, or at the very least, 12% since the obligation in question is a forebearance of money.
To clarify, the trial court's reference to legal interest may only mean either of two things: 6% or 12% per annum. In Eastern Shipping Lines, Inc. v. Court of Appeals,42 this Court laid down the following rules with respect to the manner of computing legal interest:
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.
II. With regard 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 follows:
1. When the 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 so 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 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.43
It is obvious that the obligation herein is one for the payment of a sum of money for which the rate of interest has been stipulated by the parties. It was error on the part of the appellate court to peg the interest rate at 6% per annum when there had been a valid stipulation on interest in the contracts in question.
As to the interest rate on Roblett's obligations, the Deed provides:
6. Should PHILGUARANTEE be required to proportionately advance for the guaranteed and/or counterguaranteed obligations, then such advances shall be subject to the following charges:
a) On amount advanced or portions thereof remaining unpaid for fifteen (15) days or less:
i. One time service charge of 2% of amount advanced, same to be included in the receivable account.
ii. Interest at 16% per annum.
iii. No penalty charge.
b) On amount advanced or portions thereof remaining unpaid for more than fifteen (15) days:
i. Same as a.i. on the preceding paragraph;
ii. Same as a.ii. above; andcralawlibrary
iii. Penalty charge of 16% per annum compounded monthly computed from date the account becomes liable to this charge.
However, whatever amount may be advanced by PHILGUARANTEE arising out of the guarantee and/or counterguarantee shall be subject to whatever interest rate and penalty charges that are effective at the time each advance is made.44
Meanwhile, the Surety Bond specifically provides for an interest rate of 18% per annum to be paid by Paramount as surety, to wit:
Surety further agrees to pay PHILGUARANTEE, interest rate of 18% per annum, on the amount paid by PHILGUARANTEE by virtue of (0LG No. 84-035F) and which is covered by this Surety Bond, from date of receipt by surety of PHILGUARANTEE's first demand letter up to the date of actual payment.45
None of the parties questioned the validity of the above stipulations. Neither do we find the same illegal. Therefore, they must be upheld as the law between the parties, hence, valid and binding on them.46
From what date should the respective interests due from Paramount and Roblett commence? As to the principal amount of
P11,775,611.25, the RTC ruled that both Paramount and Roblett are liable on the interest from 5 June 1990, or the date of the filing of the complaint. The RTC further held Roblett and the Abieras liable for the amount of P18,029,219.78, which apparently represents interests and penalties
approximately due from the time petitioner made the advances to BKME.47 This was affirmed by the Court of Appeals. Since neither Roblett nor the Abieras filed a petition challenging the adverse rulings before this Court, this award of
P18,029,219.78 plus interest has become final as to them, and thus, beyond the scope of our review. However, petitioner questions the rate of interest to be paid thereon. The trial court did not specify the rate of legal interest to be paid thereon. The appellate court clarified the rate to be 6% per annum. Again, we disagree.
The amount of
P18,029,219.78 is not part of the principal debt but it represents rather the interest and penalty charges on the advances made by petitioner to BKME as of the time of filing of the complaint. Hence, the appropriate interest rate to be applied thereon is 12% per annum reckoned from the time of finality of judgment until fully paid as said amount constitutes a judgment award. Consequently, the 16% interest per annum, on the principal amount of P11,775,611.25 should commence on 5 June 1990, the date of the filing of the complaint.
As to Paramount, we affirm that the rate of interest on its obligation in favor of petitioner should commence from the date of judicial demand, or on 5 June 1990.
Admittedly, the record indicates that on 1 March 1984, petitioner made a formal notice of demand on the surety bond to Paramount.48 Ostensibly, interest on a monetary obligation that is due and demandable should commence from the time demand is first made, whether judicial or extra-judicial.49 Yet it is undisputed that the last communication received by Paramount from petitioner was its letter dated 11 March 1985 whereby it expressed openness to accepting a new bond from Paramount for Roblett's repayment scheme but advising it to wait for further instructions on the terms thereof before issuing the same. Apparently, this put Paramount's actions on hold. Although the obligation of Paramount had already arisen, the delay of four years in the performance thereof is attributable to the failure of Philguarantee to inform it of the developments in the negotiations with Roblett. Hence, it is but fair that interest for that period be not counted against Paramount as the delay cannot be said to have been caused by its downright refusal to pay petitioner. Instead, the interest should commence from the date of judicial demand, or on 5 June 1990.
Of course, legal interest of 12% per annum on the total amount shall be computed from the time of finality of judgment until fully paid, the interim period being deemed by then as equivalent to a forbearance of credit.
As to the penalty charges, the Deed clearly provides for a penalty charge of 16% per annum compounded monthly on the amount advanced by petitioner or portions thereof remaining unpaid for more than 15 days. Petitioner's advances on its counterguarantee have remained unpaid for more than 20 years. Obviously, the stipulation on penalty charges should apply. However, only Roblett and the Abieras are liable for penalty charges. Paramount cannot be held liable therefor as it is not a party to the Deed. Neither does the Surety Bond contain any stipulation for penalty charges.
As to the appellate court's award of legal interest of 6% per annum on the unremitted premiums on the Surety Bond, neither Paramount nor the third-party defendants Eurasia and Jose Cutaran appealed therefrom. Thus, we find no reason to disturb the award.
Anent the fourth and final issue, petitioner argues that the appellate court erred in deleting the award of attorney's fees in its favor in view of the provision in Annex A of the Deed for the imposition of 10% attorney's fees on the total guaranteed obligations once the account is endorsed to its Legal Counsel and legal action is actually accomplished.50 The appellate court pointed out that the text of the trial court's decision made no mention of attorney's fees and the award thereof to petitioner appears only in the dispositive portion. It then concluded that the same is improper and should be deleted.
The award of attorney's fees is the exception rather than the rule, and it must have some factual, legal and equitable bases.51 The stipulation on attorney's fees contained in the Deed constitutes what is known as a penal clause.52 The award of attorney's fees by the lower court, therefore, is not in the nature of an indemnity but rather a penalty in the form of liquidated damages in accordance with the contract between petitioner and Roblett. Such a stipulation has been upheld by this Court as binding between the parties so long as it does not contravene the law, morals, public order or public policy.53 Hence, it was improper for the appellate court to have deleted the award of attorney's fees to petitioner despite the express stipulation therefor contained in the Deed.
Nevertheless, the courts still have the power to reduce the amount of attorney's fees whether intended as an indemnity or a penalty, if the same is iniquitous or unconscionable.54
While indeed we have upheld the reasonableness of penalties in the form of attorney's fees consisting of ten percent (10%) of the principal debt plus interest, however, we make an exception in this case. The principal amount in the case at bar is
P11,775,611.35. At the time the complaint was filed in 1990, the amount had already ballooned to P29,804,831.03 inclusive of interest and penalty charges. Today, the interest alone runs roughly to P37 million, which is thrice as much as the principal debt. Consequently, ten percent (10%) of the principal debt plus interest and penalty charges would definitely exceed the principal amount, thus making the attorney's fees manifestly exorbitant. Accordingly, we reduce the same to ten percent (10%) of the principal debt only.
However, since Paramount is not privy to the Deed, it cannot be held liable for the attorney's fees as stipulated therein. Nonetheless, Paramount may still be made liable for a reasonable amount of attorney's fees pursuant not to the Deed but to Article 2208 of the Civil Code which adverts to instances when it is just and equitable that attorney's fees and expenses of litigation should be recovered.55 We deem it proper to hold Paramount jointly and severally liable with Roblett and the Abierras to pay petitioner reasonable attorney's fees to the extent of
P100,000.00 as ordered by the trial court.
WHEREFORE, premises considered, the petition is hereby GRANTED. The Decision of the Court of Appeals is REVERSED and the judgment of the Regional Trial Court is REINSTATED with the following modifications:
a) ordering respondents Roblett, the Abieras, and Paramount, jointly and severally, to pay petitioner Philguarantee the amount of
P11,775,611.25, with the following rates of interest and penalty charge, to wit:
i. for respondent Paramount, eighteen percent (18%) interest per annum from 5 June 1990 until fully paid;
ii. for respondents Roblett and the Abieras, sixteen percent (16%) interest per annum from 5 June 1990 until fully paid; and penalty charge of sixteen percent (16%) per annum compounded monthly from 5 June 1990 until fully paid;
b) ordering respondents Roblett and the Abieras, jointly and severally, to pay petitioner Philguarantee the amount of
P18,029,219.78 plus 12% interest thereon from the time of finality of judgment until fully paid;
c) ordering respondents Roblett and the Abieras, jointly and severally, to pay petitioner Philguarantee ten percent (10%) of
P11,775,611.25, as attorney's fees, plus the costs of suit;
d) ordering respondent Paramount, jointly and severally with respondents Roblett and the Abieras, to pay petitioner Philguarantee
P100,000.00 as reasonable attorney's fees;
e) ordering respondents Roblett and Benlot, jointly and severally, to reimburse respondent Paramount whatever amount it would pay petitioner Philguarantee including all interests, attorney's fees and the costs; andcralawlibrary
f) ordering all the respondents, jointly and severally, and the third-party defendants, also jointly and severally, to pay petitioner Philguarantee legal interest of 12% per annum on the judgment awards respectively against them from the time of finality of judgment until fully paid.
1 Philguarantee is a government-owned and -controlled corporation created in 1974 by virtue of Presidential Decree No. 550, its primary purpose being to guarantee foreign loans, in whole or in part, granted to any domestic entity, enterprise or corporation, majority of the capital of which is owned by Filipino citizens. It was later established in 1977 as Philippine Export and Foreign Loan Guarantee pursuant to Presidential Decree No. 1080. In 1998, it was renamed Trade and Investment Development Corporation (TIDCORP) and granted expanded functions by Republic Act No. 8494. The Corporation was officially designated as the Philippine Export-Import Credit Agency or PhilEXIM through Executive Order No. 85 dated 18 March 2002.
2 Records, p.12.
3 Respondent-spouses Roberto and Leticia Abiera, the Chairman and Treasurer of Roblett, respectively, signed as co-obligors under the Deed of Undertaking.
4 Supra note at 16-23.
5 Id. at 23.
6 Exhibit "2", Folder of Exhibits, pp. 682-683.
7 Id. at 682. Emphasis supplied, underscoring in the original.
8 Exhibit "e", id. at 684.
9 Supra note 2 at 11.
10 Rollo, p. 48.
11 Through a letter dated 23 May 1984; supra note 2 at 777.
12 Exhibit H.
13 Supra note 2 at 795.
14 Id. at 119.
15 Id. at 122.
16 Id. at 110-113, 115.
17 Id. at 123.
18 Id. at 210.
19 Id. at 43.
20 Id. at 594. Emphasis supplied.
21 Id. at 89-90.
22 Id. at 1-10.
23 Id. at 61-68.
24 Id. at 71-78, 408-418. Paramount filed a third-party complaint on 23 July 1990 against third-party defendant Baltazar Benlot, as solidary indemnitor under the Indemnity Agreement. It likewise filed a third-party complaint on 30 October 1991 against Eurasia Amalgamated Insurance Agency Inc. (Eurasia) and/or Jose Cutaran, who as general agent of Paramount, issued the surety bond in question but who failed to remit the required premiums pursuant to the General Agency Agreement. However, said third-party defendants were declared in default for failure to file their respective answers, see infra.
25 Per Order dated 17 February 1992 issued by Judge Salvador S. Abad Santos of Branch 65, Regional Trial Court of Makati City.
26 Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
27 Penned by Judge Salvador S. Abad Santos of Branch 65, Regional Trial Court of Makati City.
28 Rollo, pp. 52-53.
29 CA Rollo, p. 32; Benlot's appeal was dismissed for failure to pay appeal docket fees.
30 Promulgated by the Third Division, penned by Associate Justice Ruben T. Reyes, with Associate Justices Jainal D. Rasul and Eloy R. Bello, Jr. concurring; Rollo, pp. 28-46.
31 G.R. No. 69450, 22 November 1988 (Unreported).
32 Pacific Banking Corporation v. Intermediate Appellate Court, G.R. No. 72775, 13 November 1991, 203 SCRA 496 (1998); Rizal Commercial Banking Corporation v. Court of Appeals, G.R. No. 85396, 27 October 1989, 178 SCRA 739 (1989); Luzon Surety Company, Inc. v. Quebrar, G.R. No. L-40517, 31 January 1984, 127 SCRA 295 (1984).
33 Sampayan v. Court of Appeals, G.R. No. 156360, 14 January 2005, 448 SCRA 220 citing Insular Life Assurance Company, Ltd. v. Court of Appeals, 428 SCRA 79 (2004) citing Langkaan Realty Development, Inc. v. United Coconut Planters Bank, 347 SCRA 542, 549 (2000), Nokom v. National Labor Relations Commission, 390 Phil. 1228, 1242 (2000), Commissioner of Internal Revenue v. Embroidery and Garments Industries (Phil.), Inc., 363 Phil. 541, 546 (1999), Sta. Maria v. Court of Appeals, 349 Phil. 275, 282-283 (1998). Thus:
"[I]t is a settled rule that in the exercise of the Supreme Court's power of review, the Court is not a trier of facts and does not normally undertake the re-examination of the evidence presented by the contending parties' during the trial of the case considering that the findings of facts of the Court of Appeals are conclusive and binding on the Court. However, the Court had recognized several exceptions to this rule, to wit: (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 Court of Appeals 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 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 petitioner's 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."
34 Supra note 17. Emphasis supplied.
35 Supra note 6.
36 Supra note 18.
37 Supra note 20.
39 415 Phil. 587 (2001).
40 Id. at 415.
41 TSN, August 31, 1992, pp. 26-28, 30-31 and 34. Emphasis supplied.
42 G.R. No. 97412, 12 July 1994, 234 SCRA 78 (1994).
43 Id. at 95-97. Emphasis supplied.
44 Supra note 4 at 20.
45 Supra note 7.
46 Civil Code, Art. 1158.
47 See RTC Records, p. 90.
48 Supra note 19.
49 See Lirag Textile Mills v. Social Security System, G.R. No. L-33205, 31 August 1987, 153 SCRA 338.
50 Supra note 2 at 19.
51 Globe Telecom, Inc. v. Philippine Communication Satellite Corporation, G.R. No. 147324, 25 May 2004, 429 SCRA 153.
52 Barons Marketing Corp. v. Court of Appeals and Phelps Dodge Phils., Inc., 349 Phil. 765 (1998).
53 Ibid; Restituta M. Imperial v. Alex A. Jaucian, G.R. No. 149404, 14 April 2004, 427 SCRA 517; First Metro Investment Corporation v. Este Del Sol Mountain Reserve, Inc., 420 Phil. 902.
54 Civil Code, Arts. 1229 and 2227.
55 See Civil Code, Article 2208(11).