SECOND DIVISION

[G.R. No. 130886. January 29, 2004.]

COMMONWEALTH INSURANCE CORPORATION , petitioner, vs . COURT

OF APPEALS and RIZAL COMMERCIAL BANKING CORPORATION ,
respondents.

DECISION

AUSTRIA-MARTINEZ , J : p

Before us is a petition for review on certiorari assailing the Decision 1 of the Court of
Appeals (CA), promulgated on May 16, 1997 in CA-G.R. CV No. 44473 2 , which modi ed
the decision dated March 5, 1993 of the Regional Trial Court of Makati (Branch 64); and
the Resolution 3 dated September 25, 1997, denying petitioner's motion for
reconsideration.
The facts of the case as summarized by the Court of Appeals are as follows:
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).

Speci cally, the surety bonds issued by appellee CIC in favor of appellant
RCBC to secure the obligations of JIGS totaled P2,894,128.00 while that securing
ELBA's 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 JIG's 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 ELBA's 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 nal demand for payment
(Exhibit 'P') on July 7, 1988 upon appellee CIC but the latter ignored it. Thus,
appellant RCBC led 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:

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 "WHEREFORE, premises considered, in the light of the above facts,
arguments, discussion, and more important, the law and jurisprudence, the Court
nds 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 Million Four Hundred Sixty-Four Thousand One
Hundred Twenty-Eight Pesos (P2,464,128.00), to pay the plaintiff attorney's fees
of P10,000.00 and to pay the costs of suit.

"IT IS SO ORDERED." 5

Not satis ed with the trial court's decision, RCBC led a motion for reconsideration
praying that in addition to the principal sum of P2,464,128.00, 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, ruling thus:
xxx xxx xxx
Being solidarily bound, a surety's 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
surety's 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
justi able 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.
xxx xxx xxx

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 appellee's
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 Debtor's 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
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 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 following:

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 CIC's payments;

2. Defendant-appellee Commonwealth Insurance Company shall pay

plaintiff-appellant RIZAL COMMERCIAL BANKING CORP. and (sic) attorney's fee
of P10,000.00 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.

SO ORDERED. 7

CIC filed a motion for reconsideration but the CA denied the same.
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. Petitioner's argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs . Aldanese and Union
Guarantee Co. 9 and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc. 1 0 , and more recently, in Republic vs. Court of Appeals and R & B Surety
and Insurance Company, Inc . 1 1 , 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 collection. 1 2
Petitioner's 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. 1 3 However, it is clear from the above-
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 cited jurisprudence that petitioner's 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, 1 4
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 case.
We are not convinced.
It is not disputed that out of the principal sum of P4,464,128.00 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, 1984 1 5 and
December 17, 1984. 1 6 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 ve months from its last payment, RCBC, thru its legal
counsel, sent a nal letter of demand asking petitioner to pay the remaining balance of its
obligation including interest. 1 7 Petitioner failed to pay. As of the date of the ling 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.

Petitioner's 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
P2,464,128.00, notwithstanding any disagreements with RCBC regarding the payment of
interest. The fact that the negotiations for the settlement of petitioner's obligation did not
push through does not excuse it from paying the principal sum due to RCBC.
The issue of petitioner's 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 nd no error in
the appellate court's ruling that petitioner is liable to pay interest.
As to the rate of interest, we do not agree with petitioner's 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, 1 8 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.
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
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 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 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 quanti cation 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 nally
adjudged.
3. When the judgment of the court awarding a sum of money becomes
nal 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 nality
until its satisfaction, this interim period being deemed to be by then an equivalent
to a forbearance of credit. 1 9 (Emphasis supplied)

In the present case, there is no dispute that petitioner's 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 1169
2 0 of the Civil Code and of the settled rule that where there has been an extra-judicial
demand before action for performance was led, interest on the amount due begins to run
not from the date of the ling of the complaint but from the date of such extra-judicial
demand. 2 1 RCBC's extra-judicial demand for the payment of JIGS' obligation was made on
October 30, 1984; while the extra-judicial demand for the payment of ELBA's 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. DCcHIS

WHEREFORE, the instant petition is DENIED and the assailed Decision and
Resolution of the Court of Appeals are AFFIRMED in toto.
SO ORDERED.
Puno, Quisumbing, Callejo, Sr. and Tinga, JJ., concur.

Footnotes
1. Penned by Justice Hilarion L. Aquino, concurred in by Justices Eubulo G. Verzola and
Portia Aliño-Hormachuelos.
2. Entitled, "Rizal Commercial Banking Corporation, plaintiff-appellant, vs. Commonwealth
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 Insurance Company, defendant-appellee, Commonwealth, third-party plaintiff, vs. Jigs
Manufacturing Corp., et al., third-party defendants".
3. CA Rollo, p. 135.
4. CA Rollo, pp. 100-101.

5. Original Records, p. 334.

6. CA Rollo, pp. 99-103.

7. CA Rollo, pp. 103-104.

8. Rollo, p. 13.
9. 43 Phil. 852, 859 (1922).
10. 100 Phil. 679, 681-682 (1957).
11. 354 SCRA 285, 289 (2001).
12. Ibid.
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 attorney's 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.

18. 234 SCRA 78 (1994).

19. Id. pp. 95-97.
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.
xxx xxx xxx
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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