COMMONWEALTH INSURANCE Corp. Vs CA Digest

COMMONWEALTH INSURANCE Corp.
vs CA
FACTS:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two

export loan lines, one, for ₱2,500,000.00 to Jigs Manufacturing Corporation (JIGS)
and, the other, for ₱1,000,000.00 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 ₱2,499,992.00 and the latter for ₱998,033.37 plus
₱478,985.05 from the case-to-case basis and trust receipts. These loans were
evidenced by promissory notes and secured by surety bonds 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 ₱2,894,128.00 while that securing ELBA’s
obligation was ₱1,570,000.00. Hence, the total face value of the surety bonds
issued by appellee CIC was ₱4,464,128.00.
JIGS and ELBA defaulted in the payment of their respective loans. On October 30,
1984, appellant RCBC made a written demand on appellee CIC to pay JIG’s account
to the full extend of the suretyship. A similar demand was made on December 17, 1984
for appellee CIC to pay ELBA’s account to the full extend of the suretyship. In
response to those demands, appellee CIC made several payments in the total
amount of ₱2,000,000.00. There having been a substantial balance unpaid, appellant
RCBC made a final demand for payment upon appellee CIC but the latter ignored it.
Thus, appellant RCBC filed the Complaint for a Sum of Money against appellee
CIC.
The trial 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 the plaintiff Rizal Commercial Banking Corporation the
sum 0 P2,464,128.00, to pay the plaintiff attorney’s fees of P10,000.00 and to pay the
costs of suit.
RCBC filed a motion for reconsideration praying that in addition to the principal
sum of ₱2,464,128.00, 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. The CA held:

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 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 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 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, ₱2,894,128.00 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, ₱1,570,000.00 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
₱10,000.00 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.
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.
ISSUE:
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.
RULING:
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
Gurantee Co.and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang
Machinery Co., Inc. ,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 collection.
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. However,
it is clear from the above-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, 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 ₱4,464,128.00 petitioner was only able
to pay ₱2,000,000.00. Letters demanding the payment of the respective obligations of
JIGS and ELBA were initially sent. 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. 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.
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 ₱2,464,128.00, 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 find
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,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
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 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.
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 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.
WHEREFORE, the instant petition is DENIED and the assailed Decision and Resolution
of the Court of Appeals are AFFIRMED in toto.

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COMMONWEALTH INSURANCE Corp.

In 1984, plaintiff-appellant Rizal Commercial Banking Corporation (RCBC) granted two

RCBC then appealed to the Court of Appeals. The CA held:

The contention of appellant RCBC is correct because it is supported by Arts. 1169

and disposed of the case as follows:

WHEREFORE, the appealed Decision is MODIFIED in the manner following:

2. Defendant-appellee Commonwealth Insurance Company shall pay plaintiff-

3. The third-party defendants JIGS MANUFACTURING CORPORATION, ELBA

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

We are not persuaded. Petitioner’s argument is misplaced.

We are not convinced.

1. When the obligation is breached, and it consists in the payment of

2. When an obligation, not constituting a loan or forbearance of

3. When the judgment of the court awarding a sum of money becomes

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