Comm (Insurance Case Digests)

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Insurance case digests



Vda. de Maglana vs. Consolacion [GR 60506, 6 August 1992] Third Division, Romero (J): 3 concur Facts: Lope Maglana was an employee of the Bureau of Customs whose work station was at Lasa, in DavaoCity. On 20 December 1978, early morning, Lope Maglana was on his way to his work station, driving amotorcycle owned by the Bureau of Customs. At Km. 7, Lanang, he met an accident that resulted in his death.He died on the spot . The PUJ jeep that bumped the deceased was driven by Pepito Into, operated and ownedby Destrajo. From the investigation conducted by the traffic investigator, the PUJ jeep was overtaking anotherpassenger jeep that was going towards the cit y poblacion. While overtaking, the PUJ jeep of Destrajo runningabreast with the overtaken jeep, bumped the motorcycle driven by the deceased who was going towar ds thedirection of Lasa, Davao City. The point of impact was on the lane of the motorcycle and the deceased wasthrown from the road and met his untimely death. Consequently, the heirs of Lope Maglana, Sr., filed anaction for damages and att orney's fees against operator Patricio Destrajo and the Afisco Insurance Corpora tion(AFISCO) before the then Court of First Instance of Davao, Branch II. An inf ormation for homicide thrureckless imprudence was also filed against Pepito Into . During the pendency of the civil case, Into wassentenced to suffer an indeterm inate penalty of 1 year, 8 months and 1 day of prision correccional, asminimum, to 4 years, 9 months and 11 days of prision correcional, as maximum, with all th e accessorypenalties provided by law, and to indemnify the heirs of Lope Maglana , Sr. in the amount of P12,000.00 withsubsidiary imprisonment in case of insolve ncy, plus P5,000.00 in the concept of moral and exemplarydamages with costs. No appeal was interposed by the accused who later applied for probation. On 14Decem ber 1981, the lower court rendered a decision finding that Destrajo had not exer cised sufficientdiligence as the operator of the jeepney. The court ordered Dest rajo to pay the heirs of Maglana the sum ofP28,000.00 for loss of income; the su m of P12,000.00 which amount shall be deducted in the event judgmentin Criminal Case 3527-D against the driver, accused Into, shall have been enforced; the sum of P5,901.70representing funeral and burial expenses of the deceased; the sum of P5,000.00 as moral damages which shallbe deducted in the event judgment (sic) i n Criminal Case 3527-D against the driver, accused Into; the sum ofP3,000.00 as attorney's fees and to pay the costs of suit. The court ordered the insurance co mpany is ordered to reimburse Destrajo whatever amounts the latter shall have pa id only up to the extent of its insurancecoverage. The heirs of Maglana filed a motion for the reconsideration of the second paragraph of thedispositive portion of the decision contending that AFISCO should not merely be held secondarily li ablebecause the Insurance Code provides that the insurer's liability is "direct and primary and/or jointly andseverally with the operator of the vehicle, althou gh only up to the extent of the insurance coverage." In itsOrder of February 9, 1982, the lower court denied the motion for reconsideration ruling that since th einsurance contract "is in the nature of suretyship, then the liability of the i nsurer is secondary only up to theextent of the insurance coverage." The heirs f iled a second motion for reconsideration reiterating that theliability of the in surer is direct, primary and solidary with the jeepney operator because the peti tioners becamedirect beneficiaries under the provision of the policy which, in e ffect, is a stipulation pour autrui. This motionwas likewise denied for lack of merit. The heirs filed the petition for certiorari. Issue [1]: Whether AFISCO is primarily liable, not secondarily liable, on the insurance pol icy. Held [1]: The particular provision of the insurance policy on which the heirs base their c laim provides"SECTION 1 LIABILITY TO THE PUBLIC 1. The Company will, subject to the Limits of Liability, payall sums necessary to discharge liability of the ins ured in respect of. (a) death of or bodily injury to anyTHIRD PARTY; xxx 3. In t

he event of the death of any person entitled to indemnity under this Policy, the Company will, in respect of the liability incurred to such person indemnify his personal representatives interms of, and subject to the terms and conditions her eof." The above-quoted provision leads to no otherconclusion but that AFISCO can be held directly liable by the heirs. As the Court ruled in Shafer vs. Judge,RT C of Olongapo City, Br. 75, "[w]here an insurance policy insures directly agains t liability, the insurer'sliability accrues immediately upon the occurrence of t he injury or event upon which the liability depends, anddoes not depend on the r ecovery of judgment by the injured party against the insured." The underlying re asonbehind the third party liability (TPL) of the Compulsory Motor Vehicle Liabi lity Insurance is "to protectinjured persons against the insolvency of the insur ed who causes such injury, and to give such injured persona certain beneficial i nterest in the proceeds of the policy." Since the heirs had received from AFISCO the sumof P5,000.00 under the no-fault clause, AFISCO's liability is now limite d to P15,000.00. Issue [2]: Whether AFISCO is solidarily liable with Destrajo. Held [2]: NO. In Malayan Insurance Co., Inc. v. Court of Appeals, the Court had the opport unity to resolvethe issue as to the nature of the liability of the insurer and t he insured vis-a-vis the third party injured in anaccident, where it ruled that "While it is true that where the insurance contract provides for indemnity again stliability to third persons, such third persons can directly sue the insurer, h owever, the direct liability of theinsurer under indemnity contracts against thi rd party liability does not mean that the insurer can be heldsolidarily liable w ith the insured and/or the other parties found at fault. The liability of the in surer is based oncontract; that of the insured is based on tort." The Court then proceeded to distinguish the extent of theliability and manner of enforcing the same in ordinary contracts from that of insurance contracts. While insolidary o bligations, the creditor may enforce the entire obligation against one of the so lidary debtors, in aninsurance contract, the insurer undertakes for a considerat ion to indemnify the insured against loss, damage orliability arising from an un known or contingent event." Herein, the heirs cannot validly claim that AFISCO,w hose liability under the insurance policy is also P20,000.00, can be held solida rily liable with Destrajo forthe total amount of P53,901.70 in accordance with t he decision of the lower court. Since under both the lawand the insurance policy , AFISCO's liability is only up to P20,000.00, the second paragraph of the dispo sitiveportion of the decision in question may have unwittingly sown confusion am ong the heirs and their counsel.What should have been clearly stressed as to lea ve no room for doubt was the liability of AFISCO under theexplicit terms of the insurance contract. The liability of AFISCO based on the insurance contract is d irect, butnot solidary with that of Destrajo which is based on Article 2180 of t he Civil Code. As such, the heirs havethe option either to claim the P15,000 fro m AFISCO and the balance from Destrajo or enforce the entire judgment from Destr ajo subject to reimbursement from AFISCO to the extent of the insurance coverage . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~ Guingon v. Del Monte, 20 SCRA 1043 (1967) G.R. No. L-22042 August 17, 1967 FACTS: Julio Aguilar owner and operator of several jeepneys insured them with Capit al Insurance & Surety Co., Inc. February 20, 1961: Along the intersection of Juan Luna and Moro streets, Cit y of Manila, the jeepneys operated by Aguilar driven by Iluminado del Monte and Gervacio Guingon bumped and Guingon died some days after

Iluminado del Monte was charged with homicide thru reckless imprudence and w as penalized 4 months imprisonment The heirs of Gervacio Guingon filed an action for damages praying that P82,7 71.80 be paid to them jointly and severally by the driver del Monte, owner and o perator Aguilar, and the Capital Insurance & Surety Co., Inc. CFI: Iluminado del Monte and Julio Aguilar jointly and severally to pay plai ntiffs the sum of P8,572.95 as damages for the death of their father, plus P1,00 0.00 for attorney's fees plus costs Capital Insurance and Surety Co., Inc. is hereby sentenced to pay P5,000 plus P500 as attorney's fees and costs to be applied in partial satisfaction of the judgment rendered against Iluminado del Monte and Julio Aguilar in this cas e ISSUE: 1. W/N there a stipulation pour autriu to enable that will enable the heirs to s ue against Capital Insurance and Surety Co., Inc.? - YES 2. W/N the heirs can sue the insurer and insured jointly? - YES HELD: Affirmed in toto. 1. YES policy: the insurer agreed to indemnify the insured "against all sums . . . which the Insured shall become legally liable to pay in respect of: a. death of or bodily injury to any person . . . ." - indemnity against liability TEST: Where the contract provides for indemnity against liability to third p ersons, then third persons to whom the insured is liable, CAN sue the insurer. W here the contract is for indemnity against actual loss or payment, then third pe rsons CANNOT proceed against the insurer, the contract being solely to reimburse the insured for liability actually discharged by him thru payment to third pers ons, said third persons' recourse being thus limited to the insured alone. 2. YES policy: expressly disallows suing the insurer as a co-defendant of the insur ed in a suit to determine the latter's liability no action close: suit and final judgment be first obtained against the i nsured; that only "thereafter" can the person injured recover on the policy Sec. 5 of Rule 2 on "Joinder of causes of action" and Sec. 6 of Rule 3 on "P ermissive joinder of parties" cannot be superseded, at least with respect to thi rd persons not a party to the contract, as herein, by a "no action" clause in th e contract of insurance. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~ Fortune Insurance and Surety Co. Inc. vs. Court of Appeals [GR 115278, 23 May 19 95] First Division, Davide Jr (J): 2 concur, 1 took no part, 1 on leave Facts: Producers Bank of the Philippines was insured by the Fortune Insurance and Suret y Co. Inc. and aninsurance policy was issued. An armored car of Producers, while in the process of transferring cash in the sumof P725,000.00 under the custody of its teller, Maribeth Alampay, from its Pasay Branch to its Head Office at8737 Paseo de Roxas, Makati, Metro Manila on 29 June 1987, was robbed of the said ca sh. The robbery tookplace while the armored car was traveling along Taft Avenue in Pasay City. The said armored car was drivenby Benjamin Magalong y de Vera, es corted by Security Guard Saturnino Atiga y Rosete. Driver Magalongwas assigned b y PRC Management Systems with Producers by virtue of an Agreement executed on 7 August1983. The Security Guard Atiga was assigned by Unicorn Security Services, Inc. with Producers by virtue ofa contract of Security Service executed on 25 Oc

tober 1982. After an investigation conducted by the Pasaypolice authorities, the driver Magalong and guard Atiga were charged, together with Edelmer Bantigue YE ulalio, Reynaldo Aquino and John Doe, with violation of PD 532 (Anti-Highway Rob bery Law) before theFiscal of Pasay City. The Fiscal of Pasay City then filed an information charging the aforesaid persons withthe said crime before Branch 112 of the Regional Trial Court of Pasay City. The case is still being tried as oft he date of filing of the present case. Demands were made by Producers upon Fortu ne to pay the amount ofthe loss of P725,000.00, but the latter refused to pay as the loss is excluded from the coverage of theinsurance policy, specifically und er page 1 thereof, "General Exceptions" Section (b), and which reads asfollows: "GENERAL EXCEPTIONS The company shall not be liable under this policy in respect of xxx (b)any loss caused by any dishonest, fraudulent or criminal act of the i nsured or any officer, employee, partner,director, trustee or authorized represe ntative of the Insured whether acting alone or in conjunction withothers..." Pro ducers opposed the contention of Fortune and contended that Atiga and Magalong a re not its"officer, employee, trustee or authorized representative at the time o f the robbery. On 26 April 1990, the trialcourt rendered its decision in favor o f Producers. It ordered Fortune to pay Producers the net amount ofP540,000.00 as liability under Policy 0207 (as mitigated by the P40,000.00 special clause dedu ction and bythe recovered sum of P145,000.00), with interest thereon at the lega l rate, until fully paid; the sum ofP30,000.00 as and for attorney's fees; and t o pay the costs of suit. Fortune appealed this decision to the Courtof Appeals ( CA-GR CV 32946). In its decision promulgated on 3 May 1994, it affirmed in toto the appealeddecision. On 20 June 1994, Fortune filed the petition for review on certiorari. Issue: Whether Fortune is liable under the Money, Security, and Payroll Robbery policy it issued to the issuedto Producers or whether recovery thereunder is precluded under the general exceptions clause thereof. Held: It should be noted that the insurance policy entered into by the parties is a th eft or robbery insurancepolicy which is a form of casualty insurance. Section 17 4 of the Insurance Code provides that "Casualtyinsurance is insurance covering l oss or liability arising from accident or mishap, excluding certain types ofloss which by law or custom are considered as falling exclusively within the scope o f insurance such as fire ormarine. It includes, but is not limited to, employer' s liability insurance, public liability insurance, motor vehicle liability insur ance, plate glass insurance, burglary and theft insurance, personal accident and healthinsurance as written by non-life insurance companies, and other substanti ally similar kinds of insurance."Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no otherprovisions applicable to casualty insurance or to robbery insurance in particular. These contracts are ,therefore, governed by the general provisions applicable to all types of insura nce. Outside of these, the rightsand obligations of the parties must be determin ed by the terms of their contract, taking into consideration itspurpose and alwa ys in accordance with the general principles of insurance law. It has been aptly observed thatin burglary, robbery, and theft insurance, "the opportunity to def the moral hazard is sogreat that insurers have found it necessa raud the insurer ry to fill up their policies with countless restrictions, many designedto reduce this hazard. Seldom does the insurer assume the risk of all losses due to the h azards insuredagainst." Persons frequently excluded under such provisions are th ose in the insured's service andemployment. The purpose of the exception is to g uard against liability should the theft be committed by onehaving unrestricted a ccess to the property." In such cases, the terms specifying the excluded classes are to begiven their meaning as understood in common speech. The terms "service " and "employment" are generallyassociated with the idea of selection, control, and compensation. A contract of insurance is a contract ofadhesion, thus any amb iguity therein should be resolved against the insurer, or it should be construed

liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from non-compliance with itsobligation. It goes without saying then that if the terms of the contract are clear and unambi guous, there is noroom construction and such terms cannot be enlarged or diminis hed by judicial construction. An insurancecontract is a contract of indemnity up on the terms and conditions specified therein. It is settled that the termsof th e policy constitute the measure of the insurer's liability. In the absence of st atutory prohibition to thecontrary, insurance companies have the same rights as individuals to limit their liability and to imposewhatever conditions they deem best upon their obligations not inconsistent with public policy. Insofar asFortu ne is concerned, it was its intention to exclude and exempt from protection and coverage losses arisingfrom dishonest, fraudulent, or criminal acts of persons g ranted or having unrestricted access to Producers'money or payroll. When it used then the term "employee," it must have had in mind any person who qualifiesas s uch as generally and universally understood, or jurisprudentially established in the light of the fourstandards in the determination of the employer-employee re lationship, or as statutorily declared even in alimited sense as in the case of Article 106 of the Labor Code which considers the employees under a "labor-only" contract as employees of the party employing them and not of the party who supp lied them to theemployer. Still, howsoever viewed, Producers entrusted the three with the specific duty to safely transfer themoney to its head office, with Ala mpay to be responsible for its custody in transit; Magalong to drive thearmored vehicle which would carry the money; and Atiga to provide the needed security fo r the money, thevehicle, and his two other companions. In short, for these parti cular tasks, the three acted as agents ofProducers. A "representative" is define d as one who represents or stands in the place of another; one whorepresents oth ers or another in a special capacity, as an agent, and is interchangeable with " agent." In view ofthe foregoing, Fortune is exempt from liability under the gene ral exceptions clause of the insurance policy. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~ Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 156571 July 9, 2008

INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE CORPORATION, Pe titioners, vs. REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF CUSTOMS, Respondent. D E C I S I O N BRION, J.: Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by Intra-Strata Assurance Corporation (Intra-Strata) and Ph ilippine Home Assurance Corporation (PhilHome), collectively referred to as "pet itioners." The petition seeks to set aside the decision dated November 26, 2002 of the Cour t of Appeals1 (CA) that in turn affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in Civil Case No. 83-15071.2 In its ruling, the RTC fou nd the petitioners liable as sureties for the customs duties, internal revenue t axes, and other charges due on the importations made by the importer, Grand Text ile Manufacturing Corporation (Grand Textile).3

BACKGROUND FACTS Grand Textile is a local manufacturing corporation. In 1974, it imported from di fferent countries various articles such as dyestuffs, spare parts for textile ma chinery, polyester filament yarn, textile auxiliary chemicals, trans open type r eciprocating compressor, and trevira filament. Subsequent to the importation, th ese articles were transferred to Customs Bonded Warehouse No. 462. As computed b y the Bureau of Customs, the customs duties, internal revenue taxes, and other c harges due on the importations amounted to P2,363,147.00. To secure the payment of these obligations pursuant to Section 1904 of the Tariff and Customs Code (Co de),4 Intra-Strata and PhilHome each issued general warehousing bonds in favor o f the Bureau of Customs. These bonds, the terms of which are fully quoted below, commonly provide that the goods shall be withdrawn from the bonded warehouse "o n payment of the legal customs duties, internal revenue, and other charges to wh ich they shall then be subject."5 Without payment of the taxes, customs duties, and charges due and for purposes o f domestic consumption, Grand Textile withdrew the imported goods from storage.6 The Bureau of Customs demanded payment of the amounts due from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to p ay. The government responded on January 14, 1983 by filing a collection suit aga inst the parties with the RTC of Manila. LOWER COURT DECISIONS After hearing, the RTC rendered its January 4, 1995 decision finding Grand Texti le (as importer) and the petitioners (as sureties) liable for the taxes, duties, and charges due on the imported articles. The dispositive portion of this decis ion states: 7 WHEREFORE, premises considered, the Court RESOLVES directing: (1) the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of P2,363,174.00, plus interests at the legal rate from the filing of the Co mplaint until fully paid; (2) the defendant Intra-Strata Assurance Corporation to pay plaintiff, jointly a nd severally, with defendant Grand, the sum of P2,319,211.00 plus interest from the filing of the Complaint until fully paid; and the defendant Philippine Home Assurance Corporation to pay plaintiff the sum of P43,936.00 plus interests to b e computed from the filing of the Complaint until fully paid; (3) the forfeiture of all the General Warehousing Bonds executed by Intra-Strata and PhilHome; and (4) all the defendants to pay the costs of suit. SO ORDERED. The CA fully affirmed the RTC decision in its decision dated November 26, 2002. From this CA decision, the petitioners now come before this Court through a peti tion for review on certiorari alleging that the CA decided the presented legal q uestions in a way not in accord with the law and with the applicable jurispruden ce. ASSIGNED ERRORS The petitioners present the following points as the conclusions the CA should ha ve made:

1. that they were released from their obligations under their bonds when Grand T extile withdrew the imported goods without payment of taxes, duties, and other c harges; and 2. that their non-involvement in the active handling of the warehoused items fro m the time they were stored up to their withdrawals substantially increased the risks they assumed under the bonds they issued, thereby releasing them from liab ilities under these bonds.8 In their arguments, they essentially pose the legal issue of whether the withdra wal of the stored goods, wares, and merchandise without notice to them as sureti es released them from any liability for the duties, taxes, and charges they comm itted to pay under the bonds they issued. They additionally posit that they shou ld be released from any liability because the Bureau of Customs, through the fau lt or negligence of its employees, allowed the withdrawal of the goods without t he payment of the duties, taxes, and other charges due. The respondent, through the Solicitor General, maintains the opposite view. THE COURT S RULING We find no merit in the petition and consequently affirm the CA decision. Nature of the Surety s Obligations Section 175 of the Insurance Code defines a contract of suretyship as an agreeme nt whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of ano ther party called the obligee, and includes among its various species bonds such as those issued pursuant to Section 1904 of the Code.9 Significantly, "pertinen t provisions of the Civil Code of the Philippines shall be applied in a suppleto ry character whenever necessary in interpreting the provisions of a contract of suretyship."10 By its very nature under the terms of the laws regulating suretys hip, the liability of the surety is joint and several but limited to the amount of the bond, and its terms are determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.11 The definition and characteristics of a suretyship bring into focus the fact tha t a surety agreement is an accessory contract that introduces a third party elem ent in the fulfillment of the principal obligation that an obligor owes an oblig ee. In short, there are effectively two (2) contracts involved when a surety agr eement comes into play a principal contract and an accessory contract of suretys hip. Under the accessory contract, the surety becomes directly, primarily, and e qually bound with the principal as the original promissor although he possesses no direct or personal interest over the latter s obligations and does not receive any benefit therefrom.12 The Bonds Under Consideration That the bonds under consideration are surety bonds (and hence are governed by t he above laws and rules) is not disputed; the petitioners merely assert that the y should not be liable for the reasons summarized above. Two elements, both affe cting the suretyship agreement, are material in the issues the petitioners pose. The first is the effect of the law on the suretyship agreement; the terms of th e suretyship agreement constitute the second. A feature of the petitioners bonds, not stated expressly in the bonds themselves but one that is true in every contract, is that applicable laws form part of and

are read into the contract without need for any express reference. This feature proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to rule: It is to be recognized that a large degree of autonomy is accorded the contracti ng parties. Not that it is unfettered. They may, according to Article 1306 of th e Civil Code "establish such stipulations, clauses, terms, and conditions as the y may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy." The law thus sets limits. It is a fund amental requirement that the contract entered into must be in accordance with, a nd not repugnant to, an applicable statute. Its terms are embodied therein. The contracting parties need not repeat them. They do not even have to be referred t o. Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter."13 Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and Customs Code which provide that: Sec 101. Imported Items Subject to Duty All articles when imported from any fore ign country into the Philippines shall be subject to duty upon such importation even though previously exported from the Philippines, except as otherwise specif ically provided for in this Code or in clear laws. x x x x Sec. 1204. Liability of Importer for Duties Unless relieved by laws or regulatio ns, the liability for duties, taxes, fees, and other charges attaching on import ation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the contr ol of the government. The obligation to pay, principally by the importer, is shared by the latter with a willing third party under a suretyship agreement under Section 1904 of the Co de which itself provides: Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehou sing Bond After articles declared in the entry of warehousing shall have been ex amined and the duties, taxes, and other charges shall have been determined, the Collector shall require from the importer, an irrevocable domestic letter of cre dit, bank guarantee, or bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, a nd other charges to which the articles shall then be subject and upon compliance with all legal requirements regarding their importation. We point these out to stress the legal basis for the submission of the petitione rs bonds and the conditions attaching to these bonds. As heretofore mentioned, th ere is, firstly, a principal obligation belonging to the importer-obligor as pro vided under Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a surety agreement , directly, primarily, and equally bind them to the obligee to pay the obligor s o bligation. The second element to consider in a suretyship agreement relates to the terms of the bonds themselves, under the rule that the terms of the suretyship are deter mined by the suretyship contract itself.14 The General Warehousing Bond15 that i s at the core of the present dispute provides:

KNOW ALL MEN BY THESE PRESENTS: That I/we GRAND TEXTILE MANUFACTURING CORPORATION Km. 21, Marilao, Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a domestic corpo ration duly organized and existing under and by virtue of the laws of the Philip pines, as Surety, are held and firmly bound unto the Republic of the Philippines , in the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the Philippines, for the payment whereof, we bind our selves, our heirs, executors, administrators and assigns, jointly and severally, firmly by these presents: WHEREAS, the above-bounden Principal will from time to time make application to make entry for storing in customs-internal revenue bonded warehouse certain goods, wares, and merchandise, subject to customs duties and special import tax or internal revenue taxes or both; WHEREAS, the above principal in making application for storing merchandise i n customs-internal revenue bonded warehouse as above stated, will file this in h is name as principal, which bond shall be approved by the Collector of Customs o r his Deputy; and WHEREAS, the surety hereon agrees to accept all responsibility jointly and s everally for the acts of the principal done in accordance with the terms of this bond. NOW THEREFORE, the condition of this obligation is such that if within six ( 6) months from the date of arrival of the importing vessel in any case, the good s, wares, and merchandise shall be regularly and lawfully withdrawn from public stores or bonded warehouse on payment of the legal customs duties, internal reve nue taxes, and other charges to which they shall then be subject; or if at any t ime within six (6) months from the said date of arrival, or within nine (9) mont hs if the time is extended for a period of three (3) months, as provided in Sect ion 1903 of the Tariff and Customs Code of the Philippines, said importation sha ll be so withdrawn for consumption, then the above obligation shall be void, oth erwise, to remain in full force and effect. Obligations hereunder may only be accepted during the calendar year 1974 and the right to reserve by the corresponding Collector of Customs to refuse to acc ept further liabilities under this general bond, whenever, in his opinion, condi tions warrant doing so. IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 2 0th day of September, 1974 at Makati, Rizal, Philippines. Considered in relation with the underlying laws that are deemed read into these bonds, it is at once clear that the bonds shall subsist that is, "shall remain i n full force and effect" unless the imported articles are "regularly and lawfull y withdrawn. . .on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall be subject ." Fully fleshed out, the obligat ion to pay the duties, taxes, and other charges primarily rested on the principa l Grand Textile; it was allowed to warehouse the imported articles without need for prior payment of the amounts due, conditioned on the filing of a bond that s hall remain in full force and effect until the payment of the duties, taxes, and charges due. Under these terms, the fact that a withdrawal has been made and it s circumstances are not material to the sureties liability, except to signal both the principal s default and the elevation to a due and demandable status of the s ureties solidary obligation to pay. Under the bonds plain terms, this solidary obl igation subsists for as long as the amounts due on the importations have not bee n paid. Thus, it is completely erroneous for the petitioners to say that they we re released from their obligations under their bond when Grand Textile withdrew

the imported goods without payment of taxes, duties, and charges. From a commons ensical perspective, it may well be asked: why else would the law require a sure ty when such surety would be bound only if the withdrawal would be regular due t o the payment of the required duties, taxes, and other charges? We note in this regard the rule that a surety is released from its obligation wh en there is a material alteration of the contract in connection with which the b ond is given, such as a change which imposes a new obligation on the promising p arty, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. A surety, how ever, is not released by a change in the contract which does not have the effect of making its obligation more onerous.16 We find under the facts of this case no significant or material alteration in th e principal contract between the government and the importer, nor in the obligat ion that the petitioners assumed as sureties. Specifically, the petitioners neve r assumed, nor were any additional obligation imposed, due to any modification o f the terms of importation and the obligations thereunder. The obligation, and o ne that never varied, is on the part of the importer, to pay the customs duties, taxes, and charges due on the importation, and on the part of the sureties, to be solidarily bound to the payment of the amounts due on the imported goods upon their withdrawal or upon expiration of the given terms. The petitioners lack of consent to the withdrawal of the goods, if this is their complaint, is a matter between them and the principal Grand Textile; it is a matter outside the concern of government whose interest as creditor-obligee in the importation transaction is the payment by the importer-obligor of the duties, taxes, and charges due be fore the importation process is concluded. With respect to the sureties who are there as third parties to ensure that the amounts due are paid, the creditor-obl igee's active concern is to enforce the sureties solidary obligation that has bec ome due and demandable. This matter is further and more fully explored below. The Need for Notice to Bondsmen To support the conclusion that they should be released from the bonds they issue d, the petitioners argue that upon the issuance and acceptance of the bonds, the y became direct parties to the bonded transaction entitled to participate and ac tively intervene, as sureties, in the handling of the imported articles; that, a s sureties, they are entitled to notice of any act of the bond obligee and of th e bond principal that would affect the risks secured by the bond; and that other wise, the door becomes wide open for possible fraudulent conspiracy between the bond obligee and principal to defraud the surety.17 In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship, particularly the fact that two types of relationships are involved, that is, the underlying principal relationship between the creditor (g overnment) and the debtor (importer), and the accessory surety relationship wher eby the surety binds itself, for a consideration paid by the debtor, to be joint ly and solidarily liable to the creditor for the debtor s default. The creditor in this latter relationship accepts the surety s solidary undertaking to pay if the debtor does not pay.18 Such acceptance, however, does not change in any material way the creditor s relationship with the principal debtor nor does it make the su rety an active party to the principal creditor-debtor relationship. The contract of surety simply gives rise to an obligation on the part of the surety in relat ion with the creditor and is a one-way relationship for the benefit of the latte r.19 In other words, the surety does not, by reason of the surety agreement, earn the right to intervene in the principal creditor-debtor relationship; its role beco mes alive only upon the debtor s default, at which time it can be directly held li able by the creditor for payment as a solidary obligor. A surety contract is mad

e principally for the benefit of the creditor-obligee and this is ensured by the solidary nature of the sureties undertaking.20 Under these terms, the surety is not entitled as a rule to a separate notice of default,21 nor to the benefit of excussion,22 and may be sued separately or together with the principal debtor.23 The words of this Court in Palmares v. CA24 are worth noting: Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal s default. Inasmuch as the cr editor owes no duty of active diligence to take care of the interest of the sure ty, his mere failure to voluntarily give information to the surety of the defaul t of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal s default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a sp ecial agreement to that effect in the contract of suretyship. Significantly, nowhere in the petitioners bonds does it state that prior notice i s required to fix the sureties liabilities. Without such express requirement, the creditor s right to enforce payment cannot be denied as the petitioners became bo und as soon as Grand Textile, the principal debtor, defaulted. Thus, the filing of the collection suit was sufficient notice to the sureties of their principal s default. The petitioners reliance on Visayan Surety and Insurance Corporation v. Pascual25 and Aguasin v. Velasquez26 does not appear to us to be well taken as these case s do not squarely apply to the present case. These cases relate to bonds issued as a requirement for the issuance of writs of replevin. The Rules of Court expre ssly require that before damages can be claimed against such bonds, notice must be given to the sureties to bind them to the award of damages. No such requireme nt is evident in this case as neither the Tariff and Customs Code nor the issued bonds require prior notice to sureties. The petitioners argument focusing on the additional risks they incur if they cann ot intervene in the handling of the warehoused articles must perforce fail in li ght of what we have said above regarding the nature of their obligation as suret ies and the relationships among the parties where a surety agreement exists. We add that the petitioners have effectively waived as against the creditor (the go vernment) any such claim in light of the provision of the bond that "the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond."27 Any such claim including those arising from the withdrawal of the warehoused articles without the payment of the requisite duties, taxes and charges is for the principal and the sureties to thresh out between or among themselves. Government is Not Bound by Estoppel As its final point, the petitioners argue that they cannot be held liable for th e unpaid customs duties, taxes, and other charges because it is the Bureau of Cu stoms duty to ensure that the duties and taxes are paid before the imported goods are released from its custody and they cannot be made to pay for the error or n egligence of the Bureau s employees in authorizing the unlawful and irregular with drawal of the goods. It has long been a settled rule that the government is not bound by the errors c ommitted by its agents. Estoppel does not also lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers.28 This is particularly true in the collection of legitimate taxes due where the c ollection has to be made whether or not there is error, complicity, or plain neg lect on the part of the collecting agents.29 In CIR v. CTA,30 we pointedly said:

It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes.lawphi1 Taxes are the lifeblood of the nation throug h which the government agencies continue to operate and with which the State eff ects its functions for the welfare of its constituents. Thus, it should be colle cted without unnecessary hindrance or delay. We see no reason to deviate from this rule and we shall not do so now. WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decis ion of the Court of Appeals. Costs against the petitioners. SO ORDERED. ARTURO D. BRION Associate Justice ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~

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