Pastoral v. Mutual Security Insurance Corporation
REITERATIONFacts
The Antecedents: Pedro C. Pastoral leased a crane to Mapada & Company, Inc. for P900.00 monthly, with a provision that if the crane was not returned 10 days after notice, the lessee would pay P15,000.00 as its value. Mutual Security Insurance Corporation (MSIC) executed a surety bond for P15,000.00 to guarantee compliance with the lease contract. Pastoral deferred collection of rentals for October and November 1957 until early December at the lessee's request. When no payment was made, Pastoral notified MSIC on December 5, 1957. The lessee failed to pay rentals or return the crane. Procedural History: The Court of First Instance of Manila rendered judgment in favor of Pastoral against the defendants, ordering them to pay unpaid rentals and, in default of the crane's return, P15,000.00 for the crane, with MSIC's liability not exceeding P15,000.00. Only MSIC appealed, arguing it was released from liability due to Pastoral's failure to report the violation within five days as stipulated in the bond. The Court of Appeals reversed the trial court's decision, holding that Pastoral's failure to notify MSIC of the defaults within the stipulated period nullified the bond and exonerated the surety. Pastoral sought review from the Supreme Court. The Petition: Pastoral petitioned for the review and reversal of the Court of Appeals' decision, arguing that the surety should not be absolved of liability.
Issue(s)
Whether the Court of Appeals erred in holding that Pastoral's failure to notify the surety within five days of the principal's default released the surety from liability. Whether the surety bond became effective and binding on Pastoral before he received a copy of it and became aware of its conditions. Whether Pastoral's agreement to defer payment of rentals constituted a material alteration discharging the surety.
Ruling
The Supreme Court reversed the decision of the Court of Appeals and upheld the decision of the Court of First Instance of Manila. Respondent-appellee Mutual Security Insurance Corporation was ordered to pay the costs.
Ratio Decidendi
On the issue of the surety bond's effectiveness and the notice requirement: The Court held that the Court of Appeals erred in absolving MSIC. Pastoral received a copy of the bond, which contained the five-day notice requirement, only on November 21, 1957. Therefore, compliance with the five-day notice for the defaults in early October and early November 1957 became impossible. The Court emphasized that a surety contract is not binding until accepted by the creditor, and Pastoral could not accept the bond and its conditions before learning of them. The rule 'ad impossibilia nemor tenetur' applies, excusing compliance with impossible conditions. Furthermore, the surety, by not notifying Pastoral earlier, must be deemed to have waived the condition as to rentals already due, as a condition is deemed fulfilled when the obligor voluntarily prevents its fulfillment, pursuant to Article 1186 of the Civil Code. The Court found no justification for the appellate court's pronouncement that Pastoral was obligated to know and secure a copy of the surety contract within a reasonable time; it was the guarantor's duty to notify Pastoral of the bond's conditions. On the issue of Pastoral's agreement to defer payment: The Court found the Court of Appeals' view that Pastoral's act of granting the debtor an extension to pay rentals constituted a material alteration discharging the surety to be untenable. When Pastoral agreed on October 31, 1957, to defer payment of the October and November rentals to the end of November, he had not yet learned of the bond's conditions. By November 21, when he learned of the conditions, the debtor was not yet in default due to the extension. The first default after the bond became legally effective (November 21) occurred at the end of November, and Pastoral gave notice to the surety on December 5, 1957, which was within the five-day period prescribed by the bond. The Court reiterated that a contract of guaranty or suretyship is prospective and not retroactive unless a contrary intent is clearly shown. Pastoral was entitled to assume that the notice provision did not include defaults prior to his acceptance. The surety, having drafted the bond, could have expressly provided for notice of prior defaults but failed to do so. On the application of 'strictissimi juris' to compensated sureties: The Court stressed that the rule holding sureties to be favorites of the law and their contracts to be construed 'strictissimi juris' does not apply to compensated sureties. These companies are organized for business purposes and are protected by exacting adequate counterbonds. The Court cited and followed the ruling in United States Fidelity & Guaranty Co. vs. Golden Pressed & Fire Brick Co., which established that the old rule of strict construction in favor of the surety, based on accommodation sureties, has no application to surety companies operating as an indemnity business.
Main Doctrine
A surety bond's condition requiring the creditor to notify the surety of the principal's default within a specified period is not binding until the creditor accepts the bond, especially when the creditor receives the bond after the default has already occurred, rendering compliance with the notice period impossible. For compensated sureties, the rule of 'strictissimi juris' does not apply.