National Shipyards & Steel Corporation v. Torrento
REITERATIONFacts
The Antecedents: Defendant Caridad J. Torrento applied with the National Shipyards & Steel Corporation (NASSCO) for the purchase of 60 tons of steel bars on credit. A contract of purchase and sale was executed, which was later amended due to stock limitations, changing the quantity, price, and specifications of the steel bars. Defendant Torrento, as principal, and Mutual Security Insurance Corporation, as surety, executed a surety bond to secure the payment of the steel bars. A supplemental bond was issued to match the contract price. Subsequently, a supplemental agreement was executed because NASSCO could no longer supply the originally contracted 3/8" deformed steel bars. This agreement modified the sizes and prices of other deformed steel bars to be purchased, with a specific provision that the original contract would not be affected in any other way. NASSCO delivered steel bars totaling P25,794.09. The payment period lapsed, and despite demand letters, no payment was made. Defendant Torrento acknowledged her liability but requested an extension. Procedural History: Plaintiff NASSCO filed an action to recover the unpaid contract price from both defendant Torrento and her surety. The lower court rendered judgment ordering defendants, jointly and severally, to pay NASSCO the sum of P25,794.09 with interest. The lower court also ordered defendant Torrento to reimburse the surety for any amount it would pay to NASSCO. The Petition: Defendants appealed the lower court's decision to the Court of Appeals, which certified the case to the Supreme Court as it involved questions of law. Appellant Torrento argued that the cause of action was exclusively against the surety and that the lower court erred in taking cognizance of the cross-claim before the surety had paid NASSCO. Appellant surety company argued that the supplemental agreement, executed without its consent, constituted a material alteration of the principal contract, thereby releasing it from liability.
Issue(s)
Whether the cause of action for the unpaid contract price lies exclusively against the surety. Whether the lower court erred in taking cognizance of the surety's cross-claim before payment to the plaintiff. Whether the supplemental agreement constituted a material alteration of the principal contract, releasing the surety from its obligation.
Ruling
The Supreme Court affirmed the decision of the lower court. It held that both defendants were jointly and severally liable for the unpaid contract price. The Court found no merit in the arguments raised by both appellants.
Ratio Decidendi
On the cause of action against the surety: The Court held that the surety bond clearly stated that both the principal and surety were bound jointly and severally. Citing Article 2047 and Article 1216 of the Civil Code, the Court reiterated that when a surety binds itself in solidum with the principal debtor, the creditor may proceed against any or all of them simultaneously. Therefore, the cause of action was not exclusively against the surety. On the lower court's cognizance of the cross-claim: The Court found this argument without merit, stating that the issue was not raised in the lower court and thus could not be raised for the first time on appeal. Furthermore, the Court noted that defendant Torrento did not dispute the cross-claim or cross-examine the witness who identified the indemnity agreement, which formed the basis of the cross-claim. On the material alteration of the contract: The Court found the surety's contention that the supplemental agreement constituted a material alteration to be without merit. The Court meticulously compared the original and supplemental agreements, noting that the changes involved different sizes and prices of steel bars due to unavailability of the originally specified items. Crucially, the Court highlighted that the supplemental agreement explicitly stated that the original contract would not be affected or modified in any other way. The Court emphasized that the principal condition of the contract, the period of payment, and the amount of liability were not changed. There was no added burden imposed upon the buyer, and thus, no material or essential alteration that would release the surety from its obligation. The Court cited Pacific Tobacco Corporation vs. Lorenzana, et al. and Visayan Distributors, Inc. vs. Flores to support the principle that a surety is not released by a change in the contract that does not make its obligation more onerous.
Main Doctrine
A surety is not released from its obligation under a bond due to a supplemental agreement that modifies the specifications of goods to be purchased, provided such modifications do not impose a more onerous obligation on the principal debtor or alter the essential conditions of the original contract, and the surety's liability remains untouched.