Pacific Merchandising Corporation v. Diestro Logging Development Corporation
REITERATIONFacts
The Antecedents: Plaintiff Pacific Merchandising Corporation (appellee) filed a complaint against Diestro Logging Development Corporation (Diestro) and Consolacion Insurance and Surety Co., Inc. (Consolacion, appellant) for the recovery of a sum of money. The case stemmed from a Sales Agreement where appellee sold motor vehicles to Diestro for P32,000.00, payable within 45 days. To guarantee payment, Diestro obtained a Surety Bond from Consolacion. Diestro also executed an Indemnity Agreement in favor of Consolacion, wherein Diestro agreed to indemnify Consolacion for any loss and to pay 20% of the total amount due as attorney's fees. Diestro received the vehicles in good condition but failed to pay the purchase price despite demands. Appellee notified Consolacion of Diestro's failure to pay and demanded payment under the surety bond. Consolacion refused to pay, having been advised by Diestro that the trucks were not received in good condition. Procedural History: The Court of First Instance of Manila rendered a decision ordering both defendants to pay P32,000.00 jointly and severally, with legal interest and 25% attorney's fees. Consolacion moved for reconsideration, arguing it was not liable for attorney's fees. The trial court denied the motion, stating that the surety's liability for attorney's fees arose from its refusal to pay despite demands, not from its contract with the principal. The Petition: Consolacion appealed the decision, assigning as sole error the lower court's finding that it was liable for attorney's fees.
Issue(s)
Whether the defendant-appellant Consolacion Insurance and Surety Co., Inc., as surety, is liable for attorney's fees in favor of the plaintiff-appellee.
Ruling
The Supreme Court modified the decision by eliminating the award of attorney's fees against the defendant-appellant Consolacion Insurance and Surety Co., Inc.
Ratio Decidendi
On Whether the defendant-appellant Consolacion Insurance and Surety Co., Inc., as surety, is liable for attorney's fees in favor of the plaintiff-appellee: The Supreme Court sustained the appellant, ruling that Consolacion Insurance and Surety Co., Inc., as surety, is not liable for attorney's fees. The Court held that the stipulation of facts should be construed to give effect to all its provisions, thus reconciling paragraphs 8 and 9. While paragraph 9 recognized the plaintiff-appellee's right to reasonable attorney's fees, such right could only be enforced against the principal, Diestro Logging Development Corporation, in order to give effect to paragraph 8 which limited Consolacion's liability to the P32,000.00 amount of the bond. The Court found that Consolacion was not at fault when it initially refused to pay upon demand, because it had been advised by its principal, Diestro, that the trucks were received not in good condition. This reasonable reliance on its principal's information, even if later disproven, negated any finding of gross and evident bad faith on the part of the surety. Furthermore, the Court found no justification for awarding attorney's fees against Consolacion under Article 2208 of the Civil Code, specifically subsections (5) or (11). There was neither allegation nor proof that Consolacion acted in gross and evident bad faith in refusing to comply with the demands. To impose attorney's fees on the surety under these circumstances would, in effect, be imposing a penalty on the right to litigate, as affirmed in Koster Inc. v. Zulueta. The Court concluded that if the appellee was constrained to go to court, the principal debtor, Diestro, was alone to blame and should therefore be the one to pay the attorney's fees.
Main Doctrine
A surety's liability for attorney's fees, when not explicitly covered by its contract with the principal debtor and when the surety acted in good faith based on information from its principal, may not be imposed if it would exceed the limited liability stipulated in the surety bond.