Cebu Eng Hong Co. v. Luzon Surety Co.
REITERATIONFacts
The Antecedents: The Cebu Eng Hong Company (appellee) and State Commercial Company, Inc. (principal) entered into an agreement on May 26, 1956, wherein the appellee would ship tires, tubes, and other goods on credit, with a credit limit of P3,000.00 per month. The principal agreed to pay within 30 to 60 days and to put up a surety bond. Luzon Surety Company, Inc. (appellant) posted a P3,000.00 bond as surety. The bond stipulated that the surety shall be notified in writing within ten (10) days from the moment of default, otherwise the undertaking is null and void. On May 21, 1956, the surety bond and a purchase order dated May 15, 1956, were transmitted to the appellee. The appellee could not fill the purchase order immediately due to lack of stock. On July 14, 1956, the appellee shipped goods worth P1,614.28 under Invoice Nos. 1573 and 1574, which remained unpaid after sixty days. On October 3, 1956, the appellee sent a letter to the principal, which was considered a reminder, not a demand. On December 31, 1956, the principal issued a post-dated check for P614.28 as partial payment, which was dishonored upon presentation. On January 24, 1957, the appellee formally notified the principal and the surety of the default, demanding settlement of the outstanding account of P1,614.28. The surety's Zamboanga agency initially responded with assurances and later informed the appellee that the matter was referred to the principal, while also indorsing the principal's request for time. Procedural History: The Cebu Eng Hong Company filed a complaint against State Commercial Company, Inc. and Luzon Surety Company, Inc. in the Court of First Instance of Cebu for the collection of P1,614.28 plus interest. The trial court rendered judgment against both defendants, ordering them to pay jointly and severally P1,614.28 with 12% interest from August 14, 1956, P500.00 as attorney's fees, and costs. Luzon Surety Company appealed the decision. The Petition: Luzon Surety Company appealed, arguing that it was relieved from liability due to the appellee's failure to provide written notice of default within 10 days from the date of default, and that the account in question was not covered by the bond.
Issue(s)
Whether Luzon Surety Company, Inc. is discharged from liability due to the alleged failure of Cebu Eng Hong Company to provide written notice of default within ten (10) days from the date of default. Whether the account in question, arising from a purchase order dated prior to the execution of the surety bond, is covered by the said bond.
Ruling
The Supreme Court affirmed the decision of the trial court, holding Luzon Surety Company, Inc. jointly and severally liable with State Commercial Company, Inc. for the unpaid account, plus interest and attorney's fees.
Ratio Decidendi
On the Issue of Notice of Default: The Court ruled that the appellant's first ground is without merit. The agreement did not expressly provide that default would occur upon failure to pay within sixty days without demand. Article 1169 of the Civil Code requires demand, either judicial or extrajudicial, to put a debtor in default. The letter dated October 3, 1956, was merely a reminder and not a demand for payment. The actual letter of demand was sent to the State Commercial Company on January 24, 1957, and on the same day, the surety was formally notified of the default. This notice was within the ten-day period stipulated in the surety bond, thus, the appellant is not discharged from its liability. The Court emphasized that the ten-day period for notification of default is contingent upon the occurrence of actual default, which requires a demand. On the Issue of Coverage of the Bond: The Court found the second ground relied upon by the appellant to be devoid of merit. The trial court correctly held that the account was covered by the surety bond. Although the purchase order was dated May 15, 1956, three days before the surety bond's execution (May 18, 1956) and eleven days before the written agreement (May 26, 1956), the purchase order was transmitted to the appellee on May 21, 1956, together with the surety bond. Crucially, the actual delivery of the goods covered by the disputed invoices was made on July 14, 1956, which is well after the execution of the agreement and the bond. Therefore, the obligation arose from transactions that occurred after the bond was in effect and covered by the surety agreement.
Main Doctrine
A surety is not discharged from liability if the notice of default is given within the period stipulated in the bond, provided that demand was made to put the principal in default, as mere reminders do not constitute demand.