Mercantile Insurance Co., Inc. v. Felipe Ysmael, Jr. & Co., Inc.
REITERATIONFacts
The Antecedents: Felipe Ysmael, Jr. & Co., Inc. applied for an overdraft and credit line with Philippine National Bank (PNB). PNB agreed to grant P2,000,000.00 provided a bond of P140,000.00 was filed. Consequently, Felipe Ysmael, Jr. & Co., Inc. executed two surety bonds with Mercantile Insurance Co., Inc. (Mercantile): Bond No. G(16) 007 for P100,000.00 and Bond No. G(16) 0030 for P40,000.00. As security, Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, Inc., represented by Felipe Ysmael, Jr., executed an indemnity agreement with Mercantile, binding themselves jointly and severally to indemnify Mercantile for any payments, damages, or expenses incurred. A similar indemnity agreement was executed with Gabriel Daza, Jr., Edgardo L. Tordesillas, and Augusta Torres. The total bond amount was later reduced to P100,000.00. Due to the defendants' failure to pay their overdraft and credit line with PNB, Mercantile received demands from PNB. Mercantile then sent demand letters to the defendants for settlement of their obligation. Procedural History: On February 10, 1971, Mercantile filed a collection case against the defendants. The defendants filed a motion to dismiss, which was denied. They then filed an answer. Subsequently, they failed to appear for pre-trial and were declared in default. Upon reconsideration, the case was reopened, and defendants were allowed to present evidence. After both parties submitted memoranda, the trial court rendered a decision ordering the defendants to pay Mercantile P100,000.00 plus 15% thereof as attorney's fees and costs. The defendants appealed to the Court of Appeals, which certified the case to the Supreme Court as it involved only a question of law. The Petition: The defendants-appellants raised three assignments of error: (I) the lower court erred in not dismissing the case for lack of cause of action, as the complaint was premature because the plaintiff had paid nothing and suffered no actual damage; (II) the lower court erred in not declaring paragraph 3 of the indemnity agreements void; and (III) consequently, the trial court erred in ordering the defendants to pay the plaintiff.
Issue(s)
Whether the complaint was premature due to the plaintiff surety not having paid the creditor bank. Whether paragraph 3 of the indemnity agreements is void. Whether the defendants-appellants are liable to pay the plaintiff the sum of P100,000.00 plus attorney's fees.
Ruling
The Supreme Court affirmed the decision of the lower court. It held that the surety company is entitled to indemnification from the principal debtors even before paying the creditor bank, based on the express stipulation in the indemnity agreement. The Court found no merit in the contention that the complaint was premature or that paragraph 3 of the indemnity agreements was void. Consequently, the defendants were ordered to pay the plaintiff the sum of P100,000.00 plus 15% thereof as attorney's fees and costs.
Ratio Decidendi
On the issue of prematurity and lack of cause of action: The Court held that the stipulation in the indemnity agreement allowing the surety to recover from the indemnitors even before paying the creditor is enforceable. This principle has been settled by prior jurisprudence, citing Cosmopolitan Ins. Co., Inc. v. Reyes. The defendants' contention that the action was premature because the surety had not yet paid the bank was therefore unsustainable. The complaint clearly set forth the cause of action derived from the indemnity agreement, particularly paragraph 3, which allowed the surety to proceed against the defendants for payment even prior to making payment to the Philippine National Bank. The indemnity agreement served as security for the surety company in case of default by the defendants. On the issue of the validity of paragraph 3 of the indemnity agreements: The Court ruled that paragraph 3 of the indemnity agreements is not void. Contracts are respected as the law between the contracting parties, provided they are not contrary to law, morals, good customs, public policy, or public order. The terms of the indemnity agreement were clear and did not contravene any law or public policy. The Court reiterated that such stipulations are sanctioned by well-established jurisprudence. The indemnity agreement was executed for the benefit of the surety, and since the indemnitors voluntarily agreed to the stipulation, the court must respect their contract. The principle of nemocum alterius detrimentum locopletari potest (no person should unjustly enrich himself at the expense of another) was not violated because the defendants voluntarily entered into the agreement. On the issue of defendants' liability for P100,000.00 plus attorney's fees: The Court found no error in ordering the defendants to pay jointly and severally. It was stressed that the principal debtors were also the ones who executed the indemnity agreement, placing them in the position of both principal debtor and indemnitor. Their liability was joint and several with the surety company. Therefore, the Philippine National Bank could proceed against either of them for the satisfaction of the obligation. The Court also affirmed the award of attorney's fees, stating that 15% for cases of this nature is not unreasonable, as previously ruled in Cosmopolitan Insurance Co., Inc. v. Reyes.
Main Doctrine
Under an indemnity agreement, a surety may demand indemnification from the principal debtor even before the surety has paid the creditor, provided the agreement expressly allows for such action upon the principal's default.