Government Service Insurance System v. National Food Authority
REITERATIONFacts
The Antecedents: The National Food Authority (NFA) entered into a Contract of Palay Milling with Alberto L. Fajardo. Fajardo was required to post a bond, which was secured from the Government Service Insurance System (GSIS) in the amount of P56,666.67. Fajardo executed an indemnity agreement in favor of GSIS. During the milling operations from June to November 1983, Fajardo incurred a shortage of 67,824.01 kilos of milled rice valued at P297,069.16 and a shortage in empty jute sacks amounting to P31,638.46. NFA sent demand letters to Fajardo for the rice shortage and to GSIS for the bond. Procedural History: The NFA filed a complaint for sum of money and damages against GSIS and Fajardo. Fajardo denied liability, attributing the shortage to Rosalina Bernabe and Adriano Golingan. GSIS filed an answer with a cross-claim against Fajardo based on the indemnity agreement. The Regional Trial Court (RTC) ordered Fajardo and GSIS, jointly and severally, to pay NFA P56,666.67 plus interest. It also ordered Fajardo to pay NFA P234,128.45 for rice shortage, P31,638.46 for jute sack shortage, exemplary damages, and attorney's fees. The RTC dismissed all other claims and counterclaims. The Court of Appeals affirmed the RTC decision. The Petition: The GSIS petitioned the Supreme Court, arguing that the Court of Appeals erred in affirming the trial court's decision holding GSIS liable under the surety bond despite alleged fraud and misrepresentation by Fajardo in securing it. GSIS also argued that the appellate court erred in dismissing its cross-claim against Fajardo despite the validity of the indemnity agreement.
Issue(s)
Whether the petitioner GSIS is liable under the surety bond despite alleged fraud and misrepresentation by the principal obligor, Alberto L. Fajardo. Whether the respondent Court of Appeals erred in dismissing GSIS's cross-claim against Alberto L. Fajardo.
Ruling
The Supreme Court modified the decision of the Court of Appeals. It affirmed the liability of GSIS to the NFA under the surety bond but ordered private respondent Alberto L. Fajardo to pay petitioner GSIS whatever amount the latter has been adjudged to pay NFA.
Ratio Decidendi
On the first issue of GSIS's liability under the surety bond: The Court held that the liability of GSIS to the NFA pursuant to the bond it issued in favor of Fajardo is clear. The alleged fraud and misrepresentation perpetrated by Fajardo cannot be used by GSIS to avoid its undertaking with the NFA. The Court reiterated the oft-repeated rule that petitions for review on certiorari can only raise errors of jurisdiction, and allegations of fraud and misrepresentation pose factual questions which are generally not reviewed by the Supreme Court in such petitions. Therefore, GSIS's liability to NFA stands. On the second issue of dismissing GSIS's cross-claim against Fajardo: The Court sustained petitioner GSIS's contention that the respondent court erred in dismissing its cross-claim against Fajardo. The Court noted that the respondent court itself found the Indemnity Agreement between GSIS and Fajardo to be valid. The obligation of Fajardo to GSIS under this Agreement was clearly spelled out, requiring Fajardo to indemnify GSIS for any damages, losses, costs, payments, advances, and expenses incurred as a consequence of executing the bond. Since Fajardo did not assail the existence and due execution of this Indemnity Agreement, he is bound to comply with its terms. Thus, GSIS is entitled to recover from Fajardo the amount it has to pay to NFA.
Main Doctrine
A surety cannot avoid liability under its bond by alleging fraud and misrepresentation employed by the principal obligor in securing the bond, especially when such allegations raise factual issues not proper for a petition for review on certiorari. However, the surety is entitled to recover from the principal obligor based on the indemnity agreement executed between them.