Commonwealth Insurance Corporation v. Court of Appeals
REITERATIONFacts
The Antecedents: Rizal Commercial Banking Corporation (RCBC) granted export loan lines to Jigs Manufacturing Corporation (JIGS) and Elba Industries, Inc. (ELBA). Commonwealth Insurance Company (CIC) issued surety bonds to secure these loans, totaling P4,464,128.00 in face value. JIGS and ELBA defaulted on their loan obligations. RCBC made demands on CIC for payment under the surety bonds. CIC made partial payments totaling P2,000,000.00 from February 1985 to February 1988. Despite a final demand on July 7, 1988, CIC failed to pay the remaining balance. Procedural History: RCBC filed a Complaint for Sum of Money against CIC. The Regional Trial Court (RTC) ruled that CIC, along with JIGS and ELBA, were solidarily liable for P2,464,128.00 plus attorney's fees and costs. RCBC's motion for reconsideration to include interest was denied. RCBC appealed to the Court of Appeals (CA). The CA modified the RTC decision, holding CIC liable for the principal amounts of the bonds plus 12% legal interest per annum from the dates of demand, minus payments made, and also awarded attorney's fees and costs. CIC's motion for reconsideration was denied. The Petition: CIC filed a petition for review on certiorari, assailing the CA's decision to hold it liable for legal interest over and above the principal obligation stated in the surety bonds.
Issue(s)
Whether petitioner Commonwealth Insurance Company (CIC) is liable to pay legal interest over and above its principal obligation under the surety bonds. Whether the stipulation in the surety bonds limiting CIC's liability to the face value thereof precludes liability for interest incurred due to delay.
Ruling
The petition is denied. The assailed Decision and Resolution of the Court of Appeals are affirmed in toto.
Ratio Decidendi
On the issue of liability for interest over and above the principal obligation: The Court held that CIC is liable to pay legal interest on the unpaid principal obligation. While a surety's liability is generally limited to the amount of the bond as per Section 176 of the Insurance Code, this limitation pertains to the principal obligation secured. However, when the surety defaults and incurs in delay (mora solvendi), it becomes liable for damages, including interest, as provided by Articles 1169 and 1170 of the Civil Code. This liability for interest arises from law due to the delay, not from the contract of suretyship itself, and therefore, is not covered by the limitation in the bond. The Court cited established jurisprudence, including Tagawa vs. Aldanese, Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and Republic vs. Court of Appeals, which consistently hold that a surety is liable for interest even if it exceeds the bond amount, as this increased liability is a consequence of default and the necessity of judicial collection. On whether the stipulation limiting liability precludes interest: The Court found CIC's argument that the stipulation limiting its liability to the amount stated in the bonds controls to be untenable. The Court explained that if a surety could simply delay payment without consequence beyond the bond amount, it would create an absurd situation where the surety could benefit from the use of the money while the creditor suffers. The obligation to pay interest arises from the legal consequence of delay, which is distinct from the contractual obligation under the suretyship. Therefore, the limitation in the surety bond does not exempt the surety from paying interest when it incurs in delay.
Main Doctrine
A surety's liability for interest due to delay in payment, arising from mora solvendi, is not limited by the face value of the surety bond, as such liability stems from law (Articles 1169 and 1170 of the Civil Code) and not from the contract of suretyship itself.