Cellpage vs. Solid Guaranty

A surety's liability under a surety bond is not conditioned on the existence or submission of a written principal agreement unless the surety bond itself expressly so stipulates. Where the surety bond contains no requirement that a written principal contract be attached or submitted, the surety is solidarily liable with the principal upon the latter's default, and the creditor may demand performance from the surety regardless of whether the principal agreement was reduced to writing.

Cellpage International Corporation (Cellpage) is a supplier of cellcards and accessories that extends credit lines to its customers. Jomar Powerhouse Marketing Corporation (JPMC) applied for and was granted a credit line with Cellpage for the purchase of cellcards, subject to the condition that JPMC post a good and sufficient bond to guaranty payment of its purchases. The Solid Guaranty, Inc. (Solid Guaranty) is a non-life insurance corporation that issued three surety bonds securing JPMC's credit purchases from Cellpage. The dispute concerns the extent and conditions of Solid Guaranty's liability under those bonds when JPMC defaulted on its payment obligations.

Cellpage International Corporation approved Jomar Powerhouse Marketing Corporation's application for a credit line for the purchase of cellcards, conditioned on JPMC providing a good and sufficient bond to guaranty payment of the purchases. In compliance, JPMC secured from The Solid Guaranty, Inc. three surety bonds: Surety Bond No. 007422 dated March 20, 2002 for P2,500,000.00, Surety Bond No. 00474 dated April 24, 2002 for P2,500,000.00, and Surety Bond No. 00748 dated May 6, 2002 for P2,000,000.00 — aggregating P7,000,000.00 in coverage.

In August 2002, JPMC purchased cellcards from Cellpage amounting to P7,002,600.00 across twelve separate invoices. In partial payment, JPMC issued to Cellpage five postdated checks drawn against Security Bank-Caloocan, totaling P2,457,000.00. When Cellpage presented these checks to the bank for payment, all were dishonored for being drawn against insufficient funds.

Cellpage thereafter demanded full payment of the outstanding obligation of P7,002,600.00 from JPMC, but the latter failed to pay. Cellpage also demanded payment from Solid Guaranty pursuant to the surety bonds, but Solid Guaranty refused to accede. Cellpage then filed a complaint for sum of money against JPMC and Solid Guaranty before the Regional Trial Court of Quezon City. The RTC found in favor of Cellpage, declaring JPMC and Solid Guaranty jointly and solidarily liable. On appeal, the Court of Appeals reversed, holding that the absence of a written credit line agreement precluded Cellpage from demanding performance from Solid Guaranty under the surety bonds, applying the ruling in First Lepanto-Taisho Insurance Corporation vs. Chevron Philippines, Inc. The principal contract between JPMC and Cellpage was substantiated by issue slips, delivery receipts, and purchase orders, and its existence and validity were acknowledged by both the CA and Solid Guaranty.

• No Writing Requirement in the Bonds: Cellpage maintained that the surety bonds did not require the credit line agreement to be in writing or attached to the bonds as a condition for Solid Guaranty's liability, rendering the CA's decision without basis.
• Validity of Oral Principal Contract: Cellpage argued that under Article 1356 of the Civil Code, contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for validity are present; thus, an oral agreement may be guaranteed by a surety contract.
• Estoppel: Cellpage contended that Solid Guaranty was barred by estoppel from questioning the validity and binding effect of the guaranty bonds it issued, as Solid Guaranty knew from the outset the obligation it bound itself to and did not require the purchases or credit line agreement to be in writing and attached.
• Unjust Enrichment: Cellpage claimed that excusing Solid Guaranty from liability would constitute unjust enrichment, since Solid Guaranty was paid premiums and the bonds were secured by indemnity agreements and mortgages.
• Misapplication of First Lepanto: Cellpage argued that reliance on First Lepanto vs. Chevron was misplaced because, unlike the surety in that case, Solid Guaranty did not require the submission of a written principal contract. Cellpage stressed that the principal obligation secured was not the credit line agreement itself but the subsequent purchases made on credit under the facility.

• Accessory Nature of Suretyship: Solid Guaranty argued that since a surety bond is a mere collateral or accessory agreement, the extent of its liability is determined by the terms of the principal contract between JPMC and Cellpage, and since neither party submitted copies of the written agreement, there can be no valid surety claim against it.

• Liability Without Written Principal Contract: Whether Solid Guaranty is liable to Cellpage in the absence of a written principal contract.
• Estoppel: Whether Solid Guaranty is barred by estoppel from questioning the binding effect of the surety bond it issued to JPMC.

• Liability Without Written Principal Contract: Yes. Solid Guaranty is liable because the surety bonds did not expressly require the submission or attachment of a written principal agreement as a condition for the surety's liability; the surety's obligation is determined strictly by the terms of the surety contract, and the bonds here contained no such stipulation.
• Estoppel: Resolved in Cellpage's favor by necessary implication, though the Court found no need to separately discuss the second assignment of error having ruled on the first.

• Liability Without Written Principal Contract: Section 176 of the Insurance Code provides that a surety's liability is joint and several with the obligor, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract. The phrase "in relation to the principal contract" does not mean that a written principal agreement is required; Article 1356 of the Civil Code provides that contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for validity are present. The ruling in First Lepanto was anchored on the specific terms of the surety bond in that case, which expressly required the principal agreement to be attached and made an integral part of the surety contract. Since the liability of a surety is determined strictly by the terms of the surety contract, each case must be assessed independently in light of the parties' agreement. Examination of the surety bonds issued by Solid Guaranty revealed no express requirement that a written principal agreement be submitted or attached. The phrase "in accordance with the terms and conditions of the agreement" in the second whereas clause merely described the nature of JPMC's payment obligation, not a condition imposed on Cellpage to attach the principal agreement. As a contract of adhesion prepared by the surety, its provisions are interpreted liberally in favor of the insured and strictly against the insurer; Solid Guaranty's failure to clearly specify a writing requirement must be construed against it. The existence and validity of the principal contract were not in question, being substantiated by issue slips, delivery receipts, and purchase orders, and acknowledged by both the CA and Solid Guaranty. Upon JPMC's default, Solid Guaranty's liability under the bonds accrued, making it solidarily liable with JPMC up to the face amount of the surety bonds.
• Estoppel: Having ruled that Solid Guaranty is liable on the merits of the first issue, the Court found no need to separately address the estoppel argument.

• Strict Interpretation of Surety Contracts Against the Surety-Drafter — A suretyship agreement is a contract of adhesion ordinarily prepared by the surety or insurance company; its provisions are interpreted liberally in favor of the insured and strictly against the insurer who, as drafter, had the opportunity to state plainly the terms of its obligation. Applied here to construe against Solid Guaranty its failure to expressly require attachment of a written principal agreement.
• Surety's Liability Determined by Terms of the Surety Bond — Under Section 176 of the Insurance Code, the surety's liability is joint and several with the obligor, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract. Whether a written principal agreement is required depends on the terms of the surety contract itself; each case must be assessed independently.
• Direct, Primary, and Absolute Liability of Surety — Although the surety's obligation is secondary or collateral to the principal's, the surety's liability to the creditor is direct, primary, and absolute; the surety is directly and equally bound with the principal.
• Validity of Oral Contracts Under Article 1356 — Contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for their validity are present; thus, an oral agreement with all essential requisites may be guaranteed by a surety contract.

• "Does the phrase 'in relation to the principal contract between the obligor and obligee' means that a written principal agreement is required in order for the surety to be liable? The Court answers in the negative." — This passage states the ratio decidendi: the statutory phrase does not mandate a written principal agreement as a prerequisite for surety liability.
• "Thus, whether or not a written principal agreement is required in order to demand performance from the surety would depend on the terms of the surety contract itself." — This defines the controlling doctrine that the writing requirement is a matter of contractual stipulation, not of law, and must be assessed on a case-by-case basis.
• "A suretyship agreement is a contract of adhesion ordinarily prepared by the surety or insurance company. Therefore, its provisions are interpreted liberally in favor of the insured and strictly against the insurer who, as the drafter of the bond, had the opportunity to state plainly the terms of its obligation." — This articulates the canonical formulation of the rule on strict construction against the surety-drafter, frequently cited in subsequent suretyship jurisprudence.

• First Lepanto-Taisho Insurance Corporation vs. Chevron Philippines, Inc., 679 Phil. 313 (2012) — Distinguished. The Court held that First Lepanto's requirement of a written principal agreement was anchored on the specific terms of the surety bond in that case, which expressly required the principal agreement to be attached and made an integral part of the surety contract. Since the bonds in the present case contained no such express requirement, First Lepanto was inapplicable.
• Eastern Shipping Lines vs. Court of Appeals, 304 Phil. 236 (1994) — Followed. The Court applied its guidelines for the imposition of compensatory interest on monetary awards, as modified by BSP Circular No. 799.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Followed. Applied for the prospective reduction of the legal interest rate from 12% to 6% per annum effective July 1, 2013 pursuant to BSP Circular No. 799.
• FGU Insurance Corp. vs. Spouses Roxas, 816 Phil. 71 (2017) — Followed. Cited for the doctrines that a suretyship agreement is a contract of adhesion interpreted strictly against the insurer-drafter, and that the surety's liability is direct, primary, and absolute.

• Section 175, Presidential Decree No. 612 (Insurance Code) — Defines suretyship as an agreement where a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third person called the obligee. Applied to characterize the relationship among Cellpage, JPMC, and Solid Guaranty.
• Section 176, Presidential Decree No. 612 (Insurance Code) — Provides that the liability of the surety is joint and several with the obligor, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract. The Court interpreted the phrase "in relation to the principal contract" as not requiring a written principal agreement absent an express stipulation in the surety bond.
• Article 1356, Civil Code — Provides that contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for their validity are present. Applied to hold that an oral principal agreement may validly be guaranteed by a surety contract.
• Article 1159, Civil Code — Provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Cited in support of the principle that parties may stipulate conditions in their contract, including a writing requirement, as long as not contrary to law, morals, good customs, public order, or public policy.
• BSP-MB Circular No. 799, series of 2013 — Reduced the rate of interest applicable on loan or forbearance of money from 12% to 6% per annum, effective July 1, 2013. Applied prospectively to modify the interest rate on the monetary award.

Peralta, C.J. (Chairperson), Caguioa (Working Chairperson), Lazaro-Javier, and Lopez, JJ., concurred.