Commonwealth Insurance Corporation vs. Court of Appeals

A surety who defaults on extrajudicial demand is liable for legal interest at 12% per annum from the date of demand, even if the total liability exceeds the face amount of the surety bond, because the interest is a consequence of mora solvendi (default) under Articles 1169 and 1170 of the Civil Code and not a liability assumed in the suretyship contract. The bond’s limitation clause applies only to the principal obligation, not to damages for delay.

Rizal Commercial Banking Corporation (RCBC) granted two export loan lines in 1984: one for ₱2,500,000.00 to Jigs Manufacturing Corporation (JIGS) and another for ₱1,000,000.00 to Elba Industries, Inc. (ELBA). Both corporations drew on their credit lines, and their total indebtedness was secured by surety bonds issued by Commonwealth Insurance Corporation (CIC). JIGS and ELBA defaulted on their loans. RCBC demanded payment from CIC in writing on October 30, 1984 (JIGS account) and December 17, 1984 (ELBA account). CIC made installment payments totaling ₱2,000,000.00 from February 1985 to February 1988 but left a substantial unpaid balance. RCBC sent a final demand letter on July 7, 1988, which CIC ignored, prompting RCBC to file a collection suit on September 19, 1988.

• The Loan Transactions: In 1984, RCBC granted two export loan lines: ₱2,500,000.00 to JIGS and ₱1,000,000.00 to ELBA. JIGS drew ₱2,499,992.00; ELBA drew ₱998,033.37 plus ₱478,985.05 from case-to-case basis and trust receipts. Both loans were evidenced by promissory notes.

• The Surety Bonds: CIC issued surety bonds in favor of RCBC totaling ₱2,894,128.00 for JIGS’s obligations and ₱1,570,000.00 for ELBA’s obligations. The total face value of the bonds was ₱4,464,128.00. Each bond stipulated that CIC’s liability would not exceed the stated amount.

• Default and Demand: JIGS and ELBA defaulted. RCBC made written demands on CIC: on October 30, 1984 for the JIGS account, and on December 17, 1984 for the ELBA account.

• CIC’s Partial Payments and Subsequent Default: From February 25, 1985 to February 10, 1988, CIC made several payments aggregating ₱2,000,000.00. A substantial balance of ₱2,464,128.00 remained unpaid. RCBC sent a final demand letter on July 7, 1988, which CIC ignored.

• RCBC’s Complaint: RCBC filed a complaint for sum of money on September 19, 1988, seeking recovery of the unpaid principal balance plus interest. CIC admitted the principal obligation but resisted liability for interest, asserting that its liability could not exceed the face amount of the bonds and that its delay was not unreasonable due to ongoing settlement negotiations.

• Liability Limited to Bond Amount: Petitioner CIC maintained that under the express terms of the surety bonds, its liability “shall in no case exceed” the amount stated therein, and therefore it could not be compelled to pay interest that would bring its total liability beyond the bond’s face value.

• Unreasonable Delay Not Present: Petitioner argued that under Section 244 of the Insurance Code, interest accrues only when the delay or refusal to pay is unreasonable. CIC contended that its delay was not unreasonable because it was engaged in negotiations with RCBC for an amicable settlement.

• Rate of Interest Should Be 6%: Petitioner alternatively insisted that if any interest were due, the rate should be 6% per annum, not 12%.

• Interest as Damages for Mora: Respondent RCBC argued that once demand was made and CIC failed to pay, it incurred in delay (mora solvendi) under Articles 1169 and 1170 of the Civil Code, and thus became liable for legal interest as damages. This obligation arises from law, not from the contract of suretyship, and is not subject to the bond’s limitation clause.

• Liability for Interest in Excess of Bond: Whether a surety that fails to pay upon extrajudicial demand may be held liable for legal interest that exceeds the face amount of the surety bond.

• Unreasonable Delay: Whether CIC’s delay in payment was unreasonable under Section 244 of the Insurance Code, warranting the imposition of interest.

• Rate of Interest: Whether the applicable rate of legal interest is 6% or 12% per annum.

• Liability for Interest in Excess of Bond: The surety’s liability for interest was upheld. The obligation to pay interest stems from default (mora) under Articles 1169 and 1170 of the Civil Code, not from the suretyship contract. The limitation clause in the bond governs only the principal obligation voluntarily assumed; it does not insulate the surety from the legal consequences of its own default. Jurisprudence, from Tagawa vs. Aldanese and Union Gurantee Co. (1922) to Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc. (2001), has consistently held that “if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection.”

• Unreasonable Delay: CIC’s delay was found unreasonable. Despite admitting its obligation to pay the principal balance, CIC failed to tender the remaining ₱2,464,128.00 after demand, merely citing disagreements over interest. Negotiations for an amicable settlement did not excuse it from paying the undisputed principal. As of the filing of the complaint, the balance remained outstanding, and no valid reason for non-payment was offered.

• Rate of Interest: The 12% per annum rate was correctly imposed. CIC’s obligation constituted a loan or forbearance of money. Under the Eastern Shipping Lines, Inc. vs. Court of Appeals guidelines, when an obligation consists of a loan or forbearance of money and no interest rate is stipulated, the rate is 12% per annum computed from the time of extrajudicial demand under Article 1169 of the Civil Code. Thus, interest ran from October 30, 1984 for the JIGS account and December 17, 1984 for the ELBA account.

• Surety’s Liability for Interest As Damages for Delay — A surety’s failure to pay upon valid demand places it in mora solvendi. The resulting liability for legal interest arises from Articles 1169 and 1170 of the Civil Code, independent of the suretyship contract, and is not capped by the bond’s limitation clause. The surety remains liable for the full legal interest even if the total exceed the bond amount, because the increased liability flows from the default and the necessity of judicial collection, not from the contract.

• Eastern Shipping Lines Guidelines on Legal Interest — For obligations consisting in the payment of a sum of money, i.e., a loan or forbearance of money, in the absence of a stipulated interest rate, the legal interest rate is 12% per annum computed from the date of judicial or extrajudicial demand under Article 1169 of the Civil Code. (This was the prevailing rate at the time of the decision, prior to subsequent Monetary Board revisions.)

• “The increased liability is not because of the contract but because of the default and the necessity of judicial collection.” — This passage, cited from prior jurisprudence, captures the ratio that the surety’s liability for excess interest originates in its breach, not in the voluntary assumption under the bond.

• “If the theory of appellee and the lower court is correct, then the Surety may just as well not pay and use the P1 million in the meantime. It can choose to pay only after several years – after all, his liability can never exceed P1 million. That would be absurd and the law could not have intended it.” — The Court of Appeals’ reductio ad absurdum, adopted by the Supreme Court, illustrating why the bond’s limit cannot be read to immunize the surety from interest for delay.

• Tagawa vs. Aldanese and Union Gurantee Co. , 43 Phil. 852 (1922) — Early authority for the rule that a surety who defaults on demand becomes liable for interest even if the total exceeds the bond amount.

• Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc. , 100 Phil. 679 (1957) — Followed Tagawa and affirmed the principle that liability beyond the bond arises from default, not contract.

• Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc. , 354 SCRA 285 (2001) — Reiterated the rule and expressly applied it to sustain interest exceeding the bond’s face.

• Eastern Shipping Lines, Inc. vs. Court of Appeals , 234 SCRA 78 (1994) — Established the guidelines for the imposition of legal interest; applied to fix the rate at 12% for loan or forbearance of money from the date of extrajudicial demand.

• Article 1169, Civil Code — Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands fulfillment. Applied to fix the commencement of CIC’s liability for interest on the dates RCBC made written demand.

• Article 1170, Civil Code — Those who in the performance of their obligations are guilty of delay are liable for damages. Served as the basis for holding CIC liable for legal interest as a form of damages.

• Section 176, Insurance Code — A surety’s liability is limited to the amount of the bond. Construed to apply only to the principal obligation assumed, not to damages for delay.

• Section 244, Insurance Code — In litigation for enforcement of an insurance policy, interest and damages may be awarded if denial or delay in payment is unreasonable. Addressed but distinguished: the award of interest was based on the Civil Code’s default provisions, and CIC’s delay was nonetheless unreasonable.

Puno (Chairman), Quisumbing, Callejo, Sr., and Tinga, JJ., concurred. No separate concurring opinions were noted.

N/A — The decision was unanimous, with no recorded dissenting opinion.