Country Bankers Insurance Corporation vs. Antonio Lagman

A continuing surety bond with no fixed expiration date remains in full force and effect until cancelled by the obligee, the Insurance Commissioner, or a court of competent jurisdiction, and the payment of premiums for a one-year period does not automatically limit the bond's effectivity to one year. A photocopy of a document is inadmissible as secondary evidence unless the offeror proves the existence, due execution, and unavailability of the original without bad faith, and when multiple originals exist, all must be accounted for before secondary evidence may be admitted.

Nelson Santos applied for a license with the National Food Authority (NFA) to engage in the business of storing palay in his warehouse in Tarlac. Under Act No. 3893, the General Bonded Warehouse Act, as amended by Republic Act No. 247, Presidential Decree No. 4, and Presidential Decree No. 1770, the license was conditioned upon posting a bond in an amount fixed by the NFA Administrator at not less than 33⅓% of the market value of the maximum quantity of rice to be received. Country Bankers Insurance Corporation issued the required surety bonds through its agent, Antonio Lagman, who also acted as a co-signor to the corresponding Indemnity Agreements.

Country Bankers Insurance Corporation issued Warehouse Bond No. 03304 for ₱1,749,825.00 on November 5, 1989, and Warehouse Bond No. 02355 for ₱749,925.00 on December 13, 1989, to secure Nelson Santos's license to store palay. Santos was the bond principal, Antonio Lagman was the surety, and the Republic of the Philippines, through the NFA, was the obligee. In consideration of these issuances, Indemnity Agreements were executed by Santos, Ban Lee Lim Santos, Rhosemelita Reguine, and Lagman as co-signors, binding themselves jointly and severally liable to Country Bankers for any damages, losses, costs, payments, and expenses, including attorney's fees and legal costs, arising from the bonds, with interest at 12% per annum compounded monthly and attorney's fees of 20% of the amount due.

Santos secured a loan using his warehouse receipts as collateral. When the loan matured, Santos defaulted, and the sacks of palay covered by the warehouse receipts were no longer found in the bonded warehouse. Country Bankers was compelled to pay ₱1,166,750.37 by virtue of the surety bonds. Country Bankers then filed a complaint for sum of money before the RTC of Manila. In his Answer, Lagman alleged that the 1989 Bonds were valid only for one year from issuance, that they were never renewed, that Country Bankers issued Warehouse Bond No. 03515 in 1990 which was also valid for one year without an Indemnity Agreement, and that the 1990 Bond superseded and cancelled the 1989 Bonds.

The bond principals Santos and Ban Lee Lim could not be served with summons and the case was dismissed against them without prejudice. Reguine was declared in default. The RTC rendered judgment against Reguine and Lagman, relying on the express terms of the Indemnity Agreements and holding that the bonds remained in force unless cancelled by the NFA Administrator. Lagman appealed to the Court of Appeals, which reversed the RTC, holding that the 1990 Bond superseded the 1989 Bonds and that Lagman was exonerated because he was not a signatory to the alleged 1990 Indemnity Agreement. The appellate court also found that the receipts issued for the bonds indicated they were effective for only one year.

Before the Supreme Court, Country Bankers argued that the 1989 Bonds were continuing bonds that could only be cancelled by the NFA Administrator under Section 177 of the Insurance Code, and that the receipts for premium payments did not determine the period of effectivity. Country Bankers also questioned the existence of the 1990 Bond, noting that Lagman failed to produce the original, that its issuance was not approved by Country Bankers, and that the NFA was not in possession of it. Lagman, for his part, raised novation, asserting that the 1990 Bond superseded the 1989 Bonds and that he had no cause of action against him. During direct examination, Lagman testified that there were four duplicate originals of the 1990 Bond: one kept by the NFA, one with the NFA Loan Officer in Tarlac, one with Country Bankers, and one in his possession. He presented only a photocopy, explaining that he could no longer produce his copy because he had severed his ties with Country Bankers.

• Continuing Bond: Country Bankers maintained that by the express terms of the 1989 Bonds, they shall remain in full force until cancelled by the Administrator of the NFA, and that Section 177 of the Insurance Code applies, allowing cancellation only by the obligee, the Insurance Commissioner, or a competent court.
• Existence of the 1990 Bond: Country Bankers questioned the existence of the 1990 Bond on the grounds that Lagman failed to produce the original, no basis was laid for secondary evidence, the issuance was not approved and processed by Country Bankers, and the NFA as bond obligee was not in possession of it.
• Premium Receipts: Country Bankers argued that the receipts issued for the 1989 Bonds are mere evidence of premium payments and should not be relied upon to determine the period of effectivity, as they only represent transactions between the bond principal and the surety and do not involve the NFA as bond obligee.
• Incontestability Clause: Country Bankers invoked the incontestability clause in the Indemnity Agreements which prohibits Lagman from questioning his liability therein.

• Novation: Lagman raised the issue of novation, asserting that the 1989 Bonds were superseded by the 1990 Bond, which did not include him as a party, and therefore Country Bankers had no cause of action against him.
• Expiration of Bonds: Lagman argued that the 1989 Bonds expired after one year, as evidenced by the receipts for premium payments, and that because of novation, the 1989 Bonds are neither perpetual nor continuing.

• Effectivity of the 1989 Bonds: Whether the 1989 surety bonds were continuing bonds that remained in force until cancelled by the NFA Administrator, notwithstanding the one-year premium receipts.
• Admissibility of the 1990 Bond: Whether the photocopy of the 1990 Bond was admissible as secondary evidence under the best evidence rule.
• Novation: Whether the 1990 Bond novated the 1989 Bonds, thereby extinguishing Lagman's liability under the Indemnity Agreements.

• Effectivity of the 1989 Bonds: Yes. The 1989 Bonds were continuing bonds that remained in full force and effect until cancelled by the NFA Administrator, the Insurance Commissioner, or a court of competent jurisdiction, pursuant to Section 177 of the Insurance Code. The official receipts served only as proof of premium payment for one year and did not automatically limit the bond's effectivity.
• Admissibility of the 1990 Bond: No. The photocopy of the 1990 Bond was inadmissible because Lagman failed to prove the existence, due execution, and unavailability of the original without bad faith, and he did not account for the other three duplicate originals he admitted existed.
• Novation: No. Without a valid and admissible new contract, there can be no novation; only the first requisite of novation (a previous valid obligation) was present, and the old contract was not extinguished.

• Effectivity of the 1989 Bonds: The Court held that the official receipts for premium payments do not automatically mean that the surety bond is effective for only one year. The effectivity of the bond is not wholly dependent on the payment of premium. Section 177 of the Insurance Code provides that no contract of suretyship or bonding shall be valid and binding unless and until the premium has been paid, except where the obligee has accepted the bond. The 1989 Bonds contained identical provisions stating that the bond "shall remain in full force until cancelled by the Administrator of National Food Authority." This provision complies with the second paragraph of Section 177, which specifies that a continuing bond, where there is no fixed expiration date, may be cancelled only by the obligee, the Insurance Commissioner, or a court. The Court quoted the trial court's finding that there was no record of cancellation of the Warehouse Bonds by the NFA Administrator, the Insurance Commissioner, or the Court, and therefore the bonds were valid and binding and could not be unilaterally cancelled by Lagman.

• Admissibility of the 1990 Bond: The Court applied the best evidence rule under Section 3, Rule 130 of the Rules of Court, which requires the original document to be produced whenever its contents are the subject of inquiry, except in specified cases. A photocopy, being secondary evidence, is not admissible unless it is shown that the original is unavailable. Under Section 5, Rule 130, the offeror must prove: (1) the existence or due execution of the original; (2) the loss or destruction of the original or the reason for its non-production; and (3) the absence of bad faith. The Court noted that Lagman admitted there were four duplicate originals of the 1990 Bond, and he failed to explain why he could not produce his copy or secure an original from any of the other three custodians. The Court found that Lagman failed to exert diligent efforts to produce the original, and the absence of an Indemnity Agreement for the 1990 Bond fueled suspicion regarding its existence. The trial court's observation that Lagman's defense of "non-existence of an indemnity agreement" was indicia of bad faith was quoted with approval.

• Novation: The Court defined novation as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one, requiring: (1) a previous valid obligation; (2) agreement of the parties to a new contract; (3) extinguishment of the old contract; and (4) a valid new contract. In this case, only the first element existed. There was neither a valid new contract nor a clear agreement between the parties to a new contract since the very existence of the 1990 Bond was rendered dubious. Without the new contract, the old contract was not extinguished. The Court also rejected implied novation, which requires a new obligation with which the old is in total incompatibility, because there was no new obligation at all. Lagman remained bound by the Indemnity Agreements executed in consideration of the 1989 Bonds, which contained identical stipulations binding the co-signors jointly and severally to indemnify Country Bankers for any damages or losses sustained on account of the execution of the bonds. The Incontestability Clause provided that any payment made by Country Bankers on account of the bond shall be final and shall not be disputed by the undersigned.

• Continuing Bond Doctrine — A continuing bond with no fixed expiration date remains in full force and effect until cancelled by the obligee, the Insurance Commissioner, or a court of competent jurisdiction. The Court applied this doctrine to hold that the 1989 Bonds could not be unilaterally cancelled by Lagman, and that the payment of premiums for one year did not limit the bond's effectivity to one year.

• Best Evidence Rule — When the subject of inquiry is the contents of a document, no evidence shall be admissible other than the original document itself, except in specified cases. A photocopy, being secondary evidence, is not admissible unless the offeror proves: (1) the existence or due execution of the original; (2) the loss or destruction of the original or the reason for its non-production; and (3) the absence of bad faith. When more than one original copy exists, it must appear that all of them have been lost, destroyed, or cannot be produced before secondary evidence can be given of any one. The Court applied this rule to exclude the photocopy of the 1990 Bond because Lagman failed to account for the other three duplicate originals.

• Novation Requisites — For novation to take place, the following requisites must concur: (1) there must be a previous valid obligation; (2) the parties concerned must agree to a new contract; (3) the old contract must be extinguished; and (4) there must be a valid new contract. The Court applied this test to find that only the first element existed, since the 1990 Bond's existence was dubious and inadmissible.

• Implied Novation — Implied novation necessitates a new obligation with which the old is in total incompatibility such that the old obligation is completely superseded by the new one. The Court held that there could be no implied novation because there was no new obligation at all.

• "The official receipts in question serve as proof of payment of the premium for one year on each surety bond. It does not, however, automatically mean that the surety bond is effective for only one (1) year. In fact, the effectivity of the bond is not wholly dependent on the payment of premium." — This passage articulates the Court's core reasoning on the effectivity of continuing bonds, distinguishing between premium payment and bond duration.

• "By law and by the specific contract involved in this case, the effectivity of the bond required for the obtention of a license to engage in the business of receiving rice for storage is determined not alone by the payment of premiums but principally by the Administrator of the NFA. From beginning to end, the Administrator's brief is the enabling or disabling document." — This passage establishes the controlling principle that the NFA Administrator's cancellation, not premium payment, determines the bond's effectivity.

• "A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the original is unavailable." — This passage states the best evidence rule as applied to the inadmissible photocopy of the 1990 Bond.

• "In this case, only the first element of novation exists. Indeed, there is a previous valid obligation, i.e., the 1989 Bonds. There is however neither a valid new contract nor a clear agreement between the parties to a new contract since the very existence of the 1990 Bond has been rendered dubious. Without the new contract, the old contract is not extinguished." — This passage applies the four-element test of novation to the facts, demonstrating why Lagman's defense failed.

• Consolidated Bank and Trust Corporation (SOLIDBANK) vs. Del Monte Motor Works, Inc., G.R. No. 143338, July 29, 2005 — Cited for the proposition that the original document must be produced whenever its contents are the subject of inquiry under the best evidence rule.
• Lee vs. Tambago, A.C. No. 5281, February 12, 2008 — Cited for the rule that a photocopy, being secondary evidence, is not admissible unless the original is shown to be unavailable.
• Citibank, N.A. Mastercard vs. Teodoro, 458 Phil. 480 (2003) — Cited for the correct order of proof before secondary evidence may be admitted: existence, execution, loss, and contents; also cited for the rule that when more than one original exists, all must be accounted for.
• Heirs of Teofilo Gabatan vs. Court of Appeals, G.R. No. 150206, March 13, 2009 — Cited for the requirement that a party must first present proof of loss or other satisfactory explanation for the non-production of the original instrument.
• Adriatico Consortium, Inc. vs. LandBank of the Philippines, G.R. No. 187838, December 23, 2009 — Cited for the four requisites of novation.
• Salazar vs. J.Y. Brothers Marketing Corporation, G.R. No. 171998, October 20, 2010 — Cited for the definition of implied novation requiring total incompatibility between the old and new obligations.

• Section 177, Insurance Code — Provides that the surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor; no contract of suretyship or bonding shall be valid and binding unless and until the premium has been paid, except where the obligee has accepted the bond. In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee, the Commissioner, or a court of competent jurisdiction. The Court applied this provision to hold that the 1989 Bonds were continuing bonds that could only be cancelled by the NFA Administrator.
• Section 3, Rule 130, Rules of Court — Provides that when the subject of inquiry is the contents of a document, no evidence shall be admissible other than the original document itself, except in specified cases. The Court applied this rule to exclude the photocopy of the 1990 Bond.
• Section 5, Rule 130, Rules of Court — Provides that when the original document has been lost or destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and the cause of its unavailability without bad faith, may prove its contents by a copy. The Court applied this rule to find that Lagman failed to satisfy the requirements for secondary evidence.
• Act No. 3893, as amended by Republic Act No. 247, Presidential Decree No. 4, and Presidential Decree No. 1770 — The General Bonded Warehouse Act, which conditioned Santos's license upon posting a bond in an amount fixed by the NFA Administrator at not less than 33⅓% of the market value of the maximum quantity of rice to be received.

• Justice Antonio T. Carpio (Chairperson)
• Justice Teresita J. Leonardo de Castro
• Justice Martin S. Villarama, Jr.
• Justice Maria Lourdes P. A. Sereno