Ejercito vs. Oriental Assurance Corporation

Indemnitors under a Deed of Indemnity are jointly and severally liable for renewed surety bonds where the contract expressly authorizes the surety company to grant renewals, regardless of the indemnitors' subjective intent to limit liability to the original term, provided the contractual terms are clear and unequivocal.

Oriental Assurance Corporation issued a Surety Bond in favor of FFV Travel & Tours, Inc. to guarantee the company's payment of airline tickets purchased on credit from International Air Transport Association (IATA) members up to ₱3,000,000.00. On the same day, petitioners Paulino M. Ejercito, Jessie M. Ejercito, Johnny D. Chang, and Merissa C. Somes executed a Deed of Indemnity in favor of Oriental Assurance to secure the surety company against any losses from the bond.

• The Surety Bond and Indemnity Agreement: On May 10, 1999, respondent Oriental Assurance Corporation, through its Executive Vice President Luz N. Cotoco, issued a Surety Bond in favor of FFV Travel & Tours, Inc. (Company) guaranteeing payment of airline tickets purchased on credit from participating International Air Transport Association (IATA) members up to ₱3,000,000.00. On the same date, petitioners Paulino M. Ejercito, Jessie M. Ejercito, and Johnny D. Chang, together with Merissa C. Somes, executed a Deed of Indemnity in favor of respondent to secure the surety company against any losses arising from the bond.
• Original Term and Renewal: The Surety Bond was originally effective for one year from May 10, 1999 until May 10, 2000. It was subsequently renewed for another year from May 10, 2000 to May 10, 2001, as evidenced by Bond Endorsement No. OAC-2000/0145 dated April 17, 2000. The renewal premium amounting to ₱15,024.54 was paid by the insured corporation under Official Receipt No. 100262.
• Default and Payment by Surety: FFV Travel & Tours, Inc. was declared in default for failure to pay obligations amounting to ₱5,484,086.97 and USD 18,760.98 as of July 31, 2000. Consequently, IATA demanded payment of the bond, and respondent heeded the demand on November 28, 2000 as evidenced by China Bank Check No. 104949. IATA executed a Release of Claim on November 29, 2000 acknowledging payment of the surety bond.
• Demand for Reimbursement: Respondent sent demand letters to petitioners and Somes for reimbursement of the ₱3,000,000.00 pursuant to the indemnity agreement. For their failure to reimburse, respondent filed the collection suit.
• RTC Findings: The trial court found that there was no written agreement showing the intention of petitioners to renew the Deed of Indemnity, evidenced by the absence of any signature on the Renewal Notice. However, the RTC held Somes liable because she paid the premium for the renewal and used the renewed bond by submitting it to IATA.
• CA Findings: The appellate court found that petitioners had authorized respondent to grant any renewals or extensions pursuant to the indemnity agreement, which contained a stipulation authorizing the company to grant or consent to the grant of any extension, continuation, increase, modification, change, alteration, and/or renewal of the original bond. The CA noted that petitioners voluntarily signed the agreement and are educated persons (Paulino being a lawyer), precluding any claim of misunderstanding the legal effects of their undertaking.

• Limitation of Liability to Original Term: Petitioners maintained that they could not be held liable for the renewed bond because they did not give their consent to be bound by the Deed of Indemnity beyond the one-year effectivity period of the original surety bond. They argued that their liability was limited to the original one-year period only.
• No Breach of Obligation: Petitioners argued that they could not be held liable for attorney's fees because they did not breach their obligation under the Deed of Indemnity during the one-year effectivity period of the original surety bond. They contended that since they did not consent to the renewal, no breach occurred vis-à-vis their undertaking.
• Contract of Adhesion: Petitioners asserted that the Deed of Indemnity was a contract of adhesion that should be construed against the surety company, claiming they were not given the opportunity to negotiate the terms, specifically the renewal clause.

• Clear Contractual Terms: Respondent countered that the Deed of Indemnity expressly contained provisions authorizing the company to grant renewals, extensions, and modifications of the bond, and that petitioners were bound by these clear and unequivocal terms. The indemnity agreement explicitly covered "its renewals, extensions, modifications or substitutions."
• Authorization to Renew: Respondent argued that the clause empowering the company to "grant or consent to the granting of any extension, continuation, increase, modification, change, alteration and/or renewal of the original bond" was binding on petitioners, who voluntarily executed the contract with full knowledge of its contents.
• Solidary Liability: Respondent maintained that petitioners held themselves jointly and severally liable for the original bond or for any extension, renewal, or substitution thereof until the full amount was paid, as explicitly stipulated in the indemnity agreement.

• Scope of Indemnity Obligation: Whether the Court of Appeals erred in ruling that petitioners are liable to indemnify the respondent under the Deed of Indemnity considering that petitioners did not give their consent to be bound thereby beyond the one-year effectivity period of the original surety bond.
• Attorney's Fees: Whether the Court of Appeals erred in ruling that petitioners are liable to pay the respondent attorney's fees considering that petitioners did not breach their obligation under the Deed of Indemnity to indemnify the respondent during the one-year effectivity period of the original surety bond.

• Scope of Indemnity Obligation: Liability attaches to petitioners for the renewed bond. The Deed of Indemnity contained explicit stipulations under the headings "INDEMNITY," "MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH," "INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY," and "RENEWALS ALTERATIONS AND SUBSTITUTIONS," which collectively authorized respondent to grant or consent to renewals and bound petitioners jointly and severally liable for any extension, renewal, or substitution of the original bond. Because the terms of the contract are clear, explicit, and unequivocal, the literal meaning of its stipulations controls. The subsequent acts of the company through Somes that led to the renewal of the surety bond are binding on petitioners. Somes' intention to renew cannot be denied as she paid the renewal premium and submitted the renewed bond to IATA. Any claim by petitioners that they only consented to a one-year validity must be directed against Somes in a separate action, as respondent is not privy to any alleged separate agreement between Somes and petitioners.
• Attorney's Fees: Petitioners are liable for attorney's fees. The indemnity agreement expressly stipulated that petitioners would indemnify respondent for "counsel or attorney's fees" which "shall not be less than fifteen (15%) per cent of the amount claimed by the company in each action," due and payable irrespective of whether the case is settled judicially or extrajudicially. Having breached their obligation to reimburse respondent upon demand, the liability for attorney's fees follows as a matter of contractual stipulation.
• Contract of Adhesion: The contention that the Deed of Indemnity is a contract of adhesion fails. Contracts of adhesion are not invalid per se, and their binding effects have been upheld on numerous occasions. The reasoning that such contracts are void when the weaker party is imposed upon and deprived of the opportunity to bargain on equal footing cannot apply where one of the petitioners, Paulino M. Ejercito, is a lawyer who cannot feign ignorance of the legal effect of his undertaking. Petitioners could have easily inserted a remark limiting the renewal clause if such was their intention.
• Ignorance of Contractual Terms: The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it applies to the Indemnity Agreement. The mistake of petitioners as to the legal effect of their obligation is ordinarily no reason for relieving them of liability.

• Cardinal Rule of Contract Interpretation — When the terms of a contract are clear and leave no doubt on the intention of the contracting parties, the literal meaning of its stipulations shall control. Courts have no duty to relieve a party from the effects of an unfavorable stipulation when the terms are explicit and unequivocal.
• Contracts of Adhesion — Contracts of adhesion are not invalid per se and their binding effects have been upheld on numerous occasions. Such contracts are void only when the weaker party is imposed upon in dealing with the dominant party and is reduced to the alternative of accepting the contract or leaving it, completely deprived of the opportunity to bargain on equal footing. The status, education, and expertise of the parties are relevant considerations in determining whether a contract of adhesion should be struck down.
• Liability for Instruments Signed — The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it applies with full force to contracts of indemnity and suretyship. A party who executes a document with full knowledge of its general import cannot escape liability by claiming ignorance of specific provisions or mistaken belief as to the legal effect of the obligation undertaken.
• Waiver of Civil Code Provisions on Suretyship — Parties to a contract of indemnity may validly waive the benefits provided under Articles 2077, 2078, 2079, 2080, and 2081 of the Civil Code, which provisions generally protect sureties and indemnitors, provided such waiver is explicit and unequivocal.

• "The contract of indemnity is the law between the parties." — Articulates the fundamental principle that parties are bound by the explicit terms of their indemnity agreements.
• "It is a cardinal rule in the interpretation of a contract that if its terms are clear and leave no doubt on the intention of the contracting parties, the literal meaning of its stipulation shall control." — Establishes that courts must apply clear contractual language without attempting to relieve parties from unfavorable terms.
• "The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it may also be applied to this Indemnity Agreement. And the mistake of petitioners as to the legal effect of their obligation is ordinarily no reason for relieving them of liability." — Affirms that signatories are bound by the legal effects of documents they execute, regardless of their subjective understanding.
• "Contracts of adhesion are not invalid per se and that their binding effects have been upheld on numerous occasions." — Confirms the validity of contracts of adhesion unless there is imposition upon a weaker party deprived of bargaining power.

• Verendia v. Court of Appeals, G.R. Nos. 76399 and 75605, 22 January 1993, 217 SCRA 417 — Cited for the principle that the contract of indemnity is the law between the parties.
• Pacific Banking Corporation v. Court of Appeals, 250 Phil. 1 (1988) — Cited in Verendia regarding the contractual nature of indemnity agreements.
• Abella v. Court of Appeals, G.R. No. 107606, 20 June 1996, 257 SCRA 482 — Applied for the cardinal rule of contract interpretation that clear terms control.
• Palmares v. Court of Appeals, G.R. No. 126490, 351 Phil. 664-691 (1998) — Cited for the doctrine that contracts of adhesion are not invalid per se.
• Titan Construction Corp. v. Uni-Field Enterprises, Inc., 546 Phil. 14, 20 — Referenced regarding the binding nature of contracts of adhesion.
• Churchill v. Bradley, 5 A. 189 — Cited for the principle that mistake as to the legal effect of an obligation is no reason for relieving liability.

• Articles 2077, 2078, 2079, 2080, and 2081, Civil Code of the Philippines — Provisions generally protecting sureties and indemnitors, which were expressly waived by petitioners in the Deed of Indemnity under the "WAIVER" clause.
• Rule 45, 1997 Rules of Civil Procedure — Procedural basis for the Petition for Review on Certiorari.

Teresita J. Leonardo-De Castro, Lucas P. Bersamin, Jose Portugal Perez, and Estela M. Perlas-Bernabe.