First Lepanto-Taisho Insurance Corporation vs. Chevron Philippines, Inc.

A surety is not liable on a bond that expressly secures a written principal agreement when the creditor fails to provide such written agreement or communicate the terms of the principal contract to the surety.

Fumitechniks Corporation obtained a credit line from Caltex Philippines, Inc. (respondent) to purchase fuel products. To secure this credit line, Fumitechniks secured a surety bond from First Lepanto-Taisho Insurance Corporation (petitioner) for ₱15,700,000.00. The bond, executed on October 15, 2001, expressly stated it secured the principal's agreement with Caltex, "a copy of which is attached hereto and made a part hereof." Fumitechniks defaulted on its purchases, issuing a dishonored check. Caltex demanded payment from the surety, which refused, citing the non-submission of the written principal agreement.

• The Surety Bond: Fumitechniks applied for and was issued a credit line by respondent Caltex. Petitioner issued Surety Bond FLTICG (16) No. 01012 for ₱15,700,000.00 to guarantee payment of fuel products withdrawn by Fumitechniks. The bond's condition stated Fumitechniks entered into an "agreement" with Caltex, "a copy of which is attached hereto and made a part hereof." No written agreement was ever attached.
• Default and Demand: Fumitechniks defaulted; its check for ₱11,461,773.10 was dishonored. Caltex demanded payment of ₱15,084,030.30 from the surety.
• Petitioner's Refusal: Petitioner requested copies of the delivery receipts and the principal agreement. Fumitechniks informed petitioner that no written agreement existed with Caltex. Petitioner denied the claim, asserting the bond could not exist without the written principal agreement referenced therein.
• Lower Court Findings: The RTC dismissed the complaint, finding the surety bond an accessory contract that cannot stand without the written agreement it expressly secured. The CA reversed, holding the surety estopped from assailing the oral agreement and that the Statute of Frauds did not apply due to partial execution.

• Terms of the Surety Bond: Petitioner argued that the bond expressly secured a written agreement, which was required to be attached. The non-compliance with this express stipulation rendered the bond ineffective.
• Parol Evidence Rule / Statute of Frauds: Petitioner maintained that respondent's evidence of an oral agreement should be struck down for contradicting the bond's terms and violating the Statute of Frauds.
• Pro Forma Motion: Petitioner argued that respondent's motion for reconsideration before the RTC was a mere scrap of paper and pro forma, making the RTC decision final and executory.
• Counterclaim: Petitioner asserted it was entitled to its counterclaim for moral damages and attorney's fees.

• Effectivity of the Bond: Respondent countered that the bond was validly delivered and the premium paid, making the surety liable regardless of the non-attachment of the written agreement.
• Purpose of Attachment: Respondent argued that the attachment of the written agreement was merely for evidentiary purposes, and the real intention was to secure payment of purchases up to the bond's maximum amount.
• Parol Evidence Exception: Respondent maintained that introducing evidence of the oral agreement was an exception to the parol evidence rule to establish the actual terms of the separate distribution agreement.

• Liability Under the Surety Bond: Whether a surety is liable to the creditor under a surety bond that expressly secures a written principal agreement when the principal contract is merely oral and its terms were never communicated to the surety.
• Pro Forma Motion: Whether a motion for reconsideration that reiterates issues already passed upon by the court is considered pro forma.
• Counterclaim for Damages: Whether the surety is entitled to moral damages and attorney's fees on its counterclaim.

• Liability Under the Surety Bond: The surety is not liable. The bond expressly referenced a written agreement to be attached. The liability of a surety is strictly determined by the terms of the suretyship contract in relation to the principal contract (Sec. 176, Insurance Code). Because the creditor accepted the bond with the specific requirement of a written agreement but failed to reduce the principal contract to writing or communicate its terms to the surety, the creditor's right to demand performance is precluded. A surety contract is strictly construed against the creditor.
• Pro Forma Motion: A motion for reconsideration is not pro forma simply because it reiterates issues already passed upon. The very purpose of such a motion is to convince the court that its ruling is erroneous.
• Counterclaim for Damages: The counterclaim was correctly dismissed. A juridical person is generally not entitled to moral damages absent proof of actual injury. Furthermore, the right to litigate should not be penalized; thus, attorney's fees are not automatically granted to a winning party, especially where the opposing party acted in good faith.

• Strict construction of suretyship contracts against the creditor — The extent of a surety's liability is determined strictly by the terms of the suretyship contract in relation to the principal contract. It cannot be extended by implication beyond the terms of the contract. Every doubt is resolved in favor of the solidary debtor.
• Nature of a motion for reconsideration — A motion for reconsideration is not pro forma merely because it reiterates issues already passed upon by the court, as its purpose is precisely to convince the court that its ruling is erroneous.
• Moral damages for juridical persons — Juridical persons are generally not entitled to moral damages because they cannot experience physical suffering or moral shock. An exception may be granted if there is proof of the factual basis of the damage and its causal relation to the defendant's acts.

• "The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee."
• "Having accepted the bond, respondent as creditor must be held bound by the recital in the surety bond that the terms and conditions of its distributorship contract be reduced in writing or at the very least communicated in writing to the surety. Such non-compliance by the creditor (respondent) impacts not on the validity or legality of the surety contract but on the creditor’s right to demand performance."

• Philippine Bank of Communications v. Lim, G.R. No. 158138, April 12, 2005 — Cited for the definition of suretyship arising upon the solidary binding of a person with the principal debtor.
• Asset Builders Corporation v. Stronghold Insurance Company, Incorporated, G.R. No. 187116, October 18, 2010 — Cited for the principle that a surety assumes liability as a regular party to the undertaking, even though the contract is secondary to the principal obligation.
• Garon v. Project Movers Realty and Development Corporation, G.R. No. 166058, April 3, 2007 — Cited for the rule that the extent of a surety's liability is determined by the language of the suretyship contract and cannot be extended by implication.
• Security Bank and Trust Company, Inc. v. Cuenca, G.R. No. 138544, October 3, 2000 — Cited for the doctrine that a surety agreement, being an onerous undertaking, is strictly construed against the creditor.
• Crystal v. Bank of the Philippine Islands, G.R. No. 172428, November 28, 2008 — Cited for the rule that a juridical person is generally not entitled to moral damages.

• Section 175, Insurance Code — Defines a suretyship as a contract whereby a surety guarantees the performance by another of an obligation in favor of a third party.
• Section 176, Insurance Code — States that the liability of the surety is joint and several with the obligor and limited to the amount of the bond, determined strictly by the terms of the suretyship contract in relation to the principal contract.
• Article 1370, Civil Code — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.
• Article 1159, Civil Code — Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.

Chief Justice Renato C. Corona (Chairperson), Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Lucas P. Bersamin, Associate Justice Mariano C. Del Castillo.