Gilat Satellite Networks, Ltd. vs. United Coconut Planters Bank General Insurance Co., Inc.

A surety is a stranger to the principal contract and cannot invoke the arbitration clause contained therein against the creditor. The creditor may proceed directly against the surety for payment upon the principal debtor's default, and the surety's liability is direct, primary, and solidary with the principal, independent of the principal contract's dispute resolution mechanisms.

Petitioner Gilat Satellite Networks, Ltd. entered into a Purchase Agreement with One Virtual for telecommunications equipment valued at over US$2.1 million. To secure the payment obligation of US$1.2 million, One Virtual procured a surety bond from respondent United Coconut Planters Bank General Insurance Co., Inc., naming petitioner as the creditor/obligee. The Purchase Agreement contained an arbitration clause stipulating that disputes between the buyer and seller would be resolved through arbitration in New York under United States law.

• The Surety Bond and Principal Contract: On September 15, 1999, One Virtual executed a purchase order with petitioner for telecommunications equipment, accessories, and software totaling US$2,128,250.00. To guarantee the payment of US$1.2 million pursuant to a schedule dated November 22, 1999, respondent issued a surety bond dated December 3, 1999, in favor of petitioner. An endorsement dated December 23, 1999, amended the bond's expiry date to July 30, 2001. The underlying Purchase Agreement contained an arbitration clause requiring disputes between buyer and seller to be arbitrated in New York under United States law.
• Delivery and Default: Petitioner shipped and delivered all equipment to One Virtual between September 1999 and June 2000, as evidenced by airway bills. One Virtual failed to remit US$400,000.00 due on May 30, 2000.
• Demands: Petitioner sent a demand letter to respondent on June 5, 2000, for the unpaid amount. Following One Virtual's failure to pay the subsequent installment due November 30, 2000, petitioner sent a second demand letter on January 24, 2001, for the full guaranteed amount of US$1,200,000.00 plus interest and expenses. Respondent refused payment.
• Trial Court Proceedings: The RTC found that petitioner had delivered and installed all equipment, and that One Virtual's default triggered respondent's liability. The RTC ordered respondent to pay the principal debt of US$1,200,000.00 with legal interest of 12% per annum from finality of judgment, and attorney's fees of US$44,004.04. The RTC denied interest accruing from demand, finding respondent's refusal was based on One Virtual's advice regarding alleged breaches by petitioner.
• Appellate Proceedings: The CA reversed, holding that the surety bond must be construed together with the Purchase Agreement. It dismissed the case for lack of jurisdiction and ordered petitioner and One Virtual to proceed to arbitration pursuant to the arbitration clause.

• Inapplicability of Arbitration: Petitioner maintained that only parties to an arbitration agreement may request referral to arbitration under Section 24 of Republic Act No. 9285. Neither petitioner nor One Virtual sought arbitration; thus, the CA lacked basis to order it.
• Direct Action Against Surety: Petitioner argued that Articles 1216 and 2047 of the Civil Code permit a creditor to proceed directly against the surety without first suing the principal debtor. The surety bond expressly made respondent liable upon the principal's mere failure to pay.
• Entitlement to Interest: Citing Article 1169 of the Civil Code, petitioner asserted that legal interest of 12% per annum should run from the first extrajudicial demand on June 5, 2000, or alternatively from the second demand on January 24, 2001, due to respondent's inexcusable delay.

• Accessory Nature of Suretyship and Arbitration: Respondent countered that as an accessory contract, the surety bond derives validity from the principal Purchase Agreement. Consequently, respondent may invoke all defenses available to the principal debtor, including the arbitration clause.
• Limitation on Interest: Respondent argued that liability for legal interest should be limited to 6% per annum commencing from the date of the last demand on January 24, 2001.

• Arbitration: Whether the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate.
• Interest: Whether petitioner is entitled to legal interest for respondent's delay in fulfilling its obligation under the Suretyship Agreement.

• Arbitration: The dismissal was reversed. A surety is not a party to the principal contract and cannot invoke the arbitration clause therein. Acceptance of a surety agreement does not confer intervention rights in the principal creditor-debtor relationship. An arbitration agreement binds only its parties and their assigns; Section 24 of RA 9285 requires a request from at least one party thereto. Compelling arbitration would negate the direct, primary, and solidary liability of the surety, which exists precisely to allow the creditor immediate recourse upon default.
• Interest: Petitioner was entitled to interest. Delay (mora) commenced upon extrajudicial demand on June 5, 2000, as the obligation was liquidated and demandable. Respondent's reliance on One Virtual's advice regarding alleged breaches did not constitute justifiable cause for delay; the RTC found petitioner had fulfilled its obligations. Pursuant to Nacar v. Gallery Frames and Bangko Sentral-Monetary Board Circular No. 799, legal interest of 6% per annum was imposed from June 5, 2000, until full satisfaction.

• Surety as Stranger to Principal Contract — A surety is not a party to the principal contract between the creditor and the principal debtor. Acceptance of a surety agreement does not give the surety the right to intervene in the principal contract or invoke its provisions, such as arbitration clauses, against the creditor. The surety's role arises only upon the debtor's default, at which time it may be held directly liable.
• Direct and Solidary Liability of Surety — Although accessory, a suretyship agreement creates a direct, primary, and absolute liability for the surety, joint and solidary with the principal debtor. The creditor may proceed directly against the surety without exhausting remedies against the principal, and the surety is not entitled to excussion or separate notice of default.
• Interest on Surety Obligations — A surety may be held liable for interest accruing from the date of extrajudicial demand, even if such liability exceeds the principal obligation, provided the delay is inexcusable. The rate shall be 6% per annum from the time of demand until full satisfaction pursuant to current guidelines.

• "The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety."
• "In suretyship, the oft-repeated rule is that a surety's liability is joint and solidary with that of the principal debtor... a surety is directly and equally bound with the principal."
• "The acceptance [of a surety agreement], however, does not change in any material way the creditor's relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship."
• "Sureties do not insure the solvency of the debtor, but rather the debt itself... This responsibility necessarily places a surety on the same level as that of the principal debtor."
• "Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation."

• Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd., G.R. Nos. 158820-21 (2009) — Controlling precedent establishing that a surety is not an active party to the principal contract and cannot intervene therein.
• Nacar v. Gallery Frames, G.R. No. 189871 (2013) — Applied for the modified guidelines on legal interest rates (6% per annum from demand).
• Palmares v. Court of Appeals, 351 Phil. 664 (1998) — Cited regarding the surety's remedy of payment and subrogation if dissatisfied with the creditor's pursuit of the principal.

• Article 1216, Civil Code — Allows the creditor to proceed against any one of the solidary debtors or all simultaneously; demand against one does not bar subsequent demands against others.
• Article 2047, Civil Code — Defines suretyship and provides that if a person binds himself solidarily with the principal debtor, the provisions on solidary obligations apply.
• Article 1169, Civil Code — Provides that delay arises from the time the obligee judicially or extrajudicially demands performance and the obligor fails to comply.
• Section 24, Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — States that referral to arbitration may only take place if at least one party requests it not later than the pre-trial conference.

Teresita J. Leonardo-De Castro, Lucas P. Bersamin, Martin S. Villarama, Jr., Bienvenido L. Reyes.