Intra-Strata Assurance Corporation vs. Republic of the Philippines

A surety on a customs warehousing bond is not released from liability when the importer withdraws goods from a bonded warehouse without payment of duties, taxes, and charges, because the bond expressly provides that the obligation "shall remain in full force and effect" unless the articles are "regularly and lawfully withdrawn on payment of the legal customs duties, internal revenue taxes, and other charges." The surety's solidary obligation subsists for as long as the amounts due on the importations have not been paid, and the withdrawal merely signals the principal's default and elevates the surety's obligation to a due and demandable status.

Intra-Strata Assurance Corporation and Philippine Home Assurance Corporation are domestic corporations engaged in the business of issuing surety bonds. Grand Textile Manufacturing Corporation is a local manufacturing corporation that imported various articles from different countries in 1974. The importations were subject to customs duties, internal revenue taxes, and other charges under the Tariff and Customs Code, which requires importers to secure a warehousing bond equivalent to the amount of such duties, taxes, and charges before articles may be stored in a customs bonded warehouse. The Bureau of Customs, as the government agency tasked with collecting these revenues, required the bonds pursuant to Section 1904 of the Tariff and Customs Code.

Grand Textile Manufacturing Corporation (Grand Textile), a local manufacturing corporation, imported various articles from different countries in 1974, including dyestuffs, spare parts for textile machinery, polyester filament yarn, textile auxiliary chemicals, trans open type reciprocating compressor, and trevira filament. Subsequent to the importation, these articles were transferred to Customs Bonded Warehouse No. 462. The Bureau of Customs computed the customs duties, internal revenue taxes, and other charges due on the importations to amount to ₱2,363,147.00.

To secure the payment of these obligations pursuant to Section 1904 of the Tariff and Customs Code, Intra-Strata Assurance Corporation (Intra-Strata) and Philippine Home Assurance Corporation (PhilHome) each issued general warehousing bonds in favor of the Bureau of Customs. The bonds, which were executed on September 20, 1974, provided that the goods shall be withdrawn from the bonded warehouse "on payment of the legal customs duties, internal revenue, and other charges to which they shall then be subject." The bonds further stated that the obligation would be void if the goods were "regularly and lawfully withdrawn from public stores or bonded warehouse on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall then be subject" within six months from the date of arrival of the importing vessel, or within nine months if extended, but would "remain in full force and effect" otherwise. The bonds also contained a provision that "the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond."

Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand Textile withdrew the imported goods from storage. The Bureau of Customs demanded payment of the amounts due from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The government responded on January 14, 1983, by filing a collection suit against the parties with the RTC of Manila.

After hearing, the RTC rendered its January 4, 1995 decision finding Grand Textile (as importer) and the petitioners (as sureties) liable for the taxes, duties, and charges due on the imported articles. The RTC directed Grand Textile to pay the sum of ₱2,363,174.00 plus interest at the legal rate from the filing of the complaint; Intra-Strata to pay jointly and severally with Grand Textile the sum of ₱2,319,211.00 plus interest; PhilHome to pay the sum of ₱43,936.00 plus interest; and ordered the forfeiture of all the General Warehousing Bonds and costs of suit. The CA fully affirmed the RTC decision in its decision dated November 26, 2002.

• Release from Obligation Upon Withdrawal: Petitioners argued that they were released from their obligations under their bonds when Grand Textile withdrew the imported goods without payment of taxes, duties, and other charges.
• Increased Risk Due to Non-Involvement: Petitioners argued that their non-involvement in the active handling of the warehoused items from the time they were stored up to their withdrawals substantially increased the risks they assumed under the bonds they issued, thereby releasing them from liabilities under these bonds.
• Lack of Notice: Petitioners argued that upon the issuance and acceptance of the bonds, they became direct parties to the bonded transaction entitled to participate and actively intervene, as sureties, in the handling of the imported articles; that, as sureties, they are entitled to notice of any act of the bond obligee and of the bond principal that would affect the risks secured by the bond; and that otherwise, the door becomes wide open for possible fraudulent conspiracy between the bond obligee and principal to defraud the surety.
• Government Negligence/Estoppel: Petitioners argued that they cannot be held liable for the unpaid customs duties, taxes, and other charges because it is the Bureau of Customs' duty to ensure that the duties and taxes are paid before the imported goods are released from its custody, and they cannot be made to pay for the error or negligence of the Bureau's employees in authorizing the unlawful and irregular withdrawal of the goods.

• Maintenance of Liability: The respondent, through the Solicitor General, maintained the opposite view, arguing that the petitioners remained liable as sureties for the unpaid customs duties, taxes, and other charges on the importations.

• Release from Suretyship Obligation: Whether the withdrawal of the stored goods, wares, and merchandise without notice to the petitioners as sureties released them from any liability for the duties, taxes, and charges they committed to pay under the bonds they issued.
• Effect of Government Negligence: Whether the petitioners should be released from liability because the Bureau of Customs, through the fault or negligence of its employees, allowed the withdrawal of the goods without the payment of the duties, taxes, and other charges due.

• Release from Suretyship Obligation: No. The petitioners were not released from their obligations under their bonds when Grand Textile withdrew the imported goods without payment of taxes, duties, and charges. Under the bonds' plain terms, the solidary obligation subsists for as long as the amounts due on the importations have not been paid, and the withdrawal merely signals the principal's default and elevates the sureties' obligation to a due and demandable status.
• Effect of Government Negligence: No. The government is not bound by the errors committed by its agents, and estoppel does not lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers, particularly in the collection of legitimate taxes due.

• Release from Suretyship Obligation: The Court examined the nature of a surety's obligations under Section 175 of the Insurance Code, which defines a contract of suretyship, and Article 2047 of the Civil Code, which provides that the liability of the surety is joint and several but limited to the amount of the bond. The Court noted that applicable laws form part of and are read into the contract without need for any express reference, pursuant to Article 1306 of the Civil Code. The Court considered Sections 101 and 1204 of the Tariff and Customs Code, which establish the importer's liability for duties and taxes as a personal debt, and Section 1904, which requires the warehousing bond. The Court found that the bonds shall subsist — that is, "shall remain in full force and effect" — unless the imported articles are "regularly and lawfully withdrawn on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall then be subject." The Court reasoned that the fact that a withdrawal has been made and its circumstances are not material to the sureties' liability, except to signal both the principal's default and the elevation to a due and demandable status of the sureties' solidary obligation to pay. The Court further noted that a surety is released from its obligation only when there is a material alteration of the contract that makes its obligation more onerous, and found no such alteration in this case. The Court rejected the petitioners' argument that they were entitled to notice, citing Palmares vs. CA for the rule that a surety is not entitled, as a matter of right, to be given notice of the principal's default, and that the creditor owes no duty of active diligence to take care of the interest of the surety. The Court distinguished Visayan Surety and Insurance Corporation vs. Pascual and Aguasin vs. Velasquez, which involved replevin bonds where the Rules of Court expressly require notice to sureties before damages can be claimed, a requirement not present in the Tariff and Customs Code or the bonds at issue. The Court also noted that the petitioners effectively waived any claim against the creditor in light of the bond provision that "the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond," and that any such claim is a matter between the principal and the sureties to thresh out between or among themselves.
• Effect of Government Negligence: The Court applied the settled rule that the government is not bound by the errors committed by its agents, and that estoppel does not lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers. The Court cited CIR vs. CTA for the principle that the government cannot and must not be estopped particularly in matters involving taxes, as taxes are the lifeblood of the nation. The Court held that this is particularly true in the collection of legitimate taxes due, where the collection has to be made whether or not there is error, complicity, or plain neglect on the part of the collecting agents.

• Nature of Suretyship — A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of another party called the obligee. The surety becomes directly, primarily, and equally bound with the principal as the original promissor, although he possesses no direct or personal interest over the latter's obligations and does not receive any benefit therefrom. The Court applied this doctrine to hold the petitioners solidarily liable with Grand Textile for the unpaid duties, taxes, and charges.
• Statutory Terms Read into Contracts — Applicable laws form part of and are read into the contract without need for any express reference, pursuant to Article 1306 of the Civil Code. Every contract contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter. The Court applied this doctrine to read Sections 101, 1204, and 1904 of the Tariff and Customs Code into the warehousing bonds.
• No Right to Notice of Default — A surety is not entitled as a rule to a separate notice of default, nor to the benefit of excussion, and may be sued separately or together with the principal debtor. The creditor owes no duty of active diligence to take care of the interest of the surety, and the surety is bound to take notice of the principal's default and to perform the obligation. The Court applied this doctrine to reject the petitioners' argument that they should have been notified of the withdrawal of the goods.
• Government Not Bound by Estoppel — The government is not bound by the errors committed by its agents, and estoppel does not lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers. This is particularly true in the collection of legitimate taxes due, where the collection has to be made whether or not there is error, complicity, or plain neglect on the part of the collecting agents. The Court applied this doctrine to reject the petitioners' argument that the Bureau of Customs' negligence should release them from liability.

• "Under these terms, the fact that a withdrawal has been made and its circumstances are not material to the sureties' liability, except to signal both the principal's default and the elevation to a due and demandable status of the sureties' solidary obligation to pay. Under the bonds' plain terms, this solidary obligation subsists for as long as the amounts due on the importations have not been paid." — This passage articulates the core ratio decidendi: the surety's obligation under a warehousing bond continues until the duties, taxes, and charges are fully paid, and the withdrawal of goods without payment triggers, rather than extinguishes, the surety's liability.
• "Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety." — This passage, quoted from Palmares v. CA, establishes the rule that a surety has no right to notice of the principal's default absent an express stipulation in the contract of suretyship, and that the creditor's failure to give notice does not discharge the surety.
• "It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. Thus, it should be collected without unnecessary hindrance or delay." — This passage, quoted from CIR v. CTA, articulates the principle that the government is not bound by estoppel in tax collection matters, regardless of the errors or negligence of its agents.

• Palmares vs. CA, G.R. No. 126490, March 31, 1998, 288 SCRA 422 — Controlling precedent on the rule that a surety is not entitled to notice of the principal's default and that the creditor owes no duty of active diligence to protect the surety's interests.
• Garcia vs. CA and Lasal Development Corporation, G.R. No. 80201, November 20, 1990, 191 SCRA 493 — Cited for the definition and characteristics of a suretyship, particularly that the surety becomes directly, primarily, and equally bound with the principal.
• Maritime Company of the Philippines vs. Reparations Commission, G.R. No. L-29203, July 26, 1971, 40 SCRA 70 — Cited for the doctrine that applicable laws form part of and are read into every contract without need for express reference.
• Umali vs. Court of Appeals, G.R. No. 89561, September 13, 1960, 189 SCRA 529 — Cited for the rule that the terms of the suretyship are determined by the suretyship contract itself.
• NASSCO vs. Torrento, G.R. No. L-21109, June 26, 1967, 20 SCRA 427 — Cited for the rule that a surety is released from its obligation only upon a material alteration of the contract that makes its obligation more onerous.
• Visayan Surety and Insurance Corporation vs. Pascual, 85 Phil. 779 (1950) — Distinguished; involved replevin bonds where the Rules of Court expressly require notice to sureties, unlike the warehousing bonds at issue.
• Aguasin vs. Velasquez, 88 Phil. 357 (1951) — Distinguished; involved replevin bonds where the Rules of Court expressly require notice to sureties, unlike the warehousing bonds at issue.
• Republic of the Philippines vs. Heirs of Felix Caballero, G.R. No. L-27473, September 30, 1977, 208 SCRA 726 — Cited for the rule that the government is not bound by the errors committed by its agents and that estoppel does not lie against the government.
• Caltex Philippines vs. COA, G.R. No. 92585, May 8, 1992, 208 SCRA 726 — Cited for the rule that the government is not bound by estoppel in the collection of legitimate taxes due.
• CIR vs. CTA, G.R. No. 106611, July 21, 1994, 243 SCRA 348 — Cited for the principle that the government cannot and must not be estopped particularly in matters involving taxes, as taxes are the lifeblood of the nation.
• Manila Surety & Fidelity Co., Inc. vs. Batu Construction & Co., 101 Phil. 494 (1957) — Cited for the rule that a surety is not entitled to the benefit of excussion.

• Section 175, Insurance Code — Defines a contract of suretyship as an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of another party called the obligee. Applied to characterize the bonds issued by the petitioners as surety bonds.
• Section 178, Insurance Code — Provides that pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship. Applied to justify the suppletory application of Civil Code provisions on suretyship.
• Article 1306, Civil Code — Provides that contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy. Applied to support the doctrine that applicable laws form part of and are read into every contract.
• Article 2047, Civil Code — Defines the liability of the surety as joint and several but limited to the amount of the bond, with terms determined strictly by the contract of suretyship in relation to the principal contract. Applied to establish the nature and extent of the petitioners' liability.
• Article 1216, Civil Code — Provides for the solidary nature of the sureties' undertaking. Applied to support the conclusion that the surety contract is made principally for the benefit of the creditor-obligee.
• Section 101, Tariff and Customs Code — Provides that all articles when imported from any foreign country into the Philippines shall be subject to duty upon such importation. Applied to establish the principal obligation of the importer to pay duties.
• Section 1204, Tariff and Customs Code — Provides that the liability for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due from the importer to the government. Applied to establish the importer's primary liability.
• Section 1904, Tariff and Customs Code — Requires the Collector to demand from the importer an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the amount of duties, taxes, and other charges, conditioned upon the withdrawal of the articles within the prescribed period and for payment of any duties, taxes, and other charges. Applied as the legal basis for the warehousing bonds issued by the petitioners.

• Quisumbing, J. (Chairperson)
• Tinga, J.
• Reyes, J. (designated as additional member of the Second Division per Special Order No. 504 dated May 15, 2008)
• Leonardo-De Castro, J. (designated as additional member of the Second Division per Special Order No. 505 dated May 15, 2008)