Republic vs. Court of Appeals

Under Section 176 of the Insurance Code, a surety's liability is strictly limited to the face value of the bond and cannot be extended to cover the full amount of the principal obligation when such exceeds the bond; furthermore, a surety is not discharged from liability due to the suspension of the principal's business license where the principal failed to prove that the suspension was illegal or that it rendered re-exportation impossible.

Endelo, a company engaged in the embroidery business, imported raw materials under customs bonds issued by R & B Surety and Insurance Company, Inc. (R & B) and another surety company. The bonds secured Endelo's obligation to re-export the imported materials or pay the corresponding duties and taxes within two years. When Endelo failed to re-export the goods, the Bureau of Customs sought to recover the duties and taxes from the sureties. Endelo claimed its non-compliance was due to the suspension of its operating license by the Embroidery and Apparel Control and Inspection Board in 1970.

• Endelo imported raw materials for its embroidery business under four customs bonds issued by R & B Surety and Insurance Company, Inc., with a total face value of P3,000,000.00.
• The specific bonds were: (1) Bond No. 0064 dated February 20, 1970 for P500,000.00; (2) Bond No. 0067 dated March 18, 1970 (increased by endorsement dated April 29, 1970) for P1,000,000.00; (3) Bond No. 0067 dated March 1, 1970 (increased by endorsement dated April 29, 1970) for P1,000,000.00; and (4) Bond No. 0073 dated April 10, 1970 for P500,000.00.
• Endelo failed to re-export the imported raw materials in their original state or as finished products within the two-year period required by the bonds.
• The total duties and taxes due to the Bureau of Customs amounted to P4,305,017.00.
• Endelo claimed its failure to comply was due to the suspension of its license to operate by the Embroidery and Apparel Control and Inspection Board sometime in 1970, allegedly done illegally and unnecessarily.
• The suspension was admitted by Endelo's counsel to have resulted from pilferage by Endelo and subsequent investigation, though Endelo claimed the suspension itself was illegal.
• Endelo did not present evidence to prove the illegality of the suspension or that the suspension was for an indefinite period, nor did it attempt to have the suspension lifted.
• The trial court ordered R & B to pay the full amount of P4,305,017.00, solidary with Communications Insurance Company, Inc. (CICI), another surety.
• R & B argued that it should not be held liable for amounts exceeding the face value of the bonds and that it should not be solidarily liable with CICI.

• The Solicitor General, representing the Republic of the Philippines through the Bureau of Customs, prayed that the Motion for Reconsideration be denied for lack of merit, except for the plea to modify the amount of liability.
• The suspension of Endelo's license did not render the obligation to re-export impossible, nor did it amount to a cancellation or revocation of the license that would justify the discharge of the surety.
• Endelo failed to prove that the suspension was illegal or unnecessary, and failed to show that such suspension prevented it from complying with its obligations under the bonds.
• The burden of proving the illegality of the suspension lay with Endelo, not the Bureau of Customs.
• The presumption of regularity in the performance of official functions applies to the suspension order issued by the Board.
• Endelo was not precluded from exporting the imported materials within the two-year period, and its omission to seek the lifting of the suspension bolstered the conclusion that the suspension was proper.
• The surety (R & B) is solidarily liable with the principal (Endelo), giving the creditor the right to compel performance from either or both.

• R & B Surety contended that the suspension of Endelo's license to operate rendered the obligation to re-export impossible of performance, or was equivalent to a cancellation or revocation of the license, thereby discharging the surety from its obligation.
• Assuming liability exists, R & B argued it should not be held solidarily liable with the other surety, Communications Insurance Company, Inc. (CICI), as erroneously held by the RTC.
• R & B argued that in Bond Numbers 0064 and 0073, it was erroneously charged for more than the face value of the bond, while in Bond Number 0067, it was mistakenly charged twice, in palpable violation of Section 176 of the Insurance Code which limits the surety's liability to the amount of the bond.
• R & B claimed it should not be held liable for the payment of legal interest, as this would increase its liability beyond the amount of the bond.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the suspension of Endelo's license discharged R & B from its surety obligations due to impossibility of performance or equivalent revocation of license.
  • Whether R & B is solidarily liable with co-surety CICI, or whether its liability should be pro-rated.
  • Whether R & B's liability can exceed the face value of the customs bonds under Section 176 of the Insurance Code.
  • Whether R & B is liable for legal interest on the amount due, which would effectively increase its liability beyond the bond amount.

• Procedural: N/A
• Substantive:
  • On discharge due to suspension: The suspension did not discharge the surety. Endelo failed to discharge its burden of proving that the suspension was illegal or unnecessary, or that it prevented compliance with the obligation to re-export. The Court applied the presumption of regularity in the performance of official functions. Furthermore, Endelo did not attempt to have the suspension lifted, supporting the conclusion that the suspension was proper due to pilferage.
  • On solidary liability with CICI: The contention that liability should be pro-rated with CICI is unacceptable. The joint and several liability of the surety (R & B) with the obligor (Endelo) gave the petitioner the right to compel performance of the full obligation from either Endelo or R & B, or both.
  • On limitation of liability: Section 176 of the Insurance Code explicitly limits the surety's liability to the amount of the bond. The trial court erred in ordering R & B to pay P4,305,017.00 when the total face value of the four bonds was only P3,000,000.00. The liability must be computed per bond, not exceeding the face value of each specific bond.
  • On legal interest: R & B is liable for legal interest on the amount due (P2,588,568.00) from the time of the filing of the complaint until fully paid, as payment for legal interest is for the incurrence of default and the necessity of judicial collection. This does not violate the limitation of liability because the interest is accessory to the principal obligation.
  • The Court modified the RTC decision to limit R & B's liability to P2,588,568.00 plus legal interest thereon from the filing of the complaint until fully paid.

• Limitation of Surety's Liability (Section 176, Insurance Code) — The liability of a surety is joint and several with the obligor but is strictly limited to the amount of the bond and determined by the terms of the contract of suretyship. A surety cannot be held liable for more than the face value of the bond even if the principal obligation (duties and taxes due) exceeds such amount.
• Solidary Liability of Surety with Principal — The surety is solidarily liable with the principal obligor, giving the creditor the right to demand full performance from either the surety or the principal, or both simultaneously, until the debt is fully satisfied.
• Presumption of Regularity in Official Functions — Administrative acts, such as the suspension of a business license by a regulatory board, are presumed to have been performed regularly and with authority unless proven otherwise by clear and convincing evidence.
• Burden of Proof — A party who relies on the illegality of an official act (such as the suspension of a license) as a defense has the burden of proving such illegality; mere allegation without supporting evidence is insufficient.

• "The liability of the surety of sureties shall be joint and several with the obligor and shall be limited to the amount of the bond." — Section 176 of the Insurance Code, as cited in the Resolution.
• "Having relied on the illegality of its suspension by way of defense, Endelo and not petitioner has the burden of proving the same."
• "Endelo was duty-bound to prove whether or not the suspension of its license was for an indefinite period or merely for a limited time."
• "The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected." — Article 1216, New Civil Code.

• Smith Bell and Co., Inc. v. Court of Appeals, 267 SCRA 530 — Cited for the principle that a surety is liable for legal interest for the incurrence of default and the necessity of judicial collection.
• PNB v. Luzon Surety, 68 SCRA 206 — Cited alongside Smith Bell for the same principle regarding a surety's liability for legal interest.

• Section 176 of the Insurance Code — Limits the surety's liability to the amount of the bond; establishes that liability is joint and several with the obligor but strictly limited to the bond amount.
• Article 1216 of the New Civil Code — Provides that the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously; demand against one does not bar subsequent demands against others until the debt is fully collected.