Republic vs. Pal-Fox Lumber Co., Inc.

A surety on a simple or indefinite bond is liable for legal interest on the principal obligation, not merely for the face amount of the bond. Under Article 2055 of the Civil Code, a simple guaranty embraces the principal obligation and all its accessories, including interest, unless the bond expressly excludes them.

The Republic of the Philippines filed suit to recover forest charges and surcharges amounting to P11,851.56 from Pal-Fox Lumber Co., Inc. The Republic also sought to hold Far Eastern Surety & Insurance Co., Inc. jointly and severally liable up to P5,000 under a forestry bond executed on November 27, 1946. The bond guaranteed the principal’s faithful compliance with the Forest Law and the National Internal Revenue Code, as well as the prompt and complete payment of all charges, fines, and penalties.

• Nature of the action: The Republic sought to collect P11,851.56 in forest charges and surcharges from Pal-Fox Lumber Co., Inc., and to hold Far Eastern Surety jointly and severally liable up to P5,000 under Forestry Bond No. 7004. The bond, executed on November 27, 1946, guaranteed faithful compliance with forestry and revenue laws and “prompt and complete payment of all charges lawfully accruing on the forest products cut or gathered … and of all fines and penalties.”
• Proceedings below: Pal-Fox Lumber was declared in default. Far Eastern Surety cross-claimed against Pal-Fox and impleaded third-party defendants Gaspar Palanca and Joseph Lee under an indemnity agreement. The third-party defendants were also declared in default.
• Trial court judgment: The Court of First Instance ordered Pal-Fox Lumber and Far Eastern Surety to pay jointly and severally P5,000 with legal interest from the filing of the complaint, and Pal-Fox alone to pay the additional P6,841.56 with interest. Cross-claim and third-party liability were likewise adjudged.
• Appeal and subsequent developments: Far Eastern Surety appealed, assigning errors concerning the probative value of certain Bureau of Internal Revenue documents, the burden of proving payment, and prescription of action. While the case was pending in the Supreme Court, the surety voluntarily offered to pay the P5,000 principal. The Republic insisted on legal interest from the filing of the complaint. The surety opposed, arguing that the bond limited its liability to the sum of P5,000. The principal amount was eventually paid, leaving interest as the sole controverted matter.

• Liability for interest: Appellant maintained that its obligation was fixed at P5,000 by the express terms of the bond, which stated it was bound “in the sum of P5,000.00.” It contended that legal interest could not be imposed absent a specific provision in the bond.
• Earlier assigned errors: In its appeal, appellant had questioned the probative value of certified copies of BIR records admitted only as part of a witness’s testimony, the burden of proving that the principal obligation remained unpaid, and whether the action had prescribed. These contentions were rendered moot by the surety’s subsequent voluntary payment of the principal and by the posture of the case upon certification.

• Liability for interest: Respondent contended that the surety’s liability should include legal interest from the filing of the complaint, as adjudged by the trial court. Legal interest is an accessory of the principal obligation under Article 2055 of the Civil Code, and the bond did not exclude it. The surety was aware from the attached contract that the underlying obligation could earn interest upon default.

• Liability for interest: Whether a surety on a bond that fixes liability at a specific sum is also obliged to pay legal interest on that sum, absent an express stipulation to that effect.

• Liability for interest: The surety was held liable for legal interest on the P5,000 principal. The bond was a simple or indefinite guaranty, not a limited one. Under Article 2055, paragraph 2, of the Civil Code, a simple guaranty “shall comprise not only the principal obligation but also all its accessories, including judicial costs.” Interest is an accessory of the principal. The bond did not contain any exclusion of interest, and the surety was aware that the forest charges guaranteed could earn interest upon default. The Court applied the precedent in National Marketing Corporation vs. Marquez, where a surety on a similar bond was adjudged liable for moratory interest even though the bond amount was fixed, because Article 2055 supplied the accessory obligation and the surety had notice that the principal obligation bore interest.

• Accessory obligation of a surety under Article 2055 of the Civil Code — A simple or indefinite guaranty embraces not only the principal obligation but also all its accessories, including legal interest and judicial costs (incurred after judicial demand on the guarantor), unless the guaranty expressly provides otherwise. The surety’s knowledge that the principal obligation could yield interest, and the absence of any exclusionary language in the bond, bring interest within the scope of the surety’s undertaking.

• “If it (the guaranty) be simple or indefinite, it shall comprise not only the principal obligation but also all its accessories, including judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.” — Article 2055, Civil Code, quoted with approval.
• “Appellant surety was fully aware that the obligation earned interest, since the note was annexed to its contract … The contract of guaranty executed by the appellant Company nowhere excludes this interest, and Article 2055, paragraph 2, of the Civil Code of the Philippines is clearly applicable.” — From National Marketing Corporation vs. Marquez, adopted as controlling.

• National Marketing Corporation vs. Marquez, et al., L-25553, January 31, 1969, 26 SCRA 722 — Followed. This case ruled that a surety’s liability on a bond for a fixed sum may include moratory interest where the guaranty is simple or indefinite, Article 2055 applies, and the bond does not exclude interest. The factual parallel was deemed dispositive of the interest question in the instant case.

• Article 2055, Civil Code — Paragraph 2 defines the scope of a simple or indefinite guaranty to include the principal obligation and its accessories, including interest. Applied to hold the appellant surety liable for legal interest on the P5,000 principal amount of the forestry bond.

Concepcion, C.J., Reyes, J.B.L., Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor, and Makasiar, JJ., concurred.