The Capital Insurance and Surety Co., Inc. vs. Sadang

An ambiguous clause in a real estate mortgage securing an indemnity agreement, limiting the indemnitors' liability to the first P20,000.00 that might be incurred under a surety bond, must be construed against the surety that prepared the instrument and in accordance with the parties' real intention; payments made by the principal debtor before default reduce that first P20,000.00 limit.

Capital Insurance and Surety Co., Inc. acted as surety for Mateo Pinto under a bond in favor of Macondray Farms, Inc., guaranteeing Pinto's obligations under a fishpond lease. To secure the surety against potential loss, Esteban M. Sadang and Maria Lachica executed an indemnity agreement and a real estate mortgage over their Nueva Vizcaya property covered by TCT No. 2216. The controversy concerns the scope of the liability secured by that mortgage.

On June 21, 1954, Capital Insurance and Surety Co., Inc. subscribed to a bond, Exhibit A, in the amount of P42,000.00 in behalf of Mateo Pinto and in favor of Macondray Farms, Inc. The bond guaranteed payment of rentals of a fishpond and other obligations of Pinto under a lease agreement, Exhibit A-1. To protect Capital Insurance from liability under the bond, Mateo Pinto and the defendants Esteban M. Sadang and Maria Lachica executed an indemnity agreement, Exhibit B, and a deed of real estate mortgage, Exhibit C, over the defendants' property in Nueva Vizcaya covered by Transfer Certificate of Title No. 2216.

Pinto failed to pay rentals to Macondray Farms in the total amount of P24,668.83. Because of that failure, Capital Insurance, as surety, paid Macondray Farms P24,668.83 on May 14, 1956 to settle Pinto's obligation. Despite repeated demands, Pinto and his indemnitors, including Sadang and Lachica, failed to reimburse Capital Insurance.

Capital Insurance filed Civil Case No. 30061 against Pinto and his indemnitors, including Sadang and Lachica, for collection. Under an agreement of the parties in that case, Exhibit E, if after sale of all the properties the judgment remained unsatisfied, plaintiff could file a separate civil action against Sadang and Lachica, the other indemnitors; at the same time, the case against them was dismissed without prejudice, Exhibit F-1. Two executions issued to enforce the judgment in Civil Case No. 30061. After applying the proceeds of the sale of properties at public auction, a deficiency of P14,456.44 remained. Because Sadang and Lachica failed to pay despite repeated demands, that deficiency became the subject of the instant case.

Capital Insurance contended that under the indemnity agreement and real estate mortgage, Sadang and Lachica were liable for the deficiency of P14,456.44 plus interest, attorney's fees, and costs. Sadang and Lachica contended that their liability under the mortgage contract was limited to the first P20,000.00 that might be incurred under the bond, and that because Pinto had actually paid Macondray Farms P19,700.00, they were liable only for the remaining P300.00 after deducting that payment from the first P20,000.00.

The parties disagreed on the interpretation of the mortgage stipulation: "This mortgage is constituted to indemnify the mortgagee for any damage, cost, expenses and charges of whatever kind and nature that it may incur or sustain as a consequence of having acted as surety on the bond referred to above, and or its substitution, modification, alteration, change and/or renewals. That liability secured by the above properties is limited to the first P20,000.00 that might be incurred under the bond issued in favor of the Macondray Farms, Inc." Capital Insurance stressed the general indemnity language and argued that because Pinto paid P19,700.00 before default, no liability ever attached to Capital Insurance under the bond for that amount, so it should not be considered part of, or applied to, the first P20,000.00 that defined the limit of Sadang and Lachica's obligation.

The real intention of the parties was revealed by Sadang's testimony. He testified that when Pinto brought him to Capital Insurance, he saw a document prepared by Atty. Achacoso, with Atty. Nera and the manager of the Bonding Department present. He was made to understand that if he consented to be one of the bondsmen, he would answer only for the first P20,000.00 of the total P42,000.00 bond that Capital Insurance was to underwrite for Pinto in favor of Macondray Farms. He told Atty. Achacoso, in the presence of the manager, that he was only supposed to answer for the first P20,000.00 of the total bond indebtedness of P42,000.00 and that the moment the first P20,000.00 was paid, the bonding company automatically released his responsibility. When shown Exhibit C, he identified it as the second draft prepared after that interview and stated that the last clause limiting liability to the first P20,000.00 was inserted because he insisted on it; the first draft did not contain those last three lines. Atty. Achacoso explained that once that liability was paid, it would free him from connected liability with the other bondsmen, and Sadang consented to sign with his wife.

The trial court found Sadang's testimony uncontradicted and, on that basis, held Sadang and Lachica liable only for P300.00.

• Scope of Indemnity and Mortgage: Capital Insurance (plaintiff-appellant) stressed the general statement of appellees' liability in the mortgage contract "to indemnify the mortgagee for any damage, cost, expenses and charges of whatever kind and nature that it may incur or sustain as a consequence of having acted as surety on the bond," and contended that by virtue of the indemnity agreement and real estate mortgage, Sadang and Lachica were liable for the deficiency of P14,456.44 plus interest, attorney's fees, and costs.
• Effect of P19,700.00 Payment: Capital Insurance argued that because Mateo Pinto paid P19,700.00 to Macondray Farms, Inc. before he became in default, no liability ever attached to Capital Insurance under its bond for that amount, and hence it should not be considered as part of, or applied to, "the first P20,000.00 that might be incurred under the bond," which defined the limit of appellees' obligation.

• Limited Liability Under the Mortgage: Sadang and Lachica contended that their liability under the mortgage contract was limited to the first P20,000.00 that might be incurred under the bond and that, since Mateo Pinto actually paid Macondray Farms, Inc. P19,700.00, they were liable only for P300.00.
• Real Intention of the Parties: Sadang testified that he agreed to be an indemnitor only on condition that he would answer for the first P20,000.00 of the total P42,000.00 bond and that once the first P20,000.00 was paid, the bonding company automatically released his responsibility; the limiting clause was inserted in the second draft after he insisted on it.

• Interpretation of the Mortgage Stipulation: Whether the liability secured by Sadang and Lachica's real estate mortgage was limited to P300.00, representing the first P20,000.00 under the bond less the P19,700.00 paid by Mateo Pinto, or extended to the P14,456.44 deficiency plus interest, attorney's fees, and costs.
• Interest and Foreclosure: Whether the trial court erred in failing to provide for the stipulated interest at 12% per annum and for foreclosure of the mortgaged properties in case of non-payment.

• Interpretation of the Mortgage Stipulation: No. The liability was limited to P300.00, not the P14,456.44 deficiency. The ambiguity in the mortgage contract had to be resolved against Capital Insurance, whose lawyer prepared the document, and in accordance with the parties' real intention as shown by Sadang's uncontradicted testimony.
• Interest and Foreclosure: Yes. The trial court correctly held Sadang and Lachica liable only for P300.00 but failed to provide the stipulated 12% interest per annum, to begin from the date of filing of the complaint, and foreclosure under Rule 68 in case of non-payment.

• Interpretation of the Mortgage Stipulation: The mortgage contract contained a general indemnity clause but also a specific limitation that the liability secured by the properties was limited to the first P20,000.00 that might be incurred under the bond. Capital Insurance argued that because Mateo Pinto paid P19,700.00 before default, no liability ever attached to Capital Insurance under the bond for that amount, so it should not be applied to the first P20,000.00 limit. The argument appeared logical at first, but the real intention of the parties was revealed by Sadang's testimony. Sadang was made to understand that if he consented to be a bondsman, he would answer only for the first P20,000.00 of the total P42,000.00 bond, and that once the first P20,000.00 was paid, the bonding company automatically released his responsibility. The first draft of the mortgage did not contain the limiting clause; Sadang insisted that it be specifically mentioned, and Atty. Achacoso explained that payment of that liability would free him from connected liability with the other bondsmen. The trial court found Sadang's testimony uncontradicted. Because the mortgage contract as drafted was vague or ambiguous, the doubt had to be resolved against Capital Insurance, whose lawyer prepared the document, and in accordance with the real intention of the parties as explained by Sadang and Lachica. Thus, Sadang and Lachica were liable only for P300.00, the first P20,000.00 less the P19,700.00 paid by Mateo Pinto.
• Interest and Foreclosure: The trial court correctly held Sadang and Lachica liable only for P300.00, but it failed to provide for the stipulated interest at 12% per annum, which if not paid would be liquidated and added to the capital quarterly, and to order foreclosure of the mortgaged properties in case of non-payment. The Supreme Court therefore modified the judgment to include the stipulated interest, beginning from the date of the filing of the complaint, and directed that in case of non-payment of the sum adjudged, including interest, the mortgaged properties be sold as provided in Rule 68. No costs were imposed in the appeal.

• Ambiguity in contracts construed against the drafter — Where a contract is vague or ambiguous, doubt must be resolved against the party who prepared the document. In this case, the mortgage contract was prepared by Capital Insurance's lawyer, so the ambiguity in the limiting clause was construed against Capital Insurance.
• Real intention of the parties controls — The interpretation of a contract must accord with the real intention of the parties as shown by their contemporaneous acts and testimony. The Court relied on Sadang's uncontradicted testimony to conclude that the parties intended Sadang and Lachica's liability to be limited to the first P20,000.00 of the bond and to be extinguished once that amount was paid.
• Specific limitation qualifies general indemnity clause — A general clause in a mortgage indemnifying the surety for any damage, cost, expenses, and charges of whatever kind must be read together with a specific clause limiting the secured liability to the first P20,000.00 that might be incurred under the bond. The specific limitation, as explained by the parties' real intention, controlled the extent of recovery.
• Surety's recovery against indemnitors is bounded by contract — Although a surety that pays the principal debtor's obligation may seek reimbursement from indemnitors, the recovery is limited by the terms of the indemnity agreement and mortgage contract. Here, the mortgage limited recovery to P300.00 after crediting the principal debtor's P19,700.00 payment against the first P20,000.00.

• "If the mortgage contract as actually drafted seems to be vague or ambiguous, the doubt must be resolved against appellant, whose lawyer prepared the document, and in accordance with the real intention of the parties as explained by defendants-appellees." — This states the ratio for construing the ambiguous mortgage clause against the surety and in favor of the indemnitors' real intention.
• "Esteban Sadang agreed to be an indemnitor only on condition that he would answer for the "first P20,000.00 of the total P42,000.00 bond," and that "the moment the first P20,000.00 is paid the bonding company automatically releases my responsibility to them."" — This captures the factual basis for the Court's finding of the parties' real intention and the limitation of liability.
• "The trial court correctly held said defendants-appellants liable only for the sum of P300.00. However, it failed to provide for the stipulated interest thereon at the rate of 12% per annum, which if not paid would be liquidated and added to the capital, quarterly, and to order foreclosure of the mortgaged properties in case of non-payment." — This summarizes the Court's affirmance of the P300.00 liability and the modification for interest and foreclosure.
• "WHEREFORE, the judgment appealed from is affirmed, with the modification indicated above concerning interest, the same to begin from the date of the filing of the complaint. In case of non-payment of the sum thus adjudged, including interest, the mortgaged properties will be sold as provided in Rule 68. No costs in this instance." — This is the dispositive portion, stating the final relief and the foreclosure mechanism.

• Rule 68, Rules of Court — The Court ordered that in case of non-payment of the sum adjudged, including interest, the mortgaged properties would be sold as provided in Rule 68. The provision supplies the procedural mechanism for foreclosure of the real estate mortgage securing the limited liability.

Concepcion, C.J.; Reyes, J.B.L.; Dizon; Bengzon, J.P.; Zaldivar; Sanchez; Castro; Angeles; and Fernando, JJ.