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FIRST LEPANTO-TAISHO INSURANCE CORPORATION v. CHEVRON

FACTS:

Respondent Chevron Philippines, Inc. (formerly Caltex Philippines, Inc.) sued petitioner First Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) for the payment of unpaid oil and petroleum purchases made by its distributor Fumitechniks Corporation. Fumitechniks had applied for and was issued a surety bond by petitioner to guarantee payment of fuel products in compliance with the credit line agreement. Fumitechniks defaulted on its obligation, and respondent notified petitioner of the unpaid purchases. Petitioner demanded copies of documents such as delivery receipts and the agreement secured by the bond. Fumitechniks informed petitioner that no such agreement was executed, and petitioner advised respondent of the non-existence of the agreement. Respondent formally demanded payment from petitioner under the surety bond, but petitioner refused, claiming that the bond cannot exist without a principal agreement. After trial, the RTC dismissed the complaint, but the CA reversed the decision and ordered petitioner to pay respondent.

The petitioner in this case is Fumitechniks Corp. of the Phils. (Fumitechniks), while the respondent is Caltex Philippines, Inc. (Caltex). Fumitechniks issued a surety bond to secure the performance of a written credit line agreement between it and Caltex. The surety bond was issued by First Lepanto-Taisho Insurance Corporation. The surety bond stated that Fumitechniks and the insurance corporation are jointly and severally liable to Caltex for the payment of Php 15,700,000. The surety bond further stated that Fumitechniks had entered into the credit line agreement with Caltex, a copy of which was attached to the bond. It also indicated that the purpose of the bond was to secure Fumitechniks' full and faithful performance of its obligations under the agreement. However, Fumitechniks later argued that there was no valid written credit line agreement between them and Caltex, and therefore should not be held liable under the surety bond.

ISSUES:

  1. Whether the surety bond was rendered ineffective due to non-compliance with the submission of the written agreement as required by the bond.

  2. Whether the attaching of the copy of the written distribution agreement was merely for evidentiary purposes and did not modify the terms of the surety bond.

  3. Whether the non-submission of the oral distributorship and credit agreement binds the surety.

  4. Whether the respondent should be held bound by the recital in the surety bond that the terms and conditions of its distributorship contract should be reduced in writing.

RULING:

  1. The Court held that the surety bond was rendered ineffective due to the non-compliance with the submission of the written agreement as required by the bond. The surety bond clearly stated that the liability of the surety would only be valid if the principal performs and fulfills all the undertakings, covenants, terms, conditions, and agreements stipulated in the written agreement. Thus, by deleting the required submission and attachment of the written agreement to the surety bond and replacing it with an oral credit agreement, the obligations of the surety extended beyond the limits of the surety contract.

  2. The Court held that the attaching of the copy of the written distribution agreement was not merely for evidentiary purposes and did modify the terms of the surety bond. The surety bond specifically stated that it secures the payment of purchases on credit in accordance with the terms and conditions of the "agreement" entered into between the principal and the obligee. Even though respondent argued that distributorship accounts are not covered by written distribution agreements, the Court found that respondent never relayed the terms and conditions of its distributorship agreement to the petitioner after the delivery of the bond. Thus, the bond only secured the payment of purchases up to the maximum amount allowed under the bond.

  3. The surety is not bound by the non-submission of the oral distributorship and credit agreement. The liability of the surety is determined by the terms of the contract of suretyship in relation to the principal contract between the debtor and creditor. In this case, the bond guarantees the payment of the fuel products withdrawn by the principal in accordance with the terms and conditions of their agreement. The bond specifically refers to a written agreement, and it is basic that if the terms of the contract are clear, the literal meaning shall control. The non-compliance by the creditor in reducing the terms and conditions to writing does not invalidate the surety contract but affects the creditor's right to demand performance.

  4. The respondent should be held bound by the recital in the surety bond that the terms and conditions of its distributorship contract should be reduced in writing. The surety agreement is based on the principal agreement it secures, and the stipulations in the principal agreement must be communicated or made known to the surety. The creditor is bound by a faithful observance of the rights of the surety and the performance of every duty necessary for the protection of those rights. The respondent, as the creditor, should have relayed the terms and conditions of its contract with the principal upon the commencement of their transactions, which obligations are covered by the surety bond issued by the petitioner. The bond issued and accepted specifically referred to a "written agreement."

PRINCIPLES:

  • A surety bond is rendered ineffective if there is non-compliance with the submission of the written agreement as required by the bond.

  • The terms and conditions of a surety bond must be taken and interpreted together. Any modification or deletion of the stipulations and provisions of the surety contract may extend the obligations of the surety beyond the limits of the contract.

  • The attachment of a copy of the written agreement to a surety bond serves as evidence of the terms and conditions that the bond seeks to secure. If no copy of the written agreement is attached, the bond may only secure the payment of purchases up to the maximum amount allowed under the bond.

  • A surety contract should be read and interpreted together with the contract between the debtor and the creditor.

  • A surety contract is merely collateral and is based on the principal contract it secures.

  • The terms of a contract are to be construed according to their literal meaning if they are clear.

  • An onerous undertaking, such as a surety agreement, is strictly construed against the creditor.

  • Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.

  • The creditor is charged with notice of the specified form of the agreement or at least the disclosure of basic terms and conditions of its contract with the principal after accepting the bond.

  • A juridical person is generally not entitled to moral damages because it cannot experience physical suffering or sentiments such as wounded feelings, serious anxiety, mental anguish or moral shock. However, the Court may allow the grant of moral damages to corporations, provided there is proof of the existence of the factual basis of the damage and its causal relation to the defendant's acts.

  • Moral damages are awarded to compensate the claimant for actual injury suffered, and not to impose a penalty on the wrongdoer.

  • Not every winning party is entitled to an automatic grant of attorney's fees. No premium should be placed on the right to litigate.