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PHILIPPINE NATIONAL BANK v. CA

FACTS:

The petitioner, Philippine National Bank (PNB), filed an action for collection of a sum of money against the private respondents, Estanislao Depusoy and Luzon Surety Co (LSCI). The case arose from a building contract between Depusoy and the Republic of the Philippines for the construction of the GSIS building. Depusoy applied for credit accommodation with PNB, which was approved subject to certain conditions, including the assignment of all payments from the Bureau of Public Works of the GSIS to the bank and the furnishing of a surety bond. Depusoy executed a Deed of Assignment in favor of PNB, assigning all payments to be received from the contract with the Bureau of Public Works. LSCI issued two surety bonds on behalf of Depusoy. The trial court ordered Depusoy to pay PNB the principal sums due, but no attorney's fees. The Court of Appeals affirmed the trial court's decision with modifications.

The case involves a dispute over surety bonds issued by LSCI in connection with a contract between PNB and Depusoy. The bonds were issued to secure Depusoy's performance of the contract. The bonds contained a provision stating that LSCI would not be liable for any claims not discovered and presented within three months from the expiration of the bond. Depusoy obtained credit accommodations from PNB, and payments made by GSIS were payable to PNB and received by Depusoy, who then delivered them to PNB. PNB applied the payments to the payment of amounts due on promissory notes, and the balance was credited to Depusoy's account. Depusoy defaulted on his building contract, and GSIS stopped making payments to PNB. PNB filed a complaint against Depusoy and LSCI, seeking payment. The trial court ruled in favor of LSCI, holding that the bonds only guaranteed the performance of the deed of assignments. PNB appealed the decision.

PNB filed a complaint against Depusoy and LSCI, seeking to recover the loan obtained by Depusoy and the additional accommodations granted to him. The trial court ruled in favor of the defendants, finding that the surety bonds only guaranteed the performance of Depusoy's obligations under the Deed of Assignment, not the payment of the loan. PNB appealed the decision to the Court of Appeals, which upheld the lower court's ruling. The Court of Appeals held that the surety bonds and the Deed of Assignment only required Depusoy to assign and convey all payments to be received from the Bureau of Public Works to PNB. There was no guarantee by LSCI that Depusoy would pay his debt.

ISSUES:

  1. Whether Luzon Surety Company is liable to pay the indebtedness of Depusoy to the Philippine National Bank (PNB).

  2. Whether the surety bonds guarantee the loan or the Deed of Assignment.

  3. Whether the surety bond executed by Luzon Surety Company, Inc. (Luzon) was intended to guarantee the loan granted by the Philippine National Bank (PNB) to Depusoy.

  4. Whether Luzon is liable for the payment of promissory notes and overdrafts mentioned in the Deed of Assignment.

  5. Whether Luzon Surety is liable for the defaulted loan of Depusoy with PNB.

  6. Whether Luzon Surety guaranteed the faithful performance of Depusoy's building contract with the Bureau of Public Works.

  7. Whether the surety bond guaranteed the payment of the loan or the Deed of Assignment.

  8. Whether the surety bonds cover the principal loans and make the surety liable upon default of the principal.

  9. Whether the surety is liable for failure of the principal to comply with the terms of the deed of assignment.

  10. Whether private respondents should be adjudged liable for attorney's fees.

RULING:

  1. Luzon Surety Company is not liable to pay the indebtedness of Depusoy to the PNB. The surety bonds do not contain any provision that guarantees Luzon Surety's liability in the event of Depusoy's default.

  2. The surety bonds guarantee the Deed of Assignment executed by Depusoy in favor of the PNB, not the loan itself. The bonds recite that they are executed in consideration of the loan, but the obligation being guaranteed is the Deed of Assignment, as shown by various factors such as Luzon Surety's failure to sign the promissory notes and the testimony of the bank's representative.

  3. No, the surety bond was not intended to guarantee the loan. The terms of the bond filed by Luzon state that it was executed to secure the full and faithful performance of Depusoy's contract with the Government Service Insurance System (GSIS). Therefore, Luzon is not liable for the payment of the loan granted by PNB to Depusoy.

  4. No, Luzon is not liable for the payment of promissory notes and overdrafts mentioned in the Deed of Assignment. The Deed of Assignment only required Depusoy to execute documents that the PNB may require to evidence the assignment. The phrase "subject to the terms and conditions of the promissory notes and overdrafts" only means that any amount received by the PNB would be applied to the payment of the promissory notes and overdrafts in accordance with their terms and conditions, as they became due. It does not impose any contractual obligation on Luzon to guarantee these additional obligations.

  5. Luzon Surety is not liable for the defaulted loan of Depusoy with PNB. The Court held that under the terms of the surety bond, Luzon Surety guaranteed the payment of the loan only if Depusoy faithfully performed his building contract with the Bureau of Public Works. Since Depusoy defaulted and failed to comply with the terms of the contract, Luzon Surety is not liable.

  6. Luzon Surety did not guarantee the faithful performance of Depusoy's building contract with the Bureau of Public Works. The Court found that the surety bond only covered the payment of the loan, not the performance of the building contract. The argument that Luzon Surety guaranteed the performance of the contract is considered fanciful and wishful thinking.

  7. The surety bond guaranteed the Deed of Assignment. The Court clarified that while some parts of the exhibits may appear to refer to the loan, the main intention of Luzon Surety was to extend the duration of the surety bond. The testimony of the Manager of the Loans & Discounts Department confirms that the surety bond guaranteed the Deed of Assignment, which authorized the PNB to receive all monies due from the Bureau of Public Works and to endorse for deposit all instruments of credit. Thus, Luzon Surety guaranteed that all the monies due under Depusoy's building contract should be paid to the PNB.

  8. The surety bonds executed by private respondent were intended to guarantee the faithful performance of the principal's obligation under the deed of assignment, not to guarantee the payment of the loans or the debt of the principal to the petitioner.

  9. The liability of the surety is measured by the terms of the contract and is strictly limited to that assumed by its terms. Even if there were doubts on the terms and conditions of the surety agreement, such doubts should be resolved in favor of the surety.

  10. The trial court erred in not ordering the principal to pay attorney's fees equivalent to 10% of the amount due, as stipulated in the promissory notes. The stipulation for attorney's fees is not unreasonable and should be given effect.

PRINCIPLES:

  • When the terms of an agreement are clear, there can be no room for construction.

  • Contracts should be interpreted according to the intention of the parties.

  • The terms of a surety bond determine the extent of the surety's liability. If the bond states that it is executed to secure the performance of a specific contract, the surety is not liable for other obligations outside the scope of the bond.

  • The phrase "subject to" in an agreement or contract is a phrase of qualification, not of contract, and means being under the control, power, or dominion of a certain party, without imposing a contractual obligation on another party.

  • In a surety agreement, the liability of the surety is dependent on the principal debtor's performance of the underlying contract.

  • The terms of the surety bond must be interpreted in accordance with their plain and literal meaning.

  • In interpreting a contract, the intention of the parties must be ascertained from the language used in the contract, considering the circumstances surrounding its execution.

  • Parol evidence is not admissible to vary, contradict, or alter the terms of a written contract.

  • The literal meaning of the stipulations in a contract shall control when the terms are clear and leave no doubt upon the intention of the contracting parties. (Article 1370, Civil Code)

  • The liability of a surety cannot be extended beyond the specified limits in the contract and any doubt should be resolved in favor of the surety. (Article 2055, Civil Code)

  • The obligations of a surety are strictly limited to those assumed by its terms and cannot be extended by implication. (Umali, et al. vs. Court of Appeals, et al.)

  • The liability of a surety should not be extended beyond the terms of the contract and to the extent, manner, and circumstances pointed out in the obligation. (La Insular vs. Machuca Go Tanco, et al.)