G.R. No. L-9981 - Philippine Surety and Insurance Co., Inc. vs. Royal Oil Products, Inc.

On October 25, 1952, Royal Oil Products, Inc. entered into an employment contract with Monico Perfecto, hiring him as a salesman for its products in the provinces of Laguna, Quezon, and Batangas.
The contract provided that Perfecto was to sell products for cash or on credit, collect the accounts receivable, and remit collections promptly. He was compensated solely through a commission of 5% on gross sales fully paid.
As security for his faithful performance, Perfecto was required to furnish a bond amounting to ₱10,000. This bond, executed by the Philippine Surety & Insurance Company, Inc., was to remain effective during the term of his employment.
Additionally, on April 30, 1953, Perfecto submitted a second bond, underwritten by the Associated Insurance and Surety Co., Inc., to guarantee any liability arising under the contract in excess of ₱10,000.

Despite Perfecto’s multiple credit sales and various defalcations, he continued to transact on behalf of Royal Oil, even after defaults such as the appropriation of ₱1,107 for personal use.
A statement of account revealed outstanding balances. Initially, a May 1953 statement showed a default of ₱2,492.80 which was later revised on July 2, 1953 to ₱12,275.10.
Royal Oil, upon noting delays and defaults especially in Perfecto’s failure to remit cash collected from credit sales, sent letters demanding payment from both the Associated Insurance and the Philippine Surety.

The trial court rendered judgment in favor of Royal Oil, ordering the Philippine Surety to pay ₱10,000 plus interest computed at 12% per annum from the complaint’s filing date, attorney’s fees of 25% of the sum due, and exemplary damages of ₱3,000.
The Court of Appeals affirmed the decision with slight modifications by reducing the attorney’s fees from 25% to 20% of the sum due and exemplary damages from ₱3,000 to ₱1,000, holding other aspects of the judgment intact.
On appeal, the Philippine Surety raised four assignments of error centering on:

The alleged release from liability due to Royal Oil’s continued employment of Perfecto despite his defaults without notifying the surety.
The effect of Royal Oil’s assignment of Perfecto’s accounts to Associated Insurance on the surety’s liability.
The application of Section 2 of Republic Act No. 487 to a surety bond.
The imposition of exemplary damages despite Royal Oil’s own conduct.

The employment contract (Exhibit "A") bound Perfecto to specific duties and provided that any failure by the agent could result in immediate rescission with no waiver of Royal Oil’s rights upon non-enforcement.
The surety bond (Exhibit "B") incorporated the terms of the employment contract, stating that the surety’s obligation would be null and void if the principal complied with all stipulations, otherwise remaining in full force.
No provision in the contract required Royal Oil to notify the Philippine Surety of Perfecto’s defaults or delay in collections.

Whether the Philippine Surety was released from liability under its bond by Royal Oil’s continued employment of Perfecto despite his defaults and defalcations, without notifying the surety.
Whether Royal Oil’s assignment of Perfecto’s accounts (partially amounting to ₱4,000) to the Associated Insurance discharged or affected the liability of the Philippine Surety under its bond.
Whether Section 2 of Republic Act No. 487, which deals with the denial or withholding of claims in insurance policies, is applicable to the surety bond at issue, which is a mere instrument of suretyship rather than a conventional insurance contract.
Whether the conduct of the Philippine Surety, particularly its failure to promptly act upon the plaintiff’s letters of demand, warrants the imposition of exemplary damages and attorney’s fees despite any alleged irregularities in Royal Oil’s action.