Title
Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc.
Case
G.R. No. L-47369
Decision Date
Jun 30, 1987
Petitioners sought to avoid liability under indemnity agreements after PAGRICO defaulted on a PNB credit line secured by R & B Surety. SC ruled no novation occurred via Trust Agreement, indemnity agreements enforceable, and complaint not premature.

Case Summary (G.R. No. L-47369)

Key Dates

November 1963 — PAGRICO’s credit line increased; Surety Bond No. 4765 issued by R & B.
23–24 December 1963 — Indemnity agreements executed (one by CCM and Joseph Cochingyan, Jr.; another by PAGRICO, PACOCO, Jose K. Villanueva and Liu Tua Beh).
28 December 1965 — Trust Agreement executed among CCM (Trustor), Tomas Besa (Trustee), and PNB (Beneficiary).
1966–1968 — R & B made partial payments to PNB; suit filed by R & B on August 1, 1968. Trial decision in favor of R & B affirmed on appeal to the Supreme Court.

Applicable Law and Legal Principles

  • Republic Act No. 296, sec. 17 (basis for Supreme Court’s exclusive appellate jurisdiction over questions of law certified by the Court of Appeals).
  • Civil Code provisions on novation and guaranty, with particular reference to Article 2079 (extension by creditor without guarantor’s consent extinguishes guaranty) and established doctrines distinguishing objective and subjective novation.
  • Contract law principles governing indemnity agreements, including indemnity against liability (creates immediate obligation upon emergence of liability) versus indemnity against loss (obligation arises upon actual payment or loss).

Factual Background and Contractual Terms

PNB required PAGRICO to furnish a bond for the P400,000 increment. R & B issued Surety Bond No. 4765 in favor of PNB, binding PAGRICO and R & B jointly and severally, with R & B’s liability expressly including accrued interest and collection expenses. The bond authorized PNB to proceed directly against R & B without exhausting PAGRICO’s assets. Two indemnity agreements, executed in favor of R & B by CCM (with Joseph Cochingyan, Jr.) and by PAGRICO/PACOCO (with Villanueva and Liu signing individually), contained: obligation to pay annual premiums; broad indemnity against damages, costs and attorney’s fees (specified at not less than 20% of claimed amount); maturity provision making indemnities due upon demand from the creditor or upon R & B’s liability under the bond; authorization for R & B to accept payments or grant extensions without prior notice to other obligors; and a clause rendering payments made by R & B incontestable and requiring indemnitors to reimburse such payments.

Default, Partial Payments, and R & B’s Claims

PAGRICO defaulted on its obligation to PNB. PNB demanded payment from R & B for the P400,000 principal sum. R & B made partial payments totaling P70,000 (supported by vouchers and receipts) and formally demanded reimbursement from petitioners. Upon nonpayment, R & B sued petitioners for unpaid premiums, continuing premiums until bond discharge, reimbursement of payments made to PNB, and the full P400,000 with interest, relying on the indemnity agreements’ provisions that rendered R & B’s payments and liabilities enforceable against indemnitors.

Trial Court Disposition and Appeal

The trial court awarded R & B judgment against petitioners Cochingyan and Villanueva for the P400,000 (with specified interest on amounts corresponding to partial payments), unpaid premiums, and attorney’s fees; suit dismissed as to Liu Tua Beh for lack of service. The Court of Appeals certified the case to the Supreme Court as raising solely legal questions.

Issues on Appeal

  1. Whether the Trust Agreement of 28 December 1965 effected a novation that extinguished R & B’s liability under the Surety Bond and thus petitioners’ obligations under the indemnities.
  2. Whether the Trust Agreement’s provision that PNB would “hold in abeyance any action to enforce its claims against R & B” amounted to an unauthorized extension of the debtor’s time that would extinguish petitioners’ obligations under Article 2079.
  3. Whether R & B’s suit against indemnitors was premature because PNB had not first sued R & B.

Analysis — Novation

The Court recited the law on novation: objective (change of object or principal conditions) and subjective (change of debtor or creditor) novation require either an express declaration that the old obligation is extinguished or a new obligation utterly incompatible with the old. Novation is never presumed and must be established by clear intent to extinguish the prior obligation. The Trust Agreement expressly stated it would not release R & B from its liabilities under the bond; it further provided that the Trustor would pay obligations and that PNB would hold actions in abeyance while the trust was implemented. Because the Trust Agreement explicitly preserved R & B’s bond liability, it did not effect objective novation. Nor did it effect subjective novation: the Trust Agreement added another obligor (the Trustor) but did not release the original debtor. The Court emphasized established authority that acceptance of guaranty or assumption by a third person does not discharge the original debtor absent express release. Therefore, the bond and the indemnities continued to subsist; the Trust Agreement merely created additional parties liable to PNB.

Analysis — Article 2079 and the Alleged Unauthorized Extension

Petitioner Villanueva argued that PNB’s promise to hold actions in abeyance operated as an extension of time to the debtor which, without guarantor consent, would extinguish guaranties. The Court examined the contractual relationships: petitioners were indemnitors to R & B, not direct obligors to PNB (they did not in fact become co-sureties vis-à-vis PNB). Article 2079 protects sureties/guarantors against creditor-granted extensions that deprive them of their right to pay and be subrogated. Here, however, (a) the indemnitors were second-tier parties relative to PNB and had no direct obligation to PNB, and (b) the principal obligation and R & B’s liability had already matured before the Trust Agreement was executed; petitioners’ indemnity obligations had likewise matured because their indemnity agreements made their liability due upon R & B’s liability arising, whether or not payment had been made. The Court relied on the principle that mere delay or forbearance by a creditor after maturity does not of itself constitute an extension that discharges a surety unless there is a valid and binding

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