G.R. No. 192099 - Ejercito vs. Oriental Assurance Corp.

Case Summary (G.R. No. 192099)

Procedural Posture and Relief Sought

The petitioners sought review of the Court of Appeals (CA) decision that reversed the Regional Trial Court (RTC) and held petitioners jointly and severally liable to reimburse Oriental Assurance Corporation P3,000,000 (the bond amount) with interest, attorney’s fees, and costs. The RTC had earlier dismissed the complaint against the petitioners, holding only Merissa Somes liable. The CA set aside the RTC decision and rendered judgment for Oriental. The petition to the Supreme Court contested the CA’s ruling on petitioners’ liability under the Deed of Indemnity and on the award of attorney’s fees.

Relevant Facts — Issuance of Bond and Deed of Indemnity

On 10 May 1999 Oriental Assurance issued a Surety Bond in favor of FFV Travel & Tours, Inc. to guarantee payment of airline tickets purchased on credit from IATA members, to the extent of P3,000,000. On the same day the petitioners and Somes executed a Deed of Indemnity in favor of Oriental Assurance. The bond’s original effectiveness ran from 10 May 1999 to 10 May 2000.

Relevant Facts — Renewal, Default, Demand and Payment

The bond was renewed for the period 10 May 2000 to 10 May 2001 (Bond Endorsement No. OAC-2000/0145 dated 17 April 2000). The renewal premium (P15,024.54) was paid by the insured corporation. FFV defaulted on its obligations, resulting in outstanding liabilities (P5,484,086.97 and USD18,760.98 as of 31 July 2000). IATA demanded payment under the bond; Oriental Assurance honored the demand on 28 November 2000 and IATA executed a Release of Claim on 29 November 2000. Oriental then demanded reimbursement from the indemnitors (petitioners and Somes); when they failed to reimburse, it filed a collection suit.

RTC Decision

After trial the RTC dismissed the complaint against the petitioners for lack of merit and held Somes liable to pay P3,000,000 with interest at 12% per annum from the filing of the complaint until full payment. The RTC’s rationale included a finding that there was no written agreement showing petitioners’ intention to be bound by any renewal beyond the initial one-year term; specifically, the RTC noted the renewal notice bore no signature confirming petitioners’ consent, and Somes alone had acted to procure the renewal (having paid the premium and used the renewed bond with IATA).

Court of Appeals Decision

The CA reversed the RTC, holding petitioners liable under the Deed of Indemnity. The CA relied on express provisions of the Deed that authorized the Company (Oriental) to grant or consent to renewals, extensions, modifications, substitutions, and similar acts regarding the original bond. The CA emphasized that petitioners voluntarily signed the Deed, were capable of understanding its legal effect (noting Paulino Ejercito is a lawyer), and thus could not disavow the plain terms that empowered Oriental to renew the bond and made the indemnitors jointly and severally liable for the original bond or any renewal thereof.

Issues Presented on Review

Whether the CA erred in holding petitioners liable to indemnify Oriental under the Deed of Indemnity, given petitioners’ alleged lack of consent to be bound beyond the one-year original bond period.
Whether the CA erred in awarding attorney’s fees against petitioners, given their asserted compliance (or non-liability) during the one-year effectiveness of the original bond.

Supreme Court’s Governing Principles on Contracts

The Supreme Court reiterated that a contract is binding between the parties and that the literal meaning of clear, unambiguous terms controls. When contractual terms are explicit and leave no doubt as to the parties’ intention, interpretation yields to the plain language of the instrument. The Court applied these principles to the Deed of Indemnity’s express clauses.

Contractual Provisions Central to the Decision

The Court highlighted and quoted pivotal clauses from the Deed of Indemnity, including:

An indemnity clause obligating signatories to indemnify the Company for payments, advances, losses, costs and expenses (including counsel/attorney’s fees not less than 15% of the amount claimed in each action), for the bond “its renewals, extensions, modifications or substitutions.”
A maturity clause making indemnities payable on demand from the creditor or when Oriental became liable under the bond “its renewals, extension, modifications or substitutions,” and authorizing the Company to grant extensions without prior knowledge or consent from obligors.
An incontestability clause rendering payments or disbursements by the Company final and not to be disputed by the indemnitors.
A waiver clause wherein the undersigned waived rights under Articles 2077–2081 of the Civil Code.
A renewals/alterations clause expressly empowering the Company to grant or consent to any extension, continuation, increase, modification, change, alteration, and/or renewal of the original bond and making the undersigned jointly and severally liable for the original bond or any such renewal until full payment of principal, interest, premiums, costs and other expenses.

Supreme Court Analysis — Binding Effect of the Deed

Applying the contract interpretation rule, the Court found the Deed’s stipulations clear and unequivocal: petitioners expressly authorized Oriental to renew the original bond and agreed to remain liable for the original bond and any renewal or alteration thereof. The Court treated the Company’s subsequent acts (including renewal effected through Somes) as binding on petitioners because petitioners had contractually empowered the Company to take those steps. Somes’ acts in paying the renewal premium and presenting the renewed bond to IATA were deemed indicative of an intention to renew that could not be denied.

On Petitioners’ Alleged Separate Agreement and Contractual Estoppel

The Court observed that petitioners’ contention that they consented only to a one-year validity was an alleged separate agreement with Somes outside the Deed and thus not binding on Oriental Assurance, which was not privy to any such alleged side agreement. The Court held that the dispute over a private understanding between petitioners and Somes would lie in a separate action against Somes, not as a defense to Oriental’s enforcement of the clear terms of the Deed.

On Contract of Adhesion and Capacity to Consent

Addressing the petitioners’ claim that the Deed was a contract of adhesion and therefore should be voidable, the Court stated that contracts of adhesion are not invalid per se. The Court reiterated that such contract

Case Syllabus (G.R. No. 192099)

Case Caption, Citation and Procedural Posture

Case: Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang (petitioners) v. Oriental Assurance Corporation (respondent).
G.R. No.: 192099.
Reporter citation: 763 PHIL. 354, First Division.
Date of Supreme Court Decision: July 08, 2015.
Nature of action before the Supreme Court: Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure.
Lower courts and rulings under review: Court of Appeals Decision dated 2 October 2009 and Resolution dated 14 April 2010 in CA-G.R. CV No. 90828; the CA reversed and set aside the Regional Trial Court Decision in Civil Case No. 01-101999 and entered a new judgment in favor of the respondent.
Disposition by the Supreme Court: Petition denied; Court of Appeals Decision dated 2 October 2009 and Resolution dated 14 April 2010 in CA-G.R. CV No. 90828 affirmed. Opinion by Chief Justice Sereno; concurring Justices Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe.

Summary of Relief Ordered by the Court of Appeals (as affirmed)

The CA ordered the defendants-appellees Merissa C. Somes, Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang jointly and severally liable to pay plaintiff-appellant Oriental Assurance Corporation:
- The principal amount of P3,000,000.00 with interest at the rate of 12% per annum from the time of the filing of the complaint until fully paid;
- Attorney’s fees in the amount of P30,000.00; and
- Costs of suit.
The Supreme Court affirmed the CA’s judgment and its award of the foregoing sums.

Facts (as found by the Court of Appeals)

On 10 May 1999, Oriental Assurance Corporation, through its Executive Vice President Luz N. Cotoco, issued a Surety Bond in favor of FFV Travel & Tours, Inc. (the Company).
Purpose of the bond: to guarantee the Company’s payment of airline tickets purchased on credit from participating members of the International Air Transport Association (IATA) up to P3,000,000.00.
On the same day (10 May 1999), petitioners and Merissa C. Somes executed a Deed of Indemnity in favor of Oriental Assurance Corporation.
The Surety Bond’s original effectiveness: one year from issuance (10 May 1999 to 10 May 2000).
The bond was renewed for another year (10 May 2000 to 10 May 2001) as shown in Bond Endorsement No. OAC-2000/0145 dated 17 April 2000.
The renewal premium of P15,024.54 was paid by the insured corporation and evidenced by Official Receipt No. 100262.
As of 31 July 2000, FFV Travel & Tours, Inc. was declared in default for failure to pay obligations totaling P5,484,086.97 and USD 18,760.98.
IATA demanded payment on the bond; respondent Oriental Assurance Corporation honored the demand on 28 November 2000 as evidenced by China Bank Check No. 104949.
IATA executed a Release of Claim on 29 November 2000 acknowledging payment of the surety bond.
Respondent sent demand letters to petitioners and to Somes seeking reimbursement of the P3,000,000.00 pursuant to the indemnity agreement; their failure to reimburse led respondent to file a collection suit.

Ruling of the Regional Trial Court (Trial Court)

After trial, the RTC rendered a Decision dismissing the complaint against petitioners for lack of merit and held Somes liable to pay P3,000,000.00 with interest at 12% per annum from the date the complaint was filed until full payment.
The RTC’s reasoning included a finding that there was no written agreement showing petitioners’ intention to be bound beyond the one-year effectivity of the original surety bond.
The RTC noted the absence of any signature on the Renewal Notice and that the Renewal Notice was not signed by Somes.
The RTC nonetheless held Somes liable to pay the surety value of the cost of tickets because she had paid the premium for the renewal of the Surety Bond and used the renewed bond by submitting it to IATA.

Ruling of the Court of Appeals

The CA reversed the RTC and ruled that petitioners could not escape liability under the Deed of Indemnity because the indemnity expressly authorized the Company (respondent) to grant renewals or extensions.
The CA emphasized that the Deed of Indemnity contained a stipulation empowering the Company to grant or consent to extensions, continuations, increases, modifications, changes, alterations and/or renewals of the original bond.
The CA observed that petitioners voluntarily signed the agreement and, being educated persons (with Paulino being a lawyer), could not have misunderstood the legal effects of their undertaking.
The CA ordered the defendants jointly and severally liable to pay respondent the principal P3,000,000.00 with interest at 12% per annum from filing of the complaint, attorney’s fees P30,000.00, and costs of suit.

Issues Raised by Petitioners (as presented)

Whether the Court of Appeals erred in ruling that petitioners are l