JOSEPH COCHINGYAN, JR. AND JOSE K. VILLANUEVA, PETITIONERS, VS. R & B SURETY AND INSURANCE COMPANY, INC., RESPONDENT.

This case was certified to us by the Court of Appeals in its
resolution dated 11 November 1977 as one involving only questions of law and,
therefore, falling within the exclusive appellate
jurisdiction of this Court under Section 17, Republic Act 296, as amended.

In November 1963, Pacific Agricultural Suppliers Inc. (PAGRICO)
applied for and was granted an increase in its line of credit from P400,000.00
to P800,000.00 (the “Principal Obligation”), with the Philippine
National Bank (PNB).  To secure PNB’s approval, PAGRICO had to give a good and sufficient
bond in the amount of P400,000.00, representing the
increment in its line of credit, to secure its faithful compliance with the
terms and conditions under which its line of credit was increased.  In compliance with this requirement, PAGRICO
submitted Surety Bond No. 4765, issued by the respondent R & B Surety and
Insurance Co. Inc. (“R & B Surety”) in the specified amount in
favor of the PNB.  Under the terms of the
Surety Bond, PAGRICO and R & B Surety bound themselves jointly and
severally to comply with the “terms and conditions of the advance line [of
credit] established by the [PNB)”. 
PNB had the right under the Surety Bond to proceed directly against R &
B Surety “without the necessity of first exhausting the assets” of the
principal obligor, PAGRICO.  The Surety
Bond also provided that R & B Surety’s liability was not to be limited to
the principal sum of P400,000.00, but would also include “accrued
interest” on the said amount “plus all expenses, charges or other
legal costs incident to collection of the obligation [of R & B
Surety]” under the Surety Bond.

In consideration of R & B Surety’s issuance of the Surety
Bond, two identical indemnity agreements were entered into with R & B
Surety:  (a) one agreement dated 23
December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner
Joseph Cochingyan, Jr.; the latter signed not only as
President of CCM but also in his personal and individual capacity; and (b)
another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra
Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr. Villanueva signed both as Manager of PAGRICO and
in his personal and individual capacity; Mr. Liu signed both as President of
PACOCO and in his individual and personal capacity.

Under both indemnity agreements, the indemnitors
bound themselves jointly and severally to R & B Surety to pay an annual
premium of P5,103.05 and “for the faithful compliance of the terms and
conditions set forth in said SURETY BOND for a period beginning x x x x
until the same is CANCELLED and/or DISCHARGED.” The Indemnity Agreements
further provided:

“(b) INDEMNITY:  – To
indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments
advances and expenses of whatever kind and nature, including [of] attorney’s
fees, which the CORPORATION may, at any time, become for, sustain or incur, as
consequence of having executed the above-mentioned Bond, its renewals,
extensions or substitutions and said attorney’s fees [shall] not be less than
twenty (20%) per cent of the total amount claimed by the CORPORATION in each
action, the same to be due, demandable and payable, irrespective of whether the
case is settled judicially or extrajudicially and
whether the amount has been actually paid or not;

(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH:  – The said indemnities will be paid to the
CORPORATION as soon as demand is received from the Creditor or upon receipt of
Court order or as soon as it becomes liable to make payment of any sum under
the terms of the above-mentioned Bond, its renewals, extensions, modifications
or substitutions, whether the said sum or sums or part thereof, have been
actually paid or not.

We authorize the SURETY COMPANY, to accept in any case and at its
entire discretion, from any of us, payments on account of the pending
obligations, and to grant extension to any of us, to liquidate said
obligations, without necessity of previous knowledge
of [or] consent from the other obligors.

x x
x              x
x x                 x x x

(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY:  – Any payment or disbursement made by the
SURETY COMPANY on account of the above-mentioned Bonds, its renewals,
extensions or substitutions, either in the belief that the SURETY COMPANY was
obligate[d] to make such payment or in the belief that said payment was
necessary in order to avoid greater losses or obligations for which the SURETY
COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its
renewals, extensions or substitutions, shall be final and will not be disputed
by the undersigned, who jointly and severally bind themselves to indemnify the
SURETY COMPANY of any and all such payments as stated in the preceding clauses.

x x x              x x x                 x x x.”

When PAGRICO failed to comply with its Principal Obligation to
the PNB, the PNB demanded payment from R & B Surety of the sum of
P400.000.00 the full amount of the Principal Obligation.  R & B Surety made a series of payments to
PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.

R & B Surety in turn sent formal demand letters to
petitioners Joseph Cochingyan, Jr. and Jose K.
Villanueva for reimbursement of the payments made by it to the PNB and for a
discharge of its liability to the PNB under the Surety Bond.  When petitioners failed to heed its demands,
R & B Surety brought suit against Joseph Cochingyan,
Jr., Jose K. Villanueva and Liu Tua Beh in the Court of First Instance of Manila, praying
principally that judgment be rendered:

“b.  Ordering defendants
to pay jointly and severally, unto the plaintiff, the sum of P20,412.20
representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968,
and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is
discharged, with interest thereon at the rate of 12% per annum; [and]

 c.  Ordering the defendants to pay jointly
and severally, unto the plaintiff the sum of P400,000.00 representing the total
amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per
annum on the amount of P70,000.O0 which had been paid to the Phil. National
Bank already, the interest to begin from the month of September, 1966;

x x
x“

Petitioner Joseph Cochingyan, Jr. in
his answer maintained that the Indemnity Agreement he executed in favor of R
& B Surety:  (i)
did not express the true intent of the parties thereto in that he had been
asked by R & B Surety to execute the Indemnity Agreement merely in order to
make it appear that R & B Surety had complied with the requirements of the
PNB that credit lines be secured; (ii) was executed so that R & B Surety
could show that it was complying with the regulations of the Insurance
Commission concerning bonding companies; (iii) that R & B Surety had
assured him that the execution of the agreement was a mere formality and that
he was to be considered a stranger to the transaction between the PNB and R
& B Surety; and (iv) that R & B Surety was estopped
from enforcing the Indemnity Agreement as against him.

Petitioner Jose K. Villanueva claimed in his answer that:  (i) he had executed
the Indemnity Agreement in favor of R & B Surety only “for accomodation purposes” and that it did not express
their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB
secured by the Surety Bond had already been assumed by CCM by virtue of a Trust
Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation
of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement
was thereby extinguished by novation arising from the
change of debtor under the Principal Obligation; and (iv) that the filing of
the complaint was premature, considering that R & B Surety filed the case
against him as indemnitor although the PNB had not
yet proceeded against R & B Surety to enforce the latter’s liability under
the Surety Bond.

Petitioner Cochingyan, however, did not
present any evidence at all to support his asserted defenses.  Petitioner Villanueva did not submit any evidence
either on his “accomodation” defense.  The trial court was therefore constrained to
decide the case on the basis alone of the terms of the Trust Agreement and
other documents submitted in evidence.

In due time, the Court of First Instance of Manila, Branch 24^[1]
rendered a decision in favor of R & B Surety, the dispositive
portion of which reads as follows:

“Premises considered, judgment is hereby rendered:  (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and
severally, unto the plaintiff the sum of P400,000.00, representing the total
amount of their liability on Surety Bond No. 4765, and interest at the rate of
6% per annum on the following amounts:

On
P14,000.00 from September 27, 1966;

On P4,000.00
from November 28, 1966;

On P4,000.00
from December 14, 1966;

On P4,000.00
from January 19, 1967;

On P8,000.00
from February 13, 1967;

On P4,000.00
from March 6, 1967;

On P8,000.00
from June 22, 1967;

On P8,000.00
from September 14, 1967;

On P8,000.00
from November 28, 1967;
and

On P8,000.00
from February 26, 1968

until full payment; (b) ordering said
defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765,
with legal interest thereon from the filing of plaintiff’s complaint on August
1, 1968 until fully paid, and the further sum of P4 000.00 as and for
attorney’s fees and expenses of litigation which this Court deems just and equitable.

There being no showing the summons was
duly served upon the defendant Liu Tua Beh who has filed no answer in this case, plaintiff’s
complaint is hereby dismissed as against defendant Liu Tua
Beh without prejudice.

Costs against the
defendants Joseph Cochingyan, Jr. and Jose K.
Villanueva.”

Not satisfied with the decision of the trial court, the
petitioners took this appeal to the Court of Appeals which, as already noted,
certified the case to us as one raising only questions of law.

The issues we must confront in this appeal are:

1. whether or not the Trust Agreement
had extinguished, by novation, the obligation of R
& B Surety to the PNB under the Surety Bond which, in turn, extinguished
the obligations of the petitioners under the Indemnity Agreements;

2. whether the Trust Agreement extended the term of the Surety
Bond so as to release petitioners from their obligation as indemnitors
thereof as they did not give their consent to the execution of the Trust
Agreement; and

3. whether or not the filing of this complaint
was premature since the PNB had not yet filed a suit against R & B Surety
for the forfeiture of its Surety Bond.

We address these issues seriatim.

1.  The Trust Agreement
referred to by both petitioners in their separate briefs, was executed on 28 December
1965 (two years after the Surety Bond and the Indemnity Agreements were
executed) between:  (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of
the Catholic Church Mart, represented by Joseph Cochingyan,
Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee, and (3) the PNB as
Beneficiary.

The Trust Agreement provided, in pertinent part, as follows:

‘WHEREAS, the TRUSTOR has guaranteed a bond in the amount of
P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the
instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21,
1963, in favor of the BENEFICIARY in connection with the application of PAGRICO
for an advance line of P400,000.00 to P800,000.00;

‘WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION)
in the amount of P900,000.00 in favor of the BENEFICIARY to secure certain
credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co.,
Inc. (PACOCO);

‘WHEREAS, the PAGRICO and the PACOCO have defaulted in the
payment of their respective obligations in favor of the BENEFICIARY guaranteed
by the bonds issued by the R & B and the CONSOLACION respectively, and
by reason of said default, the BENEFICIARY has demanded compliance by the R
& B and the CONSOLACION of their respective obligations under the
aforesaid bonds;

‘WHEREAS, the TRUSTOR is, therefore, bound to comply with his
obligation under the indemnity agreements aforementioned executed by him in
favor of R & B and the CONSOLACION, respectively and in order to
forestall Impending suits by the BENEFICIARY against said companies, he is
willing as he hereby agrees to pay the obligations of said companies in favor
of the BENEFICIARY in the total amount of P1,300,000 without interest from
the net profits arising from the procurement of reparations consumer goods made
thru the allocation of WARVETS;

x x
x

‘1.  TRUSTOR hereby
constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying
to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the
obligations of the R & B under the R & B Bond No. G-4765 for
P400.000.00 dated December 23, 1963,
and of the CONSOLACION under The Consolacion Bond No.
G-5938 of June 3, 1964 for P900,00.00 or the total amount of P1,300,000.00
without interest from the net profits arising from the procurement of
reparations consumer goods under the Memorandum of Settlement and Deeds of
Assignment of February 2, 1959 through the allocation of WARVETS;

x x
x

‘6.  THE
BENEFICIARY agrees to hold in abeyance any action to enforce its claims against
R & B and CONSOLACION, subject of the bond mentioned above.  In the meantime that this TRUST AGREEMENT is
being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R
& B and the CONSOLACION as among the companies duly accredited to do
business with the BENEFICIARY and its branches, unless said companies have been
blacklisted for reasons other than those relating to the obligations subject of
the herein TRUST AGREEMENT;

x x
x

‘9.  This
agreement shall not in any manner release the R & B and CONSOLACION from
their respective liabilities under the bonds mentioned above.‘”
(Underscoring supplied)

There is no question that the Surety Bond has not been cancelled
or fully discharged^[2]
by payment of the Principal Obligation. 
Unless, therefore, the Surety Bond has been extinguished by another
means, it must still subsist.  And so
must the supporting indemnity Agreements.^[3]

We are unable to sustain petitioners’ claim that the Surety Bond
and their respective obligations under the Indemnity Agreements were
extinguished by novation brought about by the
subsequent execution of the Trust Agreement.

Novation is the extinguishment of an
obligation by the substitution or change of the obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, or
by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor.^[4] Novation through a change of the object or principal
conditions of an existing obligation is referred to as objective (or real) novation.  Novation by the change of either the person of the debtor
or of the creditor is described as subjective (or personal) novation.  Novation may also
be both objective and subjective (mixed) at the same time.  In both objective and subjective novation, a dual purpose is achieved — an obligation is
extinguished and a new one is created in lieu thereof.^[5]

If objective novation is to take place,
it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every
point incompatible with the old one.^[6] Novation is never presumed: 
it must be established either by the discharge of the old debt by the
express terms of the new agreement, or by the acts of
the parties whose intention to dissolve the old obligation as a consideration
of the emergence of the new one must be clearly discernible.^[7]

Again, if subjective novation by a
change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to
a third person.  It is essential that the
old debtor be released from the obligation, and the
third person or new debtor take his place in the new relation.  If the old debtor is not released, no novation occurs and the third person who has assumed the
obligation of the debtor becomes merely a co-debtor or surety or a co-surety.^[8]

Applying the above principles to the instant case, it is at once
evident that the Trust Agreement does not expressly terminate the obligation of
R & B Surety under the Surety Bond. 
On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating that “[the Trust
Agreement] shall not in any manner release” R & B Surety from its
obligation under the Surety Bond.

Neither can the petitioners anchor their defense on implied novation.  Absent an
unequivocal declaration of extinguishment of a pre-existing obligation, a
showing of complete incompatibility between the old and the new obligation (and
nothing else) would sustain a finding of novation by
implication.^[9] But
where, as in this case, the parties to the new obligation expressly recognize
the continuing existence and validity of the old one, where in other words, the
parties expressly negated the lapsing of the old obligation, there can be no novation.  The issue
of implied novation is not reached at all.

What the trust agreement did was, at most merely to bring in
another person or persons — the Trustor[s] — to
assume the same obligation that R & B Surety was bound to perform under the
Surety Bond.  It is not unusual in
business for a stranger to a contract to assume obligations thereunder;
a contract of suretyship or guarantee is the
classical example.  The precise legal
effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the
first debtor.^[10]
Thus, in Magdalena Estates vs. Rodrigues,^[11]
we held that:

“[t]he mere fact that the creditor
receives a guaranty or accepts payments from a third person who has agreed to
assume the obligation, when there is no agreement that the first debtor shall
be released from responsibility, does not constitute a novation,
and the creditor can still enforce the obligation against the original
debtor.”

In the present case, we note that the Trustor under the Trust Agreement, the CCM, was
already previously bound to R & B Surety under its Indemnity
Agreement.  Under the Trust Agreement,
the Trustor also became directly liable to the
PNB.  So far as the PNB was
concerned, the effect of the Trust Agreement was that where there had been only
two, there would now be three obligors directly and solidarily bound in favor of the PNB.  PAGRICO, R & B Surety
and the Trustor.  And the PNB could proceed against any of the
three, in any order or sequence. 
Clearly, PNB never intended to release, and never did release, R & B
Surety.  Thus, R & B Surety, which
was not a party to the Trust Agreement, could not have intended to release any
of its own indemnitors simply because one of those indemnitors, the Trustor under
the Trust Agreement, became also directly liable to the PNB.

2.  We turn to the
contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B
Surety was extinguished when the PNB agreed in the Trust Agreement “to
hold in abeyance any action to enforce its claims against [R & B
Surety]”.

The Indemnity Agreement speaks of the several indemnitors
“apply[ing] jointly and severally (in solidum) to the [R & B Surety] – – – to become
SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of
[P400,000.00] for the faithful compliance of the terms and conditions set forth
in said SURETY BOND – – -“.  This
part of the Agreement suggests that the indemnitors
(including the petitioners) would become co-sureties on the Security Bond in
favor of PNB.  The record, however, is
bereft of any indication that the petitioners-indemnitors
ever in fact became co-sureties of R & B Surety vis-a-vis
the PNB.  The petitioners, so far as the
record goes, remained simply indemnitors bound to R
& B Surety but not to PNB, such that PNB could not have directly demanded
payment of the Principal Obligation from the petitioners.  Thus, we do not see how Article 2079 of the
Civil Code — which provides in part that “[a]n extension granted to
the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty” — could apply in the instant case.  The petitioner-indemnitors
are, as it were, second-tier parties so far as the PNB was concerned and any
extension of time granted by PNB to any of the first-tier obligors (PAGRICO, R
& B Surety and the trustor[s]) could not
prejudice the second-tier parties.

There is another reason why petitioner Villanueva’s contention
must fail.  PNB’s
undertaking under the Trust Agreement “to hold in abeyance any action to
enforce its claims” against R & B Surety did not extend the maturity
of R & B Surety’s obligation under the Surety Bond.  The Principal Obligation had in fact already
matured, along with that of R & B Surety, by the time the Trust Agreement
was entered into.  Petitioners’
obligations under the Indemnity Agreements had, in turn, already similarly
matured, for those obligations were to mature “as soon as [R & B
Surety] became liable to make payment of any sum under the terms of the
[Surety Bond] – – – whether the said sum or sums or part thereof have been
actually paid or not.” Thus, the situation was that precisely
envisaged in Article 2079:

“[t]he mere failure on the part
of the creditor to demand payment after the debt has become due does not
of itself constitute any extension of time referred to herein.”
(Underscoring supplied)

The theory behind Article 2079 is that an
extension of time given to the principal debtor by the creditor without the
surety’s consent would deprive the surety of his right to pay the creditor and
to be immediately subrogated to the creditor’s remedies against the principal
debtor upon the original maturity date. 
The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. 
The underlying rationale is not present in the instant case.  As this Court has held,

“mere delay or negligence in
proceeding against the principal will not discharge a surety unless there is
between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to
deprive it of the power of obtaining indemnity by presenting a legal
objection for the time to the prosecution of an action on the original
security.”^[12]

In the instant case, there was nothing to
prevent the petitioners from tendering payment, if they were so minded, to PNB
of the matured obligation on behalf of R & B Surety and thereupon becoming
subrogated to such remedies as R & B Surety may have against PAGRICO.

3.  The last issue can be
disposed of quickly, Clauses (b) and (c) of the Indemnity Agreements (quoted
above) allow R & B Surety to recover from petitioners even before R & B
Surety shall have paid the PNB.  We have
previously held similar indemnity clauses to be enforceable and not violative of any public policy.^[13]

The petitioners lose sight of the fact that the Indemnity
Agreements are contracts of indemnification not only against actual loss
but against liability as well.^[14]
While in a contract of indemnity against loss an indemnitor
will not be liable until the person to be indemnified makes payment or sustains
loss, in a contract of indemnity against liability, as in this case, the
indemnitor’s liability arises as soon as
the liability of the person to be indemnified has arisen without regard to
whether or not he has suffered actual loss.^[15]
Accordingly, R & B Surety was entitled to proceed against petitioners not
only for the partial payments already made but for the full amount owed by
PAGRICO to the PNB.

Summarizing, we hold that:

(1) The Surety Pond was not novated by
the Trust Agreement.  Both agreements can
co-exist.  The Trust Agreement merely
furnished to PNB another party obligor to the Principal Obligation in addition
to PAGRICO and R & B Surety.

(2) The undertaking of the PNB to “hold in abeyance any
action to enforce its claim” against R & B Surety did not amount to an
“extension granted to the debtor” without petitioners’ consent so as
to release petitioners from their undertaking as indemnitors
of R & B Surety under the Indemnity Agreements; and

(3) Petitioners are indemnitors of R & B Surety against both
payments to and liability for payments to the PNB.  The present suit is therefore not premature
despite the fact that the PNB has not instituted any action against R & B
Surety for the collection of its matured obligation under the Surety Bond.

WHEREFORE, the petitioners’ appeal is DENIED for lack of
merit and the decision of the trial court is AFFIRMED in toto.  Costs against the petitioners.

SO ORDERED.

Yap, (Chairman), Narvasa,
Melencio-Herrera, Cruz, Gancayco,
and Sarmiento,
JJ., concur.

^[1] With then Judge Ricardo C. Puno
presiding.

^[2] R
& B Surety had earlier made partial payments thereon to PNB.

^[3] Manila Surety & Fidelity Co. v. Villarama,
107 Phil. 891, 899 (1960).

^[4] De Cortes v. Venturanza, 79 SCRA
709, 722-23 (1977).

^[5] Id. at
723.

^[6] Zapanta v.
Rotaeche, 21 Phil. 154, 159 (1912).

^[7]
E.g., Tui Siuco v. Habana, 45 Phil. 707, 713 (1924); Martinez
v. Cavives, 25 Phil. 581 (1913)

^[8] Duñgo v. Lopena, 6 SCRA 1007, 1015-16 (1962).

^[9] Guerrero v. Court of Appeals, 29 SCRA 791, 798 (1969).

^[10] Duñgo v. Lopena, 6 SCRA 1007, at 1016 (1962).

^[11] 18 SCRA 967, at 972 (1966).

^[12] Bank of Philippine Islands v. Albaladejo
y Compania, 53 Phil., 141, at 145-146 (1929);
underscoring supplied.

^[13] Security Bank v. Globe Assurance, 58 Off. Gaz. 3708 (30 April 1962); Cosmopolitan Insurance v. Reyes, 15 SCRA 258, 261 (1965);
Alto Surety v. Aguilar, G.R. No. L-5625, March 16, 1954.

^[14]
Guerrero v. Court of Appeals, 29 SCRA 791, 797 [1969], this case
involves an indemnification clause similar to the Indemnity Agreements under
consideration.  See also Alto Surety
& Insurance Co. v. Aguilar, L-5625, March 16, 1954.

^[15] Guerrero v. Court of Appeals, 29 SCRA 791 (1969); Associated
Insurance & Surety Co. v. Chua, 7 SCRA 52, 54 (1963); Alto Surety
& Insurance Co. v. Andan 100 Phil. 403,
406 (1956).