PACIFIC MERCHANDISING CORPORATION, PLAINTIFF-APPELLEE, VS. DIESTRO LOGGING DEVELOPMENT CORPORATION, AND CONSOLACION INSURANCE AND SURETY CO. INC., DEFENDANTS, CONSOLACION INSURA…

This is an appeal taken by defendant Consolacion
Insurance and Surety Co. Inc., from that portion of the decision of the Court
of First Instance of Manila dated October
5, 1964, adjudging said defendant to pay attorney’s fees, and from
the order dated October 24, 1964,
denying its motion for reconsideration.^[1]

On June 21, 1963
the plaintiff filed a complaint in the Court of First Instance of Manila for
the recovery of a sum of money against the defendants Diestro
Logging Development Corporation and Consolacion
Insurance and Surety Company, Inc.  After
the defendants had filed their respective answers, the case was submitted for
decision on the following stipulation of facts:

1.  That on or about the 23rd day of January, 1963
in the City of Manila, Philippines, the plaintiff and the defendant Diestro entered into a Sales Agreement, copy of which is
attached as Annex A to
complaint, wherein the former sold to the latter the motor vehicles described
in said Sales Agreement (Annex A to complaint), for a total price of P32,000.00
payable within Thirty (30) days from January 23, 1963, in accordance with paragraph
1 (a) of the Sales Agreement (Annex A to complaint) but which period, by mutual
consent between the parties, was extended by fifteen (15) days or a total of
forty-five (45) days from January 23, 1963.

2.  That to guarantee the payment of the purchase
price of the said motor vehicles amounting to P32,000.00 within the stipulated
period of forty-five (45) days, DIESTRO agreed to give to the plaintiff a
Surety Bond, which Surety Bond was issued by CONSOLACION as per copy attached
as Annex B to complaint;

3.  That on January 29, 1963, simultaneous with the issuance of the Surety Bond (Annex B
to complaint), and to secure cross-claimant from any loss that may attached from said bond, defendant DIESTRO EXECUTED in favor of CONSOLACION an
Indemnity Agreement.  A true copy of the
Indemnity Agreement is attached as Annex
1 to defendant’s (CONSOLACION) Answer;

4.  That under the said Indemnity Agreement (Annex
1 to defendant’s answer), cross-defendant DIESTRO inter alia, agreed
to the following stipulations:

(a)   To indemnify
cross-claimant from any loss or damage that
it may suffer or cause to
be paid by virtue of the issuance
of the Surety Bond, (Annex B to complaint), with interest thereon
at the rate of One per cent (1%) per month to be liquidated monthly and to be added to the principal to earn the same rate of interest until fully paid;

(b)   To pay 20% of the total amount due as and for
attorney’s fees;

5.    That the motor vehicles itemized in the
Sales Agreement (Annex A to the
complaint) were received in good condition by defendant DIESTRO as shown
in the Delivery Receipt No. 8050 dated February
6, 1963;

6.    That the sum of P32,000.00 representing the
purchase price of the motor vehicles sold by the plaintiff to the defendant DIESTRO as stipulated in the
Sales Agreement (Annex A to complaint) remains unpaid notwithstanding repeated
verbal and written demands from the plaintiff;

7.    That on the 14th, 27th and 31st day of May, 1963, CONSOLACION was notified by the
plaintiff that DIESTRO refused and
failed, to pay the said sum of P32,000.00 guaranteed by CONSOLACION Surety Bond (Annex B to complaint) and
in said notification, plaintiff demanded from CONSOLACION as Surety the payment of the unpaid obligations of
DIESTRO, but CONSOLACION did not pay, having been advised by DIESTRO that the
trucks subject of the Sales Agreement (Annex A to complaint) were received not in good condition as stipulated;

8.    That in accordance with the Surety Bond
(Annex B to complaint), the liability of
defendant DIESTRO and CONSOLACION to plaintiff
is joint and solidary, the latter’s liability
however, being limited to P32,000.00, the amount of the bond;

9.    That plaintiff is entitled to the payment of interest on the unpaid obligation with reasonable attorney’s fees.

On October 5, 1964 the lower court rendered judgment ordering the
defendants “to pay, jointly and severally, the sum of P32,000.00 to the
plaintiff, with interest thereon at the legal rate from January 23, 1963 until
the said amount is fully paid, plus a sum equivalent to 25% of the unpaid
indebtedness as and for attorney’s fees, and the costs hereof” Not
satisfied with the decision, the defendant Consolacion
Insurance and Surety Company, Inc. moved to reconsider, praying that the
attorney’s fees and interest be charged against the defendant Diestro Logging Development Corporation alone.  In denying the motion, the trial court in its
order of October 24, 1964
said:

“Acting upon the motion for reconsideration of the judgment
rendered by this Court filed by the Consolacion
Insurance and Surety Co., Inc. on the ground that under its contract with
defendant Diestro Logging Development Corporation it
is not liable for attorney’s fees, the Court finds that the liability for
attorney’s fees of a surety is based not on its contract with the defendant above-mentioned,
but as a consequence of its refusal to pay its obligation notwithstanding
repeated demands.  If the said surety
company paid the obligation upon demand, there is no question that it could not
have been made to pay for attorney’s fees, because such is not included in its
contract with the Defendant Diestro Logging
Development Corporation, but after its refusal and the filing of the action as
a result of the said refusal, it is but natural that it should also pay the
attorney’s fees, because the filing of this action is the result of its refusal
to pay its obligation under the surety bond.”

The defendant surety
interposed this appeal, assigning as sole error the lower court’s finding that
it was liable for the payment of attorney’s fees in favor of the plaintiff.

The appellant contends that although the appellee’s
right to the payment of reasonable attorney’s fees was stipulated, the
liability therefor pertained only to the principal, the Diestro
Logging Development Corporation.  Two
grounds are relied upon by the appellant, namely: (1) the payment of attorney’s
fees by the appellant would be in excess of its liability under the surety
bond; and (2) it was not at fault in not paying the appellee
upon the latter’s extra-judicial demands.

In support of the first ground, the appellant cites the terms of
the surety bond as well as paragraph 8 of
the stipulation of facts, which states:

“8.    That in accordance with the Surety Bond
(Annex “B” to complaint), the liability of defendant DIESTRO and CONSOLACION to plaintiff is joint and solidary, the latter’s liability, however, being limited to
P32,000.00, the amount of the bond;”

Explaining the second
ground, the appellant avers that its refusal to pay the sum of P32,000.00 upon
demand was based upon the fact, admitted in paragraph 7 of the stipulation, that it had been
advised by its principal “That the
trucks subject of the Sales Agreement (Annex “A” to complaint) were received not in good
condition…” The appellant points out that under the circumstances it
would have been imprudent to comply with the extrajudicial demands, since if it
paid the appellee and the information should turn out
to be true, its principal could validly refuse reimbursement of the amount thus
paid.

On the other hand, the appellee
disputes the appellant’s stand and insists that under the stipulation of facts
the appellant is liable for attorney’s fees, citing paragraph 9 which reads:

“9.  That plaintiff is entitled to the payment of
interest on the unpaid obligation with reasonable attorney’s fees.”

The appellee maintains that the
stipulation in paragraph (9) supersedes the one in paragraph 8, and that the latter would govern
only if the appellant had paid the obligation
upon extra-judicial demand, but not when the appellee
was constrained to bring an action in court to enforce its rights under the
surety bond.

The appellant should be
sustained.  The stipulation of facts
should be so construed as to give effect to all its provisions if the same can
fairly and reasonably be done. 
Conformably thereto, paragraphs 8 and 9 must be
reconciled rather than construed in such a way that one would nullify the other.  Thus,
while paragraph 9 recognizes the appellee’s right to
reasonable attorney’s fees, such right may be enforced only against the Diestro Logging Development Corporation, thereby giving
effect at the same time to paragraph 8, which limits the appellant’s liability to the amount of the
bond.  This is the more reasonable
interpretation, considering that the appellant was not at fault when it refused
to pay the appellee upon demand because of the advice
given by its principal that the trucks were not received in good condition.

With regard to paragraphs
5 and 7, the appellee’s claim that the latter
nullified the former is unjustified, because there is no conflict between
them.  The said stipulations simply mean
that the Diestro Logging Development Corporation did
receive the trucks in good condition, but nevertheless advised the appellant to
the contrary.  This is all the more
reason to hold that if the appellee was constrained
to go to court to enforce its rights, the principal debtor was alone to blame, and therefore should be the one to pay the attorney’s fees
awarded on that ground.

The trial court declared
that the appellant’s liability for attorney’s fees is not based on
contract, but on its refusal to pay its
obligation notwithstanding repeated demands. 
Disregarding – for purposes of testing the correctness of the judgment upon the basis thus stated – the stipulation limiting the appellant’s liability to the amount of P32,000.00
fixed in the surety bond, we now consider Article 2208 of the Civil Code, which
enumerates the instances where
attorney’s fees may be recovered in the absence of agreement.  There are eleven (11) such instances, of
which only the fifth and the last could
have any relevancy here, namely:  “(5)
where the defendant acted in gross and evident bad faith in refusing to satisfy
the plaintiff’s plainly valid, just and demandable claim;” and “(11)
in any other case where the court deems
it just and equitable that attorney’s fees…should be recovered.” Number 5 is at once ruled out in the case of
the appellant, for there is neither allegation nor proof that it refused, in
gross and evident bad faith, to comply with the appellee’s
extra-judicial demands for payment.  What
does appear, and in fact is stipulated, is that the appellant “did not
pay, having been advised by DIESTRO that the trucks subject of the sales
agreement were received not in good condition.” It must be remembered that
the appellant was merely a surety, had no knowledge of the condition in which
those trucks were delivered to its principal, and therefore could only rely
upon the information the latter supplied, which information, if true, would
have been a partial defense in the action, at least to reduce the liability of
both defendants.  The fact that the
information turned out to be untrue is of no consequence insofar as the
appellant’s position is concerned.  That
development came out only in the stipulation of facts, whereupon, the action
for collection having already been filed, the parties, submitted the case for
decision.  Under the circumstances, the
judgment for attorney’s fees against the appellant is not even justified under
paragraph (11) of Article 2208 of the Civil Code.  It would in effect be imposing a penalty on
the right to litigate.  (See Koster Inc. vs. Zulueta, G. R.
No. L-9305, 99 Phil. 945, 951.)

Wherefore, the decision is modified by eliminating the
award of attorney’s fees against the defendant-appellant.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro,
Fernando, Teehankee, Villamor,
and Makasiar,
JJ., concur.

Barredo, J., took
no part.

^[1]
Civil Case No. 54306.