PIONEER INSURANCE & SURETY CORPORATION, PETITIONER, VS. THE HON. COURT OF APPEALS, WEAREVER TEXTILE MILLS, INC., AND VICENTE LIM, RESPONDENTS.

This is a petition for certiorari seeking to annul and set
aside the decision of the Court of Appeals which affirmed the dismissal of the
petitioner’s complaint on the ground that compensation cannot take place
between the petitioner and the private respondents as its requi­sites are not
present.

In September, 1978, petitioner Pioneer Insurance and Surety
Corporation issued general warehousing bonds in favor of the Bureau of Customs
for importation of raw materials in the total amount of P6,500,000.00.  The bonds were issued on behalf of the
private respondents Wearever Textile Mills, Inc., and
its president, Vicente T. Lim.

To secure the petitioner
from and against any and all harm, damages and losses of whatever kind and
nature which it may incur as a consequence of its
becoming a surety upon the bonds, the respondents executed jointly and
severally in favor of the petitioner indemnity agreements for said bonds each
of which contain the following stipulations:

“INDEMNITY: – The undersigned, jointly and severally, agree
and bind themselves to indemnify and hold and save harmless the Corporation
from and against any and all damages, losses, costs, stamps, taxes, pe­nalties,
charges and expenses of whatsoever kind and nature which the Corporation shall
or may at any time incur in consequence of having become surety upon the
bond/note or any extension, renewal, substitution or alter­ation thereof made
at the instance of the undersigned or executed on behalf of the undersigned or
any of them; and to pay, re­imburse and make good to the Corporation, its
successors and assigns, all sums and amounts of money, which
it or its representatives shall or may pay
or cause to be paid or become lia­ble to pay, on account of the undersigned or any of them, of whatsoever kind
and nature including 20% of the amount involved in the litigation or other
matters growing out of or connected therewith for attorney’s fees but in no
case to be less than P200.00.  The
undersigned further agree, jointly and severally, that in case of any extension
or renewal of the bond/note, to bind ourselves for the payment thereof under
the same terms and conditions, as above-mentioned, without the necessity of
executing another Indemnity Agreement for the purpose and we hereby equally
waive our right to be notified of any renewal or extension of the bond/note which may be granted under this
Indemnity Agreement.

“MATURITY OF OUR OBLIGATIONS CONTRACTED HEREWITH: – The above
indemnities shall be paid to the
corporation as soon as demand is received from the creditor or as soon as it
becomes liable to make payment of any sum under the terms of the
above-mentioned bond/ note, its renewal, extensions or substitutions whether
the said sum or sums or part thereof have been actually paid or not.” (pp.
29-30, Rollo)

The private respondents
failed to comply with their commitment under the warehousing bonds by reason
whereof the Bureau of Customs demanded from the petitioner payment of the value
of the said bonds in the amount of P6,390,259.00.  This amount eventually reached P9,031,000.00 in 1983.

In the meantime, in response to the petitioner’s demand letter,
the private respondents wrote petitioner promising that they will settle their
obligations with the Bureau of Customs.

On representations by private respondents to the Bureau of
Customs, the latter granted the request of respondents for staggered monthly
installment payments of their obligation on condition that the respondents will
make an initial payment of P500,000.00 and there­after
shall amortize the balance at P400,000.00 monthly until fully paid pursuant to
the first indorsement by the Bureau of Customs dated
September 22, 1976.  Other than the
initial payment of P500,000.00, however, res­pondents
have not made any other payments thereby viola­ting the terms of the said
agreement.

As a result of the
foregoing, the Bureau of Customs again demanded from the petitioner payment of
its bonds.  No payment, however, has been
made as yet.

Sometime in 1979, a fire gutted the respondents’ factory
destroying materials insured with the petitioner in the amount of P1,144,744.49. 
Respondents demanded from the petitioner payment of the proceeds of the
insurance policy but the latter refused to pay claiming that said proceeds must
be applied by way of partial compensation or set-off against its liability with
the Bureau of Customs arising from the warehousing bonds.

The petitioner’s efforts
to protect itself from total loss in the much bigger amount of P6,390,259.00
which as of April 19, 1983 had
already reached P9,031,000.00 having proved fruitless, the complaint for
compensation was filed below.

The trial court rendered judgment in favor of the private
respondents and ordered the petitioner to pay, among others, the insurance
proceeds in the amount of P1,144,744.49 plus
legal interest from November 19, 1979 until the whole amount is fully paid.

On appeal, the Court of Appeals affirmed the trial court’s
decision, holding that legal compensation can­not take place because the
requisites thereof are not present, namely: 
that petitioner is not the creditor of private respondents; and that the
former’s claim against the latter is not due,
demandable and liquidated
because its liability on the warehousing bonds was extinguished when the
textile goods covered by the same were destroyed by the fire.  Therefore, according to the appellate court
since the petitioner and private respondents are not mutually creditors and
debtors to each other, the law on compensation is inapplicable.

In this petition, Pioneer Insurance alleges that legal
compensation or set-off under Articles 1278 and 1279 can take place because
there is due to private res­pondents from the petitioner the amount of
P1,144,744.49 as proceeds of the fire insurance policy in the same manner that
the private respondents are bound, jointly and severally, to reimburse
petitioner what the latter is liable to pay the Bureau of Customs in the total amount
of P6,390,259.00 and which, as of the
date of the filing of the complaint, had already reached P9,031,000.00.  The petitioner also stresses that even if it
has not yet paid the Bureau of Customs any amount, the private respondents have
already become indebted to the petitioner pursuant to the indemnity agreement
which stands as the law between the parties.

On the other hand, the
private respondents argue that the demands to pay made by the Bureau of Customs
did not prove nor create any liability and even if they did, the liability
under the warehousing bonds in favor of the Bureau of Customs was the liability
of the peti­tioner; that petitioner did not pay and has never paid the Bureau
of Customs under the warehousing bonds and, therefore, the private respondents
have nothing to reimburse the petitioner for and that the approved staggered
payment arrangement of the respondents with the Bureau of Customs released
petitioner from liability under the warehousing bonds.

We rule for the
petitioner.

In the
case of The International Corporate Bank, Inc. v. The Intermediate
Appellate Court, et al.  (G.R. No. 69560, June 30, 1988), we
reiterated the requisites of legal compensation.  We said:

“Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. 
(Art. 1278, Civil Code).  ‘When all the requisites mentioned in Art. 1279 of the Civil
Code are present, compensation takes effect by
operation of law, even without the consent or knowledge of the debtors.’ (Art.
1290, Civil Code). Art. 1279 of the Civil Code requires among others, that in
order that legal compensa­tion shall take place, ‘the two debts be due’ and
‘they be liquidated and demand­able.’ Compensation is not proper where the
claim of the person asserting the set?off against the other is not clear nor li­quidated; compensation cannot extend to unliquidated, disputed claim arising from breach of
contract.  (Compania General de Tabacos v.
French and Unson, 39 Phil. 34; Lorenzo & Martinez
v. Herrero, 17 Phil. 29).

“There can be no doubt that petitioner is indebted to private
respondent in the amount of P1,062,063.83 representing the proceeds of her
money market investment.  This is
admitted.  But whether private res­pondent
is indebted to petitioner in the amount of P6.81 million representing the
deficiency balance after the foreclosure of the mortgage executed to secure the
loan extended to her, is vigorously disputed.  This circumstance prevents legal compensa­tion
from taking place.  (CA
Decision, Rollo, pp. 112-113).”

There is no dispute that
the petitioner owes the private respondents the amount representing the
proceeds of the insurance policy.  The
private respondents, however, try to negate their liability by questioning the
veracity and accuracy of the Bureau of Customs’ demand letters to the
petitioner and by claiming that they have no more liability because of the
fortuitous event.  At the same time,
however, they admit liability when they argue that the petitioner was released
from the same upon their agreement with the Bureau of Customs to make staggered
payments.  Finally, the private
respondents argue that since the petitioner has not made any payment yet
regarding the amount demanded by the Bureau of Customs, there is nothing for
which the petitioner should be reimbursed.

It is needless to
emphasize that at the time the fire occurred, the private respondents together
with the petitioner had already incurred liability on the warehousing bonds
with the Bureau of Customs because of the respondents’ inability to comply with
the provisions of their undertaking.  It
is, therefore, clear that as far as the amount of P9,031,000.00
is concerned, both the petitioner and respondents were already liable for said
amount to the Bureau of Customs when the contin­gency for which compensation is
sought, happened.  Nei­ther can the
respondents claim that the petitioner was released from
liability when they made arrangements with the Bureau of Customs for staggered
payments since the facts will bear out that other than the P500,000.00 payment
by respondents, no further payment was made by them thus leading the Bureau of Customs to go after the petitioner
again.  The private respondents,
contend, however, that since the petitioner has not made any payment
with the Bureau of Customs, it cannot demand reimbursement and, thus,
petitioner cannot apply legal compensation or set-off against them because
their liability has not yet become due and demandable.

In the recent case of Mercantile Insurance Co., Inc. v. Felipe Ysmael, Jr., & Co., Inc. (G. R. No. L-43962, January
13, 1989), we ruled:

“The question as to whether or not under the Indemnity
Agreement of the parties, the Surety can demand indemnification from the
principal, upon the latter’s default, even before the former has paid to the
creditor, has long been settled by this Court in the affirmative.

“It has been held that:

“‘The stipulation in the indemnity Agreement allowing the surety to recover even before it paid the
creditor is enforceable.  In accordance
therewith, the surety may demand from the indemnitors
even before paying the creditors.’ (Cosmopolitan Ins. Co.
Inc. v. Reyes, 15 SCRA 528 [1965] citing: 
Security Bank v. Globe Assurance, 58 Off. Gaz, 3709 [April 30, 1962]; Alto Surety and Ins. Co., Inc.
v. Aguilar, et al., G. R. No. L-5625, March 16, 1954).”

Clearly, the petitioner can demand reimbursement from the
respondents even before it has actually paid its obligations to the Bureau of
Customs.  It can, in principle, be held
liable under the warehouse bonds even before actual payment to the Bureau of
Customs.  The liability has been
fixed.  What remains is simply its
liquidation.  The respondents who
defaulted on the agreement to make staggered payments thereby causing the
petitioner’s liability to the Bureau of Customs cannot refuse the set-off.  Consequently, legal compensation can take
place between the petitioner and the private respondents, that is, the
petitioner can partially set?off           the
insurance proceeds in the amount of P1,144,744.49
against its liability under the warehousing bonds which has been computed in
the amount of P9,031,000.00 as of 1983.

From the records, it is seen that the last demand letter of the
Bureau of Customs asking the petitioner to pay the value of the bonds was on March 27, 1981.  The records are silent on whether or not the
Bureau of Customs sued either of the parties to enforce liability under the
warehousing bonds.  It may be noted that
the petitioner admits its liability
under the warehousing bonds.  Since the
issue is legal compensation and in order to avoid any miscarriage of justice,
the Court refers the issue on the enforcement of liability under the bonds to
the Bureau of Customs.

WHEREFORE, the petition is GRANTED.  The decision of the Court of Appeals dated September
23, 1986 is hereby
ANNULLED and SET ASIDE.  A copy of this decision is furnished the
Commissioner of Customs for appropriate action to be taken under the
warehousing bonds.  Costs
against the private respondents.

SO ORDERED.

Fernan, C.J., (Chairman), Feliciano, Bidin, and Cortes, JJ., concur.