MERCANTILE INSURANCE CO., INC., PETITIONER, VS. HON. COURT OF APPEALS AND REPARATIONS COMMISSION, RESPONDENTS.

Mercantile Insurance versus Court of Appeals and Reparations Commission

The Case

This is a petition for review on certiorari brought by Mercantile Insurance Company against the Court of Appeals and the Reparations Commission. The dispute is essentially a collection case: the Reparations Commission sued to enforce a performance bond that Mercantile had issued to secure the obligations of Jose Lopez under a contract for the conditional purchase and sale of a reparations fishing vessel. The case matters to a reviewee because it gathers in one decision several enduring rules on suretyship and on novation — that a preliminary injunction adjusting the peso price of a vessel does not extinguish a bond, that a bond posted before the principal contract may still secure that contract where the contract expressly adopts it, and that the posting of a second bond does not by itself release the first surety.

Procedural History

The Reparations Commission first sued Mercantile, Eagle Guaranty, and Jose Lopez in the Court of First Instance of Manila for the unpaid purchase price, but that case was dismissed upon the Commission's own motion. The Commission then commenced a second suit against the same parties for the same cause of action. After trial, the Regional Trial Court of the National Capital Region rendered judgment holding Mercantile liable under its bond for the amount guaranteed, plus interest at six percent per annum from the due date until fully paid, and dismissed Mercantile's counterclaim on the ground of res judicata. Mercantile appealed to the Court of Appeals, which affirmed both the liability under the bond and the dismissal of the counterclaim. Mercantile then came to the Supreme Court by petition for review on certiorari.

Facts

On 6 February 1964, the Philippine Government, represented by the Reparations Commission, and Jose Lopez entered into a procurement contract with Japanese suppliers for a fishing vessel priced at 174,900 dollars. The vessel, later named the Jolo Lema, was delivered to Lopez in Japan on 28 August 1964. On 24 September 1964, Lopez posted a bond guaranteed by Mercantile in favor of the Commission, undertaking to pay 68,385.90 pesos should he fail to comply with any of his obligations under the contract of conditional purchase and sale.

Meanwhile, in February 1965, the Court of First Instance of Manila issued a writ of preliminary injunction in a case where Lopez was an intervenor, restraining the Commission from requiring Lopez to post a bond greater than ten percent of the purchase price computed at the preferred rate of exchange. In March 1965, the Commission and Lopez entered into the conditional contract of purchase and sale covering the vessel, without prejudice to a re-adjustment should the Supreme Court confirm the free market rate. That contract expressly made of record that Lopez had posted the Mercantile performance bond, and it required Lopez to post a performance bond in favor of the Commission.

Lopez failed to pay the first installment without interest on its due date despite repeated demands. The Commission demanded payment from Mercantile, which refused, and so the Commission confiscated the bond. Lopez later posted a second bond issued by Eagle Guaranty, which was itself later confiscated when the installment with interest fell due and remained unpaid. The vessel was eventually leased to a third person and seized for smuggling. The Commission sued to collect, and the trial court and the Court of Appeals both held Mercantile liable.

Issues

• Whether or not the writ of preliminary injunction, which reduced the peso purchase price of the vessel, released Mercantile from its obligation under the bond.
• Whether or not the Mercantile bond secured Lopez's obligations under the contract of conditional purchase and sale, given that the bond was posted before that contract was concluded.
• Whether or not the posting of the subsequent Eagle bond effected a novation that extinguished Mercantile's obligation.
• Whether or not Mercantile's counterclaim against the Commission was barred by prior judgment.

Applicable Provisions

Section 48, paragraph b, of Rule 39 of the Revised Rules of Court, on the bar of res judicata, provides:

Section 48. Effect of judgment. The effect of a judgment or final order rendered by a court or judge of the Philippines, having jurisdiction to pronounce the judgment or order, may be as follows: x x x (b) In other litigation between the same parties or their successors in interest, for the same cause, the judgment or final order is, in respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties or their successors in interest litigating for the same thing and under the same title and in the same capacity.

This provision bears on the dismissal of Mercantile's counterclaim, since the Court held that matters that could have been raised in the earlier final case are likewise barred.

Ruling

On the first issue, the Court held that the writ of preliminary injunction did not release Mercantile. The writ merely enjoined the Commission from requiring Lopez to pay at a rate of exchange other than the preferred rate; nothing in it mandated or implied release of the surety. The reduction of the peso price was a mere conversion of the dollar price at the preferred rate, and the dollar value remained 174,900 dollars, so the required bond remained ten percent of that amount. Mercantile's undertaking was adjusted downward but not extinguished.

On the second issue, the Court held that the bond did secure the contract of conditional purchase and sale. The contract expressly referred to the Mercantile bond, confirming that it was posted pursuant to Lopez's undertaking to post a performance bond. The procurement contract was not between the Commission and Lopez but between them and the Japanese suppliers, and had the bond been meant to secure that contract it should have been made in favor of the suppliers, not the Commission. The Court also rejected Lopez's testimony that the bond secured delivery of the vessel, since delivery had already been completed before the bond was posted.

On the third issue, the Court held that no novation took place, applying the rule that novation is never presumed and must be clearly and unequivocally shown:

Thus, the 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 novation, and the creditor can still enforce the obligation against the original debtor.

The Court added that in subjective novation through a change in the person of the debtor, it is not enough that a third person be added; the old debtor must be released. Here the Eagle bond merely supplemented the Mercantile bond as an additional surety, and it was posted only after the Mercantile bond had already been confiscated.

On the fourth issue, the Court found no error in the ruling that res judicata barred the counterclaim, since the Commission was not impleaded in the earlier case and that decision had become final and executory.

Doctrine

A performance bond is not extinguished by a preliminary injunction that merely adjusts the peso value of the secured obligation; the undertaking is adjusted downward but survives. A bond posted before the principal contract may still secure that contract where the contract expressly adopts and makes reference to the bond. Novation is never presumed; it must be clearly and unequivocally shown, and the mere addition of a second surety or a third person assuming the obligation, without an agreement releasing the original debtor, produces no novation — the third person becomes a co-debtor or co-surety. Finally, under Section 48, paragraph b, of Rule 39, res judicata bars not only matters directly adjudged but any other matter that could have been raised in relation thereto.

Disposition

The Supreme Court denied the petition for lack of merit and affirmed the decision of the Court of Appeals, with no pronouncement as to costs; Mercantile remained liable under its bond.

Remember This

Memorize the line that novation is never presumed and must be clearly and unequivocally shown, so that a second bond merely supplements rather than releases the first surety. Examiners use this case to test suretyship and the requisites of subjective novation, and to test whether a preliminary injunction adjusting price extinguishes a bond.