G.R. No. L-9073; November 17, 1958
TRADERS INSURANCE AND SURETY COMPANY, plaintiff-appellant, vs. DY ENG GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-LIACCO, defendants-appellees.

FACTS

From 1948 to 1952, Dy Eng Giok was the provincial sales agent for Destilleria Lim Tuaco & Co., Inc., with the duty to remit sales proceeds to the company. As of August 3, 1951, he had an outstanding balance of P12,898.61. On August 4, 1951, a surety bond (Annex A) was executed by Dy Eng Giok as principal and Traders Insurance and Surety Co. as solidary guarantor for P10,000 in favor of the Destilleria, guaranteeing the faithful fulfillment of his agency contract and the payment of his obligations thereunder not exceeding the bond amount, with liability expiring on August 4, 1952. On the same date, an indemnity agreement (Annex B) was executed by Dy Eng Giok as principal, with Pedro Lopez Dee and Pedro E. Dy-Liacco as counterboundsmen, in favor of the Surety Company, obligating them to indemnify it for any losses incurred due to the bond.
From August 4, 1951, to August 3, 1952, Dy Eng Giok incurred new obligations to the Destilleria totaling P41,449.93 and made remittances totaling P41,864.49 during the same period. The Destilleria applied these remittances first to the pre-August 4, 1951, outstanding balance of P12,898.61, and the remainder to the obligations incurred during the bond period, leaving a balance of P12,484.05. The Destilleria demanded payment from the Surety Company, which paid P10,000 (the bond limit) on July 17, 1953. The Surety Company then sought reimbursement from Dy Eng Giok and the counterboundsmen. Upon their failure to pay, it filed the present action.
The Court of First Instance of Manila absolved the counterboundsmen, Dee and Dy-Liacco, ruling that the remittances made during the bond period should be applied to the obligations incurred in that same period. Since the remittances (P41,864.49) exceeded those obligations (P41,449.93), the Surety Company incurred no liability, and thus the counterboundsmen had nothing to indemnify. The court, however, sentenced Dy Eng Giok to repay the Surety Company. Traders Insurance and Surety Co. appealed the absolution of the counterboundsmen.

ISSUE

Whether the counterboundsmen, Pedro Lopez Dee and Pedro E. Dy-Liacco, are liable to indemnify the Surety Company under the indemnity agreement (Annex B), considering the application of the debtor’s payments.

RULING

No, the counterboundsmen are not liable. The decision of the trial court is affirmed.
The Supreme Court held that the remittances made by Dy Eng Giok during the bond period (August 4, 1951, to August 3, 1952) must be applied to the obligations he incurred during that same period, which were the ones covered by the surety bond and, consequently, the counter-guaranty. This conclusion is based on two principles:
1. Prospective Application of Guaranty: A guaranty or suretyship operates prospectively, not retroactively, unless expressly stipulated. It secures only debts contracted after the guaranty takes effect. The surety bond (Annex A) did not guarantee the pre-existing balance. To apply the payments to the old, unguaranteed debt would effectively make the surety answer for obligations outside the guaranteed period without its express consent, which is contrary to law (Article 2055 of the New Civil Code; El Vencedor vs. Canlas). Since Dy Eng Giok’s remittances during the bond period exceeded the value of his sales/obligations from that period, he fulfilled his guaranteed duty to turn over sales proceeds.
2. Application of Payments to More Onerous Debts: In the absence of an express application by the debtor or a specifying receipt from the creditor, a payment should be imputed to the debt most onerous to the debtor (Article 1254, New Civil Code). A debt covered by a guaranty is more onerous because the debtor may be sued by both the creditor and the guarantor. Therefore, the payments should be applied to the guaranteed debts (those incurred during the bond period) rather than the unsecured pre-existing debt. There was no evidence that the receipts specified an application or that the debtor agreed to the Destilleria’s method of application.
Consequently, since the remittances extinguished the obligations covered by the bond, the Surety Company incurred no liability. Having no liability to pay, it could not rightfully claim indemnity from the counterboundsmen.
The Court also rejected the Surety Company’s argument based on the “incontestability clause” in the indemnity agreement, which stated that any payment made by the Company would be final and undisputable by the counterboundsmen. Such clauses are void as against public policy, as they enlarge the field for fraud and bargain away the right to a day in court.