G.R. No. 189563 April 7, 2014
GILAT SATELLITE NETWORKS, LTD., Petitioner, vs. UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.

FACTS

On September 15, 1999, One Virtual placed a purchase order with petitioner Gilat Satellite Networks, Ltd. for telecommunications equipment and services totaling US$2,128,250. One Virtual promised to pay US$1.2 million of this amount according to a payment schedule. To secure this payment, One Virtual obtained a surety bond dated December 3, 1999, from respondent UCPB General Insurance Co., Inc., in favor of Gilat. Between September 1999 and June 2000, Gilat shipped and delivered all the purchased products and equipment to One Virtual. One Virtual failed to pay the installment of US$400,000 due on May 30, 2000, and the subsequent installments. Gilat sent demand letters to UCPB on June 5, 2000, and January 24, 2001, for payment under the surety bond, but UCPB refused to pay. Gilat filed a complaint against UCPB to recover the amount covered by the surety bond. The Regional Trial Court (RTC) ruled in favor of Gilat, ordering UCPB to pay US$1,200,000 as principal debt with legal interest and attorney’s fees. The Court of Appeals (CA) reversed the RTC, dismissed the case for lack of jurisdiction, and ordered Gilat and One Virtual to proceed to arbitration based on an arbitration clause in the Purchase Agreement between them, which the CA held was binding on the surety. Gilat filed the instant petition.

ISSUE

1. Whether the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate.
2. Whether petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its obligation under the Suretyship Agreement.

RULING

1. Yes, the CA erred. The Supreme Court ruled that the existence of a suretyship agreement does not give the surety the right to intervene in the principal contract. A surety’s liability is joint and solidary with the principal debtor, making it directly and primarily liable to the creditor upon the debtor’s default. The surety remains a stranger to the Purchase Agreement between Gilat and One Virtual. Therefore, respondent UCPB, as a non-party to the Purchase Agreement, cannot invoke the arbitration clause contained therein. An arbitration agreement is contractual and binding only on the parties thereto. Furthermore, under Article 1216 of the Civil Code, the creditor may proceed against the surety without having first sued the principal debtor. The Surety Agreement itself stated that UCPB’s liability arose upon the “mere failure of the Principal to make such prompt payment.” Thus, Gilat had an immediate right to proceed against UCPB upon One Virtual’s default, and the CA’s order for arbitration was improper.
2. Yes, petitioner is entitled to legal interest. The Supreme Court modified the RTC’s award of interest. The RTC had awarded 12% per annum legal interest from the time the judgment became final and executory. Applying the case of Nacar v. Gallery Frames, the Court held that where an obligation, not constituting a loan or forbearance of money, is breached, the interest rate shall be 6% per annum from the time of judicial or extrajudicial demand. Since the surety bond did not involve a loan or forbearance of money, the applicable interest rate is 6% per annum. The interest should be computed from the date of judicial demand, which was the filing of the complaint on April 24, 2002, until full payment. The award of attorney’s fees and litigation expenses was affirmed.