G.R. No. 165487 ; July 13, 2011
COUNTRY BANKERS INSURANCE CORPORATION, Petitioner, vs. ANTONIO LAGMAN, Respondent.

FACTS

Nelson Santos applied for a license with the National Food Authority (NFA) to operate a bonded warehouse. As required by the General Bonded Warehouse Act, he needed to post a bond. Country Bankers Insurance Corporation, through its agent Antonio Lagman, issued two surety bonds (Warehouse Bond Nos. 033044 and 023555) in 1989. In consideration, corresponding Indemnity Agreements were executed by Santos (the bond principal), Ban Lee Lim Santos, Rhosemelita Reguine, and Antonio Lagman as co-signors, binding themselves jointly and severally liable to Country Bankers for any amounts it might pay under the bonds.
Santos later defaulted on a loan secured by warehouse receipts, and the palay collateral was missing. Country Bankers was compelled to pay ₱1,166,750.37 under the surety bonds. It then filed a complaint for a sum of money to recover this amount from the indemnitors.
In his Answer, Lagman alleged that the 1989 bonds were valid only for one year, were never renewed, and were superseded by a new Warehouse Bond (No. 03515) issued in 1990, for which no Indemnity Agreement was executed. The Regional Trial Court (RTC) held Lagman and Reguine jointly and severally liable based on the Indemnity Agreements. The Court of Appeals reversed the RTC, ruling that the 1990 bond superseded the 1989 bonds and that Lagman was not liable as he was not a signatory to any indemnity agreement for the 1990 bond. Country Bankers filed this petition.

ISSUE

1. Whether the 1989 surety bonds were continuing bonds that remained in force until cancelled by the NFA, and thus not superseded by the alleged 1990 bond.
2. Whether the official receipts indicating premium payments for one year determined the bonds’ one-year term, or whether the bonds’ own terms and the Insurance Code governed their duration.

RULING

The Supreme Court GRANTED the petition, REVERSED the Court of Appeals Decision, and REINSTATED the RTC Decision with modification.
1. On the Nature and Duration of the 1989 Bonds: The Court held that the 1989 bonds were continuing bonds. By their express terms, they were to “remain in full force until cancelled by the Administrator of the NFA.” This is supported by Section 177 of the Insurance Code, which provides that a contract of suretyship is valid upon acceptance by the obligee (the NFA) and can only be cancelled by the obligee, the Insurance Commissioner, or a court. The official receipts for premium payments were merely evidence of payment for one year and did not define the bonds’ term. The bonds themselves, being continuing, remained in force absent cancellation by the NFA. The alleged 1990 bond did not automatically cancel the 1989 bonds, as Lagman failed to prove that the NFA, the obligee, accepted it as a replacement.
2. On Novation and Liability under the Indemnity Agreements: The Court found no novation. For novation to occur, there must be a clear declaration to extinguish the old obligation or a complete incompatibility between the old and new agreements. Lagman failed to prove that the 1990 bond was intended to replace the 1989 bonds. The Indemnity Agreements for the 1989 bonds contained an incontestability clause, which precluded Lagman from denying his liability. Consequently, Lagman remained solidarily liable with his co-indemnitors under the clear terms of the 1989 Indemnity Agreements.
The Court modified the RTC decision by reducing the award of attorney’s fees from 20% to 10% of the principal amount due, deeming the original rate excessive.