G.R. No. 166044 ; June 18, 2012
COUNTRY BANKERS INSURANCE CORPORATION, Petitioner, vs. KEPPEL CEBU SHIPYARD, UNIMARINE SHIPPING LINES, INC., PAUL RODRIGUEZ, PETER RODRIGUEZ, ALBERT HONTANOSAS, and BETHOVEN QUINAIN, Respondents.

FACTS

Unimarine Shipping Lines contracted Keppel Cebu Shipyard for ship repairs on the M/V Pacific Fortune. The parties agreed on a reduced amount of ₱3,850,000.00, payable in installments. As a condition for releasing the vessel prior to full payment, Unimarine was required to post surety bonds totaling ₱4,620,000.00. Unimarine secured a ₱3,000,000.00 surety bond from Country Bankers Insurance Corporation (CBIC) through its agent, Bethoven Quinain, and a separate bond from another company for the balance.
Unimarine failed to pay the first installment. Consequently, Cebu Shipyard deposited the corresponding check, which was dishonored. Despite demands, Unimarine defaulted. Cebu Shipyard then filed a collection case against Unimarine and its sureties, including CBIC. The Regional Trial Court held CBIC solidarily liable with Unimarine for the bond amount. The Court of Appeals affirmed this liability. CBIC appealed, arguing it was not liable because the bond was issued based on a supposed principal obligation of only ₱2,350,000.00, and that its agent, Quinain, acted beyond his authority in issuing the bond for the full ₱3,000,000.00.

ISSUE

Whether Country Bankers Insurance Corporation (CBIC) is liable on the surety bond it issued.

RULING

No, CBIC is not liable. The Supreme Court ruled that the surety bond was void for lack of a valid principal obligation at the time of its issuance. The bond, executed on January 15, 1992, was conditioned upon a “Contract of Undertaking” to be executed by Unimarine. However, this Contract of Undertaking, which was supposed to embody the principal obligation, was only executed on February 17, 1992, over a month later. Under Article 2055 of the Civil Code, a surety agreement is ancillary and accessorial; it requires a valid and existing principal obligation. Since the principal contract did not exist when the surety bond was issued, the bond itself was null and void from the beginning.
Furthermore, the Court rejected the application of the doctrine of apparent authority to bind CBIC. While Quinain was a legitimate agent, the evidence showed he issued the bond without proper authorization and in violation of CBIC’s internal guidelines regarding bond limits. The principal, CBIC, did not commit any act that would lead a third party to reasonably believe Quinain had authority to issue such a bond beyond his actual powers. A party dealing with an agent is obliged to ascertain the extent of the agent’s authority. Cebu Shipyard failed to do this. Therefore, CBIC cannot be held liable on a contract its agent executed without authority and which was void ab initio due to the non-existence of the principal obligation. The decisions of the lower courts were reversed.