G.R. No. 43862 , January 13, 1989
MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs. FELIPE YSMAEL, JR., & CO., INC., defendants-appellants.

FACTS

Defendant-appellant Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael, applied for credit accommodations with the Philippine National Bank (PNB). PNB required a surety bond, which was issued by plaintiff-appellee Mercantile Insurance Co., Inc. To secure these surety bonds, the defendants executed indemnity agreements in favor of Mercantile Insurance. A key provision in these agreements stipulated that the surety company’s right of action against the indemnitors (the defendants) would accrue once the surety became legally liable to PNB, even prior to the surety actually making payment to the bank. When the defendants defaulted on their obligations to PNB, the bank demanded payment from Mercantile Insurance. Mercantile then demanded reimbursement from the defendants. Upon the defendants’ failure to pay, Mercantile filed a court action to enforce the indemnity agreements.
The defendants argued that the surety’s cause of action had not yet accrued because Mercantile Insurance had not yet paid PNB. They contended that the indemnity agreement provision allowing action prior to payment was void, as it contravened the nature of a contract of indemnity and violated Article 2071 of the Civil Code, which requires exhaustion of the principal debtor’s assets before proceeding against a guarantor. The trial court ruled in favor of Mercantile Insurance, ordering the defendants to pay jointly and severally.

ISSUE

Whether the provision in the indemnity agreement allowing the surety to sue the indemnitors for reimbursement even before the surety has paid the creditor is valid and enforceable.

RULING

Yes, the provision is valid and enforceable. The Supreme Court affirmed the trial court’s decision. The legal logic rests on the principle of contractual autonomy and the distinct nature of the agreements involved. The indemnity agreement is a separate contract between the surety and the indemnitors, primarily for the benefit of the surety. Its terms, being clear and unambiguous, must be respected as the law between the parties. The Court held that such stipulations, which accelerate the surety’s right to reimbursement upon its legal liability being fixed (rather than upon actual payment), are not contrary to law, morals, good customs, or public policy. Established jurisprudence sanctions such clauses as a legitimate means for a surety to protect its interests.
Furthermore, the Court clarified that Article 2071 of the Civil Code on exhaustion (excussion) does not apply. The defendants are not mere guarantors; they are the principal debtors to PNB and simultaneously the indemnitors in a direct contract with the surety. Their liability under the indemnity agreement is joint and several. Therefore, Mercantile Insurance was not required to exhaust the defendants’ properties in their capacity as principal debtors before seeking enforcement of the indemnity contract. The award of attorney’s fees was also deemed reasonable. The decision was affirmed.