G.R. No. L-14395; September 30, 1960
MALAYAN INSURANCE CO., INC., plaintiff-appellee, vs. CATALINA V. YANDOC, BIENVENIDO YANDOC and ANTONIA Y. PAEZ, defendants-appellants.

FACTS

Catalina V. Yandoc (with her husband’s consent) and Antonia Y. Paez contracted to sell a parcel of land to Hilaria Uy Isabelo. The vendors promised to deliver clean title, complete construction, and comply with city ordinances by January 31, 1951. To secure these conditions, the vendee required a bond, and Malayan Insurance Co., Inc. executed a bond (Exhibit A) guaranteeing solely the delivery of clean title. In consideration, Paez executed a deed of indemnity (Exhibit C), and the Yandocs executed a deed of counter-guaranty with mortgage (Exhibit B). At Uy Isabelo’s request dated January 29, 1951 (Exhibit 3), the surety company cancelled the bond and released the mortgage. Subsequently, Uy Isabelo sued the vendors and the surety company in the Court of First Instance of Baguio for rescission of the contract. The trial court held the surety company liable on the bond. On appeal, the Court of Appeals absolved the surety company from liability, finding the bond had been cancelled, and affirmed the judgment against the vendors. This decision became final. The surety company then demanded reimbursement from the vendors for its litigation expenses incurred in defending the previous suit. Upon their refusal, it filed the present action.

ISSUE

Whether the defendants-appellants (vendors) are obligated to reimburse the plaintiff-appellee (surety) for the attorney’s fees and expenses it incurred in defending the previous suit filed by the vendee.

RULING

No. The Supreme Court reversed the trial court’s decision and dismissed the complaint. The indemnity agreements (Exhibits B and C) obligated the principals (vendors) to indemnify the surety for expenses incurred “as a consequence of having executed the abovementioned bond.” The Court held that the previous suit against the surety was not a consequence of the execution of the bond. The bond had been cancelled at the express request of the vendee, Uy Isabelo, who had even informed the surety that the bond’s conditions had been fully performed and that the surety had no outstanding liabilities. Therefore, there was no reason to anticipate a suit on the bond. The vendee’s suit against the surety was attributable to her own “manifest bad faith,” as she impleaded the surety despite knowing it had no liability. Furthermore, the surety never became liable on the bond, as it was cancelled and its condition (delivery of clean title) was fulfilled by the vendors. Consequently, the vendors’ obligation to indemnify the surety, which was contingent upon the surety becoming liable on the bond or upon a demand from the creditor, never matured. The surety’s expenses were thus not recoverable from the vendors under the indemnity agreements.