G.R. No. L-47369, June 30, 1987
Joseph Cochingyan, Jr. and Jose K. Villanueva, petitioners, vs. R & B Surety and Insurance Company, Inc., respondent.

FACTS

In 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) secured an increase in its credit line with Philippine National Bank (PNB) by posting a surety bond from R & B Surety for P400,000. Petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva, among others, executed indemnity agreements in favor of R & B Surety. These agreements bound them jointly and severally to indemnify the surety for any amount it might become liable for under the bond, including attorney’s fees, with liability maturing upon demand from the creditor or when the surety becomes liable, irrespective of actual payment.
When PAGRICO defaulted, PNB demanded payment from R & B Surety. The surety made partial payments totaling P70,000 to PNB and then demanded reimbursement from the petitioners. Upon the petitioners’ failure to comply, R & B Surety filed a collection suit, seeking recovery of the paid amounts, the unpaid bond premiums, and the full bond amount of P400,000. Petitioners defended by arguing the suit was premature since R & B Surety had not fully paid PNB, and that a subsequent trust agreement between PNB and PAGRICO’s stockholders novated the surety bond, releasing them from liability.

ISSUE

The primary issues were: (1) whether the subsequent trust agreement novated the surety bond, releasing the indemnitors; (2) whether PNB’s agreement to hold enforcement in abeyance constituted a prejudicial extension of time without the indemnitors’ consent; and (3) whether the suit against the indemnitors was premature absent full payment by the surety to the creditor.

RULING

The Supreme Court denied the petition and affirmed the trial court’s judgment. On the first issue, the Court ruled no novation occurred. The trust agreement merely created an additional security for PNB; it did not extinguish the original principal obligation or the surety bond. Both agreements could coexist, and the clear intent was to accumulate securities, not to substitute them. On the second issue, PNB’s mere forbearance from immediate suit did not constitute a binding “extension” of the payment period that would discharge the surety and, consequently, the indemnitors. For such discharge, the extension must be a definite, binding concession made without the surety’s consent, which was not proven.
Most critically, on the third issue, the Court clarified the nature of the indemnity contracts. Following established jurisprudence, the agreements were contracts of indemnity against liability, not merely against loss. Under such contracts, the indemnitor’s obligation to reimburse the surety arises as soon as the surety’s liability to the creditor matures, without need for the surety to first fully satisfy the debt. The indemnity clauses explicitly authorized R & B Surety to claim indemnity once it became liable, “whether the said sum or sums or part thereof, have been actually paid or not.” Therefore, the suit was not premature. R & B Surety’s liability to PNB had accrued upon default and demand, triggering the petitioners’ immediate duty to indemnify, which included the partial payments made and the contingent liability for the full bond amount.