G.R. No. L-9981; October 31, 1957
PHILIPPINE SURETY AND INSURANCE COMPANY, INC., petitioner, vs. ROYAL OIL PRODUCTS, INC., and the COURT OF APPEALS, respondents.

FACTS

On October 25, 1952, Royal Oil Products, Inc. (Royal Oil) entered into a one-year employment contract with Monico Perfecto as a salesman. Perfecto was required to furnish a fidelity bond for P10,000, which was executed by the Philippine Surety and Insurance Company, Inc. (Philippine Surety) on October 27, 1952. The contract stipulated that Perfecto was to sell products for cash or on credit, but he was to be exclusively responsible for the value of credit sales and was to collect and remit all proceeds. He received a 5% commission on gross sales fully paid. By June 1953, a statement showed Perfecto had an outstanding account of P12,492.30. Royal Oil discovered that Perfecto had failed to remit collections, including an amount of P1,107 collected from a customer which he appropriated for personal use. Despite knowledge of these defaults, Royal Oil continued to supply Perfecto with merchandise, including a delivery worth P4,000 on April 28, 1953, and did not notify Philippine Surety of the defaults until demanding payment on June 5, 1953. Royal Oil also obtained a second bond from Associated Insurance and Surety Co., Inc. to cover liabilities exceeding P10,000 and assigned over P4,000 of Perfecto’s accounts to this second surety. The Court of First Instance of Manila rendered judgment in favor of Royal Oil against Philippine Surety, which was affirmed by the Court of Appeals with modifications reducing attorney’s fees and exemplary damages.

ISSUE

1. Whether Philippine Surety was released from liability under its bond due to Royal Oil’s continued employment of Perfecto despite his defaults and failure to notify the surety.
2. Whether Royal Oil’s assignment of over P4,000 of Perfecto’s accounts to Associated Insurance discharged Philippine Surety from liability.
3. Whether Section 2 of Republic Act No. 487 is applicable to the surety bond.
4. Whether Philippine Surety is liable for exemplary damages.

RULING

1. No. The Court of Appeals correctly held that Philippine Surety was not released from liability. The employment contract (Paragraph 10) provided that Royal Oil’s failure to strictly enforce its rights did not constitute a waiver. The surety bond did not contain a condition requiring notice of the agent’s defaults. The continued employment and delivery of merchandise, despite known defaults, did not materially alter the contract or increase the surety’s risk, as the bond was a continuing one for the contract’s duration. The surety, as a compensated guarantor, is not entitled to the strictissimi juris rule applicable to gratuitous sureties.
2. No. The assignment of accounts to the second surety did not discharge Philippine Surety. The assignment was for accounts exceeding the P10,000 covered by Philippine Surety’s bond and was intended to cover excess liability. It did not constitute payment or release of the accounts guaranteed by Philippine Surety, nor did it prejudice the surety’s right to seek reimbursement from Perfecto.
3. Yes. Section 2 of Republic Act No. 487 , which allows the application of the Insurance Law to surety bonds, is applicable. The bond in question is considered an insurance contract, and the provisions regarding liability and damages under the Insurance Law can be applied.
4. Yes. The Court of Appeals’ award of exemplary damages, though reduced, is affirmed. The bond expressly stipulated liability for attorney’s fees and exemplary damages in case of judicial enforcement. Philippine Surety’s refusal to pay upon demand, despite the clear terms of its bond, justified the award as a deterrent against similar conduct.