[69] Eastern Assurance and Surety Corp v IAC (CONTRACTOR) shall indemnify the OWNER the amount equivalent to 1%

G.R. No. 69450 | 1989 | J. Feliciano. of the quoted lot price for each day of late delivery.
• Only 6 out of the 7 aforementioned jeeps were repaired fully and delivered promptly to
Summary: DAR put up a bidding job project consisting of the repair of 7 jeeps. Motor City respondent DAR. The seventh unit continued to remain undelivered, despite the grant
emerged as the winner. Eastern Assurance and Surety Corporation issued a bond as surety of of several extensions in favor of and the issuance on March 13, 1978 of a final letter to
Motor City. In the proposal bond, it was stipulated that there was a P10,000 performance bond Motor City, demanding that the latter complete the repair and effect delivery of the
and that the contractor agrees to finish the repairs in 90 days. Only 6 of the jeeps were repaired seventh vehicle
and delivered to DAR. Dar commenced a suit against Motor City and Eastern. TC and CA • July 1, 1978: Respondent DAR filed a suit for specific performance and damages
ordered Motor City to deliver the jeep already repaired and upon its default, Eastern to pay. SC against Motor City. Included there as a co-defendant was petitioner Eastern.
held that Eastern is relying upon the difference between a proposal bond and a performance • Petitioner Eastern denied having incurred any liability under the Proposal Bond,
bond to escape liability (distinction in held). Proposal Bond may be seen to be not merely a alleging that such bond "did not bind answering defendant as the same was a mere
proposal (or bid) bond but also a performance bond. For it covers not merely the acceptance of proposal and not an actual undertaking."
the award and the conclusion of a contract but also the carrying out or performance of the • RTC Decision: in favor of DAR
provisions of the contract. Eastern’s liability under the Proposal Bond accrued the moment the Motor City was directed to deliver to DAR 1 unit of (USAID) Willys Mitsubishi/
principal obligor, Motor City, failed to post the P10K Performance Bond and incurred in delay and Eisenhower Jeep with Motor No. MD-70750 already repaired, pay an indemnity
eventually defaulted in the repair and delivery of the seventh jeep unit. equivalent to 1% of P30K for each day of late delivery (the period starts from Feb. 1,
1976 until delivery of the unit); and in case of default, the payment thereof to be
Doctrine: assumed or to be liquidated by petitioner Eastern but not to exceed P33,275.00.
• Liability under a surety bond is determined not upon the basis of its abstract nature or If petitioner Eastern should pay following default by Motor City, then the latter solidarily
its title or caption but rather in accordance with the particular terms and conditions set with Antonio Puchadez (Pres. and GM of Motor City) should reimburse Eastern all the
out in such bond. amounts paid by the latter to DAR with 20% of the amount as attorney’s fees.
• In this case, when viewed in its entirety, the Proposal Bond may be seen to be not • CA: RTC ruling affirmed with slight modification
merely a proposal (or bid) bond but also a performance bond. For it covers not merely The 1% indemnity charge for late delivery (in the repair contract) shall be computed
the acceptance of the award and the conclusion of a contract but also the carrying out from March 3, 1978.
or performance of the provisions of the contract • Hence, the instant petition for review
• Proposal Bond may be seen to be not merely a proposal (or bid) bond but also a
performance bond. For it covers not merely the acceptance of the award and the Issue/Held:
conclusion of a contract but also the carrying out or performance of the provisions of WON Eastern may be held liable to respondent DAR for the contractual breach committed here
the contract. by Motor City. YES.

Facts: Eastern’s argument: No liability under the Proposal Bond after the Contract for Repair of Jeeps
• Jan. 8 1978: The Region 7 (Cebu) Office of respondent Dept. of Agrarian Reform had been entered into between the DAR and Motor City.
(DAR) put up for public bidding a project consisting of the repair of 7 units of (USAID)
Willys Mitsubishi/Eisenhower jeeps. Among the bidders was Motor City, an automotive SC:
repair company, which later on emerged as the winning bidder. • Eastern is relying upon the difference between a proposal bond and a performance
• The winning bid was accompanied by a Proposal Bond 2 — required by DAR of all bond. A proposal or bid bond has for its purpose to assure the owner of the project of
bidders — in the amount of P33,275.00 and issued by petitioner Eastern Assurance the good faith of the bidder and that the bidder will enter into a contract with the
and Surety Corp., as surety, on behalf of Motor City, its principal. project owner should his proposal be accepted. A performance bond is, on the
o Proposal Bond: NOW, THEREFORE, the conditions of this obligation are other hand, designed to afford the project owner security that the bidder, now
such that if the above-bounden principal [i.e., Motor City] shall, in the event the contractor, will faithfully comply with the requirements of the contract
of his becoming a successful bidder in the above proposal: (1) fails to awarded to the contractor and make good damages sustained by the project
guarantee the true and faithful performance of the contract in case of award; owner in case of the contractor’s failure to so perform.
(2) shall refuse to accept the same or (3) shall not answer for any delay and/ • Eastern’s argument is, however, clearly too broad to be helpful; for liability
or default in the execution of the contract as provided in the proposal; then under a surety bond is determined not upon the basis of its abstract nature or
DAR shall be entitled to be indemnified of any loss/damage it may suffer by its title or caption but rather in accordance with the particular terms and
reason thereof not to exceed the sum of P33,275.00, otherwise this conditions set out in such bond. It is thus necessary to look into the actual terms of
obligation shall be void and without effect. the Proposal Bond in question.
• Jan. 31, 1976: A Contract for Repair of Jeeps 3 was entered into between respondent • Thereunder, liability on the part of Eastern as surety would be incurred upon the
DAR (owner) and Motor City (contractor), the latter obligating itself thereunder as happening of any of the following events: the failure/refusal of Motor City as principal
follows: (1) to guarantee the true and faithful performance of the contract in case of an award;
o 1. That for and/in consideration of the sum of P30K, which the OWNER (2) to accept the award; and (3) to answer for any delay and/or default in the execution
agrees to pay unto the CONTRACTOR, the said CONTRACTOR agrees of the contract as provided in the proposal.
and undertakes to repair the owner’s 7 units of (USAID) Willys Mitsubishi/ 1. first condition: “to guarantee the true and faithful performance of the contract in
Eisenhower Jeeps… case of an award”
o 5. That the CONTRACTOR agrees to put up the amount of P10K as o The first condition refers to failure to post a performance bond in the amount
Performance Bond upon award of the bid; of P10,000. Eastern’s principal did not in fact post any such performance
o 8. That the CONTRACTOR agrees to finish the repairs on all 7 units within bond. Therefore, there was a breach of condition No. 1 of the Proposal
90 working days, counted from the day of the award of the bid, and should Bond.
the CONTRACTOR fail to finish the repairs within the said period, he
1
 o Eastern: The beneficiary of the bond, DAR, had waived the stipulation in
the Repair Contract providing for the posting of such bond by entering into
the contract with Motor City although the latter had not posted the P10K
Performance Bond.
o SC: DAR did NOT waive the breach of this condition. There was no express
waiver.
2. second condition: “to accept the award”
o This condition was not breached for Motor City did accept the award of the
contract and did enter into the Contract for Repair of Jeeps.
3. third condition: “to answer for any delay and/or default in the execution of
the contract”
o Eastern: This refers merely to the execution, i.e., the signing or conclusion
of the Contract for Repair of Jeeps, and not to the performance or
implementation or carr ying out of the provisions of such contract.
o SC: There are at least 2 difficulties with this argument. First, the dictionary
meaning of "to execute" a contract (and especially to "execute a contract as
provided in the proposal") is or includes BOTH execution and performance.
Second, if one assumes that Eastern’s contention is correct, then the
second and third condition in the Proposal Bond must be taken to refer to
the same thing circumstance. But either the second or the third condition
would then have to be regarded as superfluous and meaningless, a result
that must be abjured in view of the principle of effectiveness in the
interpretation of contracts.
o When viewed in its entirety, the Proposal Bond may be seen to be not
merely a proposal (or bid) bond but also a performance bond. For it covers
not merely the acceptance of the award and the conclusion of a contract but
also the carrying out or performance of the provisions of the contract.
o The P10K Performance Bond required by par. 5 of the Contract for Repair of
Jeeps is lower in face amount than the Proposal Bond which has a max.
value or face amount of P33,275.00. If Eastern’s argument that its liability
under the Proposal Bond ceased the moment the Repair Contract was
entered into is correct, then par. 5 of that Contract would be reduced to
nonsense: for it must be nonsensical to require a proposal bond in an
amount 300% more than the amount of the required performance bond, if
the proposal bond were to become functus oficio the moment the contract
was legally entered into. On the other hand, the requirement of posting of a
performance bond of P10K is quite understandable if it be understood as
simply additional security for the carrying out of the terms of the contract,
that is, additional to the Proposal Bond.

Ruling: Petition for review DENIED. Eastern’s liability under the Proposal Bond accrued the
moment the principal obligor, Motor City, failed to post the P10K Performance Bond and incurred
in delay and eventually defaulted in the repair and delivery of the seventh jeep unit.

Notes: The Proposal Bond is set out in a printed contract form of Eastern. The 3 circumstances
occurrence of which would trigger off the liability of Eastern under the bond, appear to be
standard stipulations imposed by petitioner upon all persons seeking to secure proposal bonds
from Eastern. To this extent, the Proposal Bond is a contract of adhesion, having been
prepared solely by Eastern. Accordingly, any ambiguity or obscurity that may be found to
infect the terms of the Proposal Bond, must be construed against Eastern

2
[70] ZARAGOZA v. FIDELINO ▪ The surety was then included; solidarily liable
G.R. No. L-29723 | July 14, 1988 | Narvasa, J. • No MFR or appeal by Fidelino; Surety presented MFR but such was denied
• Thus, this appeal
ANTONIO ZARAGOZA, plaintiff-appellee • Surety: TC no jurisdiction bc no summons was served on it – filing of counter-bond not
MARIA ANGELA FIDELINO and/or "JOHN DOE," defendants equivalent to voluntary submission to the Court's jurisdiction; Zaragoza failed to make a
proper application with notice before finality of the decision as provided by Section 20, Rule
MABINI INSURANCE & FIDELITY CO., INC., surety-appellant.
57 of the Rules of Court1 ; when the order amending the judgment was promulgated, the
judgment had already become final, the running of the period of appeal not having been
SUMMARY: suspended by Zaragoza's motion to amend decision so the Court no longer had authority to
Antonio Zaragoza filed a suit for replevin of a car with CFI QC against Ma. Angela Fidelino and/ amend it on April 16, 1968
or John Doe. He alleged that the car had been sold to Fidelino but she failed to pay the price in
the manner stipulated in their agreement. The car was then taken from Fidelino's possession by ISSUE + RATIO:
the sheriff on the strength of a writ of delivery but was promptly returned to her on orders of the W/N the surety company is solidarily liable with Zaragoza
Court when a surety bond for the car's releases was posted in her behalf by Mabini Insurance & • Surety: the situation at bar is governed by Section 10, Rule 602 , in relation to Section 20,
Fidelity Co., Inc. Rule 57, of the Rules of Court
• SC: surety company is correct; it would seem at first that Sec. 20, Rule 57 is not relevant –
DOCTRINE: title and first sentence speak [1] of an illegal attachment, and [2] of a judgment "in favor of
To hold a surety on a counter-bond liable, what is entailed is: the party against whom (said illegal) attachment was issued" and here, the writ of delivery
(1) the filing of an application therefor with the Court having jurisdiction of the action; was not illegal and the judgment was for, not against, the party in whose favor the writ of
(2) the presentation thereof before the judgment becomes executory (or before the trial or delivery was issued (or in favor of Fidelino) BUT this is not the case; the judgment was
before appeal is perfected); against Fidelino
(3) the statement in said application of the facts showing the applicant's right to damages and o HOWEVER, such interpretation is not correct; although a party be adjudged
the amount thereof; liable to another, if it is established that the attachment issued at the latter's
(4) the giving of due notice of the application to the attaching creditor and his surety or instance was wrongful and the former had suffered injury thereby, recovery
sureties; and for damages may be had by the party prejudiced by the wrongful
(5) the holding of a proper hearing at which the attaching creditor and the sureties may be attachment, even if the judgment is adverse to him
heard on the application. ▪ It is entirely possible for a plaintiff to have a meritorious cause of action
against a defendant but have no proper ground for a preliminary
FACTS: attachment and in such a case, if the plaintiff still applies for and
• Antonio Zaragoza filed a suit for replevin of a car with CFI QC against Ma. Angela Fidelino succeeds in obtaining an attachment but is subsequently declared by
and/or John Doe final judgment as not entitled to it and the defendant shows that he has
o Alleged that the car had been sold to Fidelino but she failed to pay the price in suffered damages by reason of the attachment, there can be no
the manner stipulated in their agreement. The car was then taken from Fidelino's gainsaying that indemnification is justly due the latter
possession by the sheriff on the strength of a writ of delivery but was promptly • As for the second and third sentences of Sec. 20, Rule 57, in relation to Section 10,
returned to her on orders of the Court when a surety bond for the car's Rule 60, they are unquestionably relevant to the matter of the surety's liability upon a
releases was posted in her behalf by Mabini Insurance & Fidelity Co., Inc counter-bond for the discharge of a writ of delivery in a replevin suit
• CFI: ruled in favor of Zaragoza; defendants to pay P19,417.46 (balance of the purchase o Sec. 10, Rule 60: the surety's liability for damages upon its counter-bond should
price of the car sold including interest, collection charges, notarial fees and sheriffs fees "be claimed, ascertained, and granted under the same procedure as prescribed
and expenses in conn with the recovery of the vehicle sold) and liquidated damages for in section 20 of Rule 57” and Sec. 20 decrees that “(s)uch damages may
P6,471.84 (equivalent to 33 1/3 % of the balance outstanding) and to pay the costs of this be awarded only upon application and after proper hearing, and shall be included
suit in the final judgment. The application must be filed before the trial or before
o Zaragoza moved for the amendment of the decision to include Mabini Insurance appeal is perfected or before the judgment becomes executory, with due notice to
& Fidelity Co., Inc. (surety) as a party solidarily liable with the defendant for the the attaching creditor and his surety or sureties, setting forth the facts showing
payment of sums awarded in the judgment (within reglementary period for his right to damages and the amount thereof."
appeal) o To hold a surety on a counter-bond liable, what is entailed is:
o Fidelino and the surety company did not file any opposition to the motion nor did ▪ the filing of an application therefor with the Court having
either of them appear at the hearing thus TC deemed the motion meritorious and jurisdiction of the action;
granted it

1 SEC. 20. Claim for damages on account of illegal attachment. — If the judgment on the action be in favor of the party against whom attachment was issued, he may recover, upon the bond given or deposit made by the attaching
creditor, any damages resulting from the attachment. Such damages may be awarded only upon application and after proper hearing, and shall be included in the final judgment. The application must be filed before the trial or before
appeal is perfected or before the judgment becomes executory, with due notice to the attaching creditor and his surety or sureties, setting forth the facts

showing his right to damages and the amount thereof

xxx xxx xxx

2SEC. 10. Judgment to include recovery against sureties. — The amount, if any, to be awarded to either party upon any bond filed by the other in accordance with the provisions of this rule, shall be claimed, ascertained, and granted
under the same procedure as prescribed in section 20 of Rule 57.

3
 ▪ the presentation thereof before the judgment becomes executory case, had never been made a party, and had not been notified of the trial BUT
(or before the trial or before appeal is perfected); the Court overruled the contention, and upheld the propriety of the amendment of
▪ the statement in said application of the facts showing the the judgment which ordered the appellant surety company to pay, to the extent of
applicant's right to damages and the amount thereof, its bond and jointly and severally with defendant, the judgment obligation
▪ the giving of due notice of the application to the attaching creditor • SC: the surety's last argument that by the time the Court amended its decision, the
and his surety or sureties; and decision had already become final and therefore unalterable, is also untenable
▪ the holding of a proper hearing at which the attaching creditor o The motion for amendment of the decision was unquestionably in the nature of a
and the sureties may be heard on the application motion for reconsideration under Section 1 (c), Rule 37 of the Rules of Court
o However, it must be noted that enforcement of a surety's liability on a counter- which, having been filed within "the period for perfecting an appeal," had the
bond given for the release of property seized under a writ of preliminary effect of interrupting said period of appeal
attachment is governed not by Sec. 20 but by Sec. 17 of Rule 57 3
• Record shows that the surety company bound itself "jointly and severally" with the RULING:
defendant Fidelino "in the sum of PESOS FORTY EIGHT THOUSAND ONLY (P48,000.00), WHEREFORE, judgment is hereby rendered AFFIRMING in toto the Decision of the Court a
Philippine Currency, which is double the value of the property stated in the affidavit of the quo dated February 12, 1968, as amended by the Order of April 16, 1968. Costs against the
plaintiff, for the delivery thereof if such delivery is adjudged, or for the payment of such sum appellant surety.
to him as may be recovered against the defendant and the costs of the action”
o Thus, the surety's liability attached upon the promulgation of the verdict
against Fidelino
o All that was necessary to enforce the judgment against it was an application
therefor with the Court, with due notice to the surety, and a proper hearing, i.e.,
that it be formally notified that it was in truth being made responsible for its co-
principal's adjudicated prestation (in this case, the payment of the balance of the
purchase price of the automobile which could no longer be found and therefore
could not be ordered returned), and an opportunity, at a hearing called for the
purpose, to show to the Court why it should not be adjudged so responsible;
separate action not necessary
o Surety undoubtedly received a copy of Zaragoza's Motion to Amend Decision
and the motion’s purpose is clear – that the decision "be amended, or an
appropriate order be issued, to include .. (the surety) as a party jointly and
severally liable with the defendant to the extent of the sums awarded in the
decision to be paid to plaintiff'-as well as the basis thereof-the counter-bond filed
by it by the explicit terms of which it bound itself "jointly and severally (with the
defendant) .. for the payment of such sum to him (plaintiff) as may be recovered
against the defendant and the cost of the action"
▪ The surety's omission to appear at the hearing despite notice
constituted a waiver of the right to be heard on the matter
• SC: the surety's argument that it never came under the jurisdiction of the LC bc
never been served with summons is untenable
o The terms of the counter-bond it voluntarily filed in behalf of defendant
leave no doubt of its assent to be bound by the Court's adjudgment of the
defendant's liability, i.e., its acceptance of the Court's jurisdiction bc there, it
implicitly prayed for affirmative relief
▪ The release of the seized car, in consideration of which it explicitly
bound itself solidarily with defendant to answer for the delivery of the
car subject of the action "if such delivery is adjudged," i.e., commanded
by the Court's judgment, or "for the payment of such sum as may be
recovered against the defendant and the costs of the action," the
reference to a possible future judgment against the defendant,
and necessarily against itself is certain and unmistakable thus the
filing of that bond was an act of voluntary submission to the
Court's authority, which is one of the modes for the acquisition of
jurisdiction over a party
o Dee v. Masloff: a surety on a counter-bond given to release property from
receivership sought to avoid liability by asserting that it was not a party to the

3 SEC. 17. When execution returned unsatiated, recovery had upon bond. — If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counter-bond given pursuant to the provisions of this rule to secure
the payment of the judgment shall become charged on such counter-bond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties
after notice and summary hearing in the same action.
4
[71] Stronghold Insurance v. CA 3) Northern Motors Inc. filed a "Motion for Issuance of Writ of Execution Against Bond of
G.R. No. 89020 | May 5, 1992 | Paras Plaintiff's Surety" which was treated by the lower court as an application for damages
Petitioner: Stronghold Insurance against the replevin bond.
Respondent: Court of Appeals, Northern Motors, Inc. 4) At the hearing of the said motion as well as the opposition thereto filed by Stronghold
TOPIC: Suretyship – Proceeding against the surety bond Insurance Co., Inc., Northern Motors Inc. presented one witness in the person of its former
manager Clarissa G. Ocampo, whose testimony proved that:
SUMMARY ! (a) Northern Motors Inc., and Macronics Marketing entered into a leased
Leisure Club, Inc. filed civil case against Northern Motors Inc. for the recovery of certain office agreement wherein the latter leased certain premises from the former.
furniture and equipment. Accordingly, Leisure Club Inc. posted a replevin bond issued by ! (b) Macronics failed to pay its bills to Northern Motors Inc., so the latter was forced
Petitioner Stronghold Insurance Co., Inc. The lower court then issued the writ of replevin, to terminate the lease.
thereby enabling Leisure Club Inc. to take possession of the disputed properties. Northern ! (c) Because of Macronics' unpaid liabilities to Northern Motors Inc., the latter was
Motors Inc. filed a counterbond for the release of the disputed properties but this was futile as forced to sell off the former's properties in an auction sale wherein Northern
Leisure Club Inc. was never heard of again. Northern Motors Inc. then filed a "Motion for Motors Inc. was the buyer. Macronics was duly notified of the sale.
Issuance of Writ of Execution Against Bond of Plaintiff's Surety" which was treated by the lower ! (d) These properties sold were the sole means available by which Northern Motors
court as an application for damages against the replevin bond. The lower court ruled in Northern Inc. could enforce its claim against Macronics.
Motors favor and issued an Order finding Stronghold liable under its surety bond for the 5) Stronghold Insurance Co., Inc. did not cross-examine the said witness. Instead it asked for
damages awarded to Northern Motors Inc. Stronghold opposed sand contended that the an continuance in order to present its own witness. Stronghold, however, never presented any
application against the bond should have been the remedy pursued and not a motion for a writ of witness.
execution because it is not a party to the case and that the decision clearly became final and 6) The lower court issued its now disputed Order finding Stronghold liable under its surety
executory and, therefore, is no longer liable on the bond. bond for the damages awarded to Northern Motors Inc.
! Stronghold opposed to the effect that the motion for a writ of execution is not the
The issue in this case is whether or not Northern Motors is entitled for damages against the proper remedy but an application against the bond should have been the remedy
surety and the Court here held yes because as found by the lower Court the replevin bond was pursued.
obtained by the plaintiff to answer for whatever damages the defendant may suffer for the o It contends that it is not a party to the case and that the decision clearly
wrongful issuance of the writ. became final and executory and, therefore, is no longer liable on the
bond.
PROVISIONS APPLICABLE o It also raised the issue as to when the decision became final and
Insurance Code, Section 178. The liability of the surety or sureties shall be joint and several executory.
with the obligor and shall be limited to the amount of the bond. It is determined strictly by the o It also avers that the defendant failed to prove any damage by reason of
terms of the contract of suretyship in relation to the principal contract between the obligor and the insurance of replevin bond.
the obligee. ! Sec. 20 of Rule 57, in relation to Sec. 10 of Rule 60, provides that the party against
DOCTRINE: The party against whom the bond was issued may recover on the bond for any whom the bond was issued may recover on the bond for any damage resulting
damage resulting from the issuance of the bond upon application and hearing. from the issuance of the bond upon application and hearing.
FACTS o The application must be filed either: before trial; before appeal is perfected;
1) Leisure Club, Inc. filed civil case against Northern Motors Inc. for replevin and damages. It before judgment becomes final and executory.
sought the recovery of certain office furniture and equipment. ! Being the prevailing party, the lower court ruled that it is undeniable that the
! The lower court ordered the delivery of subject properties to Leisure Club Inc. Northern Motors is entitled to recover against the bond.
subject to the posting of the requisite bond under Section 2, Rule 60 of the Rules o The application for that propose was made before the decision became final
of Court. and before the appeal was perfected.
! Accordingly, Leisure Club Inc. posted a replevin bond issued by Stronghold o Both the prevailing and losing parties may appeal the decision.
Insurance Co., Inc. ▪ In the case of the plaintiff appears that its counsel did not claim
! In due course, the lower court issued the writ of replevin, thereby enabling the decision which was sent by registered mail on June 20, 1986
Leisure Club Inc. to take possession of the disputed properties. and filed the motion for execution against the bond on July 3,
2) Northern Motors Inc. filed a counterbond for the release of the disputed properties. 1986.
! However, efforts to recover these properties proved futile as Leisure Club Inc. ▪ Hence, with respect to the defendant the motion against the bond
was never heard of again. was filed before any appeal was instituted and definitely on or
3) For failure to appear in the pre-trial of the case, Leisure Club, Inc. was declared non- before the judgment became final.
suited. ! Although the claim against the bond was denominated as a motion for issuance of a
! Northern Motors Inc. presented its evidence ex-parte and the lower court rendered its writ of execution, the allegations are to the effect that the Northern Motors is
decision in favor of Northern Motors Inc. applying for damages against the bond.

5
 o In fact, the defendant invokes Sec. 10, Rule 60, in relation to Sec. 20, Rule ! As correctly held by respondent Court of Appeals ––
57, Rules of Court. Evidently, therefore, the defendant is in reality claiming ◦ Stronghold Insurance, Inc. has no ground to assail the awards against
damages against the bond. it in the disputed Order.
◦ Unless it has a new defense, it cannot simplistically dissociate itself
! It is undisputed that the replevin bond was obtained by the plaintiff to answer for
from Leisure Club, Inc. and disclaim liability vis-a-vis the findings
whatever damages the defendant may suffer for the wrongful issuance of the made in the Decision of the lower court dated June 9, 1986.
writ. ◦ Under Section 2, Rule 60 the bond it filed is to ensure "the return of the
o By virtue of the writ, the plaintiff took possession of the auctioned property to the defendant if the return thereof be adjudged, and for the
properties. payment to the defendant of such sum as he may recover from the plaintiff
o Despite a redelivery bond issued by the defendant, the plaintiff refused in the action."
to return the properties and in the fact repossessed the same. ▪ The bond itself ensures, inter alia, "the payment of such sum as may in
the cause be recovered against the plaintiff and the cost of the action."
o Clearly, Northern Motors suffered damages by reason of the wrongful
! Beside, Leisure Club Inc.'s act of filing a replevin suit without the intention of
replevin, in that it has been deprived of the properties upon which it prosecuting the same but for the mere purpose of disappearing with the provisionally
was entitled to enforce its claim. recovered property in order to evade lawfully contracted obligations constitutes a
o Moreover, the extent of the damages has been qualified in the decision wanton, fraudulent, reckless, oppressive and malevolent breach of contract
dated June 9, 1986. which justifies award of exemplary damages under Art. 2232 of the Civil Code.
7) CA affirmed the Order. Hence, this petition. ! The attorney's fees awarded in favor of Northern Motors Inc. are likewise warranted
under Art. 2208 of the New Civil Code.
! In any event, the trial court has decided with finality that the circumstances
ISSUES, HELD, RATIO
justifying the award of exemplary damages and attorney's fees exist.
1) WON Northern Motors is entitled for damages against the surety - YES o The obligation of Stronghold under the bond is specific. It assures "the
! Citing Visayan Surety & Insurance Corp. vs. Pascual, the Court explained the nature payment of such sum as may in the cause be recovered against the
of the proceedings to recover damages against a surety, in this wise: plaintiff, and the costs of the action."
o Upon application of the prevailing party, the court must order the surety to
show cause why the bond should not respond for the judgment of damages. RULING
o If the surety should contest the reality or reasonableness of the WHEREFORE, the petition is DENIED for lack of merit. No costs.
damages claimed by the prevailing party, the court must set the
application and answer for hearing.
▪ The hearing will be summary and will be limited to such new
defense, not previously set up by the principal, as the surety may
allege and offer to prove.
! IN THE CASE AT BAR, Stronghold Insurance Co., Inc., never denied that it issued a
replevin bond. Under the terms of the said bond,
o Stronghold Insurance together with Leisure Club Inc. solidarily bound
themselves in the sum of P42,000
(a) for the prosecution of the action,
(b) for the return of the property to the defendant if the return thereof
be adjudged, and
(c) for the payment of such sum as may in the cause be recovered
against the plaintiff and the costs of the action.
o All the necessary conditions for proceeding against the bond are
present, to wit:
(i) the plaintiff (i..e, Leisure Club), in bad faith, failed to prosecute the
action, and after relieving the property, it promptly disappeared;
(ii) the subject property disappeared with the plaintiff, despite a court
order for their return; and
(iii) a reasonable sum was adjudged to be due to respondent, by way
of actual and exemplary damages, attorney's fees and costs of suit.

2) WON the award for damages and attorney's fees are proper – YES
! Northern Motors proved the damages it suffered thru evidence presented in the
hearing of the case itself and in the hearing of its motion for execution against the
replevin bond.
o No evidence to the contrary was presented by Stronghold Insurance
Co., Inc. in its behalf.
o It did not impugn said award of exemplary damages and attorney's fees
despite having every opportunity to do so.
6
[72] Arranz v. Manila Fidelity and Surety Co., Inc. Fidelity; and that he paid these against his will in order to save the properties from loss
G.R. No. L-9674. April 29, 1957 and obtain the credit accommodation from PNB.
! Motion to dismiss by Manila Fidelity on the ff grounds:
Summary: Manila Fidelity & Surety Co. executed and delivered a surety bond to Manila Ylang o No cause of action;
o payment made by virtue of the compromise, which was not vitiated by
Ylang Distillery in which it undertook to pay jointly and severally the sum of P90,000 with Melecio
mistake, violence, intimidation, undue influence and fraud.
Arranz as principal. Arranz failed to pay installments so a complaint was filed by Manila Ylang
! Lower court: Dismissed complaint on the ground that payment of P14,200 demanded
Ylang Distillery. Manila Fidelity however had no funds to pay the installments. So Arranz had no
was paid as a price for the release of the properties held on the second mortgage by
choice but to pay the amount and thereafter sought to recover the amount he paid against his Manila Fidelity, or in order to save the properties.
will in order to save his properties. The SC held that Arranz is under the obligation to pay the
premium due to the failure of the surety to pay. Issue/Ratio:
W/N the plaintiff is under obligation to pay the premium on the bond because of failure of
Doctrine: Plaintiff-appellant cannot excuse himself from the payment of the premium on the his surety to pay the indebtedness secured by it - YES
bond upon the failure or refusal of the surety to pay the loan and the interest. Even if, therefore,
the payment of the premium were against his will, still plaintiff- appellant has no cause of action ! Plaintiff cannot excuse himself from payment of the premium on the bond upon the
for the return thereof, because the surety was entitled thereto. failure or refusal of the surety to pay the loan and the interest.
! There is no allegation in the complaint or in any other paper in the case that the surety
The failure or refusal of the surety to pay the debt for the principal's account did not have the promised the principal that it will pay the loan or obligation contracted by the principal
effect of relieving the principal of his obligation to pay the premium on the bond furnished. (Arranz) for the latter's account.
! In the contract of suretyship the creditor was given the right to sue the principal,
Facts: or the latter and the surety at the same time. This does not imply, however, that
● Manila Fidelity & Surety Co. executed and delivered a surety bond to the Manila Ylang the surety covenanted or agreed with the principal that it will pay the loan for
Ylang Distillery, in which it undertook to pay jointly and severally the sum of P90,000 the benefit of the principal. Such a promise is not implied by law either.
with Melecio Arranz as principal. This surety bond contains the following stipulation:
o Plaintiff, therefore, cannot claim that there has been a breach on the
○ The surety hereunder waives notice of default and expressly agrees that it
shall not be necessary for the Manila Ylang Ylang Distillery, Ltd. to proceed part of the surety of any obligation it has made or undertaken under
against the Principal upon his default or to exhaust the property of said the suretyship contract. And the failure or refusal of the surety to pay
Principal, before proceeding against the surety, the Surety's liability under the debt for the principal's account did not have the effect of relieving
this bond being a primary one and shall be eligible and demandable the principal of his obligation to pay the premium on the bond
immediately upon occurrence of such default. furnished.
● To secure the surety against loss arising from the surety bond, Arranz executed a o As the loan and interest remained unpaid the surety continued to be bound
second mortgage over the properties transferred by Manila Ylang Ylang Distillery to
Arranz. For Arranz's failure to pay the installments that were already due (first to the creditor-obligee, and as a corollary its right to collect the premium on
installment: P50k due on 30 June 1950; second installment: P40k due on 30 June the bond also continued.
1951), a complaint was filed by the Manila Ylang Ylang Distillery.
● Manila Fidelity had no funds with which to pay either the first or second installment, as Ruling: The order of dismissal is affirmed.
it was able to raise P20,000, which was then paid to Manila Ylang Ylang Distillery on
account. Because of this, Ararnz made an arrangement with PNB to mortgage the
properties in order to raise the amount needed to pay the loan. PNB wanted Manila
Fidelity & Surety Co, Inc. to cancel the second mortgage executed in its favor by
Arranz. Manila Fidelity refused to do so unless Arranz pay to it the following sums:

a. P20,000, the partial payment made to the Manila Ylang Ylang Distillery on
account of the latter's judgment credit;
b. P3,045.12 from December 31, 1950 to December 31, 1954;
c. P7,691.09, including renewal premium on Bond No. 8674, from November
25, 1950 to November 25, 1954, and incidental expenses and interests;
d. P10,000, for attorney's fees, and
e. P25,000, to be held by defendant in trust to answer for an alleged
contingent liability of the Manila Ylang Ylang Distillery to it.

! As the plaintiff feared that the credit accommodation he sought from the Philippine
National Bank could not be secured without release by the surety of its second
mortgage, Arranz paid the above amounts except the P25,000, and thereupon the
second mortgage executed in favor of surety, defendant-appellee, was cancelled.
! Arranz now seeks to recover (a) P7,200, the premiums corresponding to the period
from November 25, 1950 to November 25, 1954; and (b) P7,000 representing
attorney's fees. He claims that these amounts were never due & owing to Manila
7
[73] REPARATIONS COMMISSION v. UNIVERSAL DEEP-SEA FISHING CORPORATION and - total purchase price of P687,777.76
MANILA SURETY AND FIDELITY CO., INC. - delivered to UNIVERSAL on April 20, 1959
A.M. No. 21901-96 | June 27, 1978 | Concepcion, Jr., J. - Contract of Conditional Purchase and Sale Reparations Goods, dated
November 25, 1959, provided that "the first installment representing 10% of
SUMMARY: The Reparations Commission (RC) awarded 6 trawl boats to Universal which were the amount or P68,777.77 shall be paid within 24 months from the date of
delivered two at a time, each delivery being covered by a Contract of Condition Purchase and complete delivery thereof, the balance shall be paid in the manner herein
Sale providing for identical schedules of payments. The first installment represented 10% of the stated as shown in the Schedule of Payments:
total cost was to be paid 24 months after delivery and the balance of the total cost to be paid in - TOTAL F.O.B. COSTS — P687,777.76
10 equal installments, which, in the schedule were numbered as "1", "2", "3", etc., the first of - AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) —
which was due one year after the first installment. To guarantee the faithful compliance with the P68,777.77
obligations under said contract, a performance bond of P53, 643.00, with Universal as principal - DUE DATE OF 1st INSTALLMENT — July, 1961
and Manila Surety & Fidelity Co., Inc., as surety, was executed in favor of RC. However, RC - TERM: Ten (10) EQUAL YEARLY INSTALLMENTS
sued Universal and its surety to recover various amounts of money due under the contracts. - RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
Universal claimed that the amounts were not yet due and demandable. The surety company also - (There’s a table of installments, but it basically provides for 10
contended that the action is premature, but set up a crossclaim against Universal for installments every July (day not stated), from 1962-1971, for
reimbursement of whatever amount of money it may have to pay the plaintiff by reason of the P72,565.68 per installment)
complaint, including interest, and for the collection of accumulated and unpaid premiums on the - A performance bond in the amount of P68,777.77, issued by the Manila
bonds with interest thereon. With leave of court first obtained, the surety company filed a third- Surety & Fidelity Co., Inc., was also submitted to guarantee the faithful
party complaint against Pablo S. Sarmiento, one of the indemnitors in the indemnity agreements. compliance with the obligations set forth in the contract, and indemnity
Sarmiento denied personal liability claiming that he signed the indemnity agreements in question agreement was executed in favor of the surety company in consideration of
in his capacity as acting general manager of Universal. TC rendered judgment against Universal. the said bond.
SC affirms this decision. - M/S UNIFISH 5 and M/S UNIFISH 6
- covered by a contract for the Utilization of Reparations Goods (M/S
DOCTRINE: The terms of the contracts for the purchase and sale of the reparations vessels are "UNIFISH 5" and M/S "UNIFISH 6") executed by the parties on February 12,
very clear and leave no doubt as to the intent of the contracting parties. 1960, and the Schedule of Payments attached thereto, provided, as follows:
- AMOUNT OF 1st INSTALLMENT (10% of F.O.B. COST) — P54,500.00
FACTS: - DUE DATE OF 1st INSTALLMENT — Oct. 17, 1961
- Universal Deep-Sea Fishing Corporation (UNIVERSAL) was awarded 6 trawl boats by - TERM: 10 EQUAL YEARLY INSTALLMENTS
the Reparations Commission as an end-user of reparations goods. - RATE OF INTEREST: THREE PERCENT (3%) PER ANNUM
- These fishing boats are christened the M/S UNIFISH 1, M/S UNIFISH 2. M/ - (There’s a table of installments, but it basically provides for 10 installments
S UNIFISH 3. M/S UNIFISH 4, M/S UNIFISH 5, and M/S UNIFISH 6, and every Oct. 17th, from 1962-1971, for P57,501.57 per installment)
were delivered to UNIVERSAL two at a time. - A performance bond in amount of P54,500.00 issued by judgment, Manila
Surety & Fidelity Co., Inc., was submitted, and an indemnity agreement was
- M/S UNIFISH 1 and M/S UNIFISH 2 executed by UNIVERSAL in favor of surety company.
- Aggregate purchase price of P536,428.44
- Delivered to UNIVERSAL on November 20,1958 - On August 10, 1962, the Reparations Commission instituted the present action against
- The contract of Conditional Purchase and Sale of Reparations Goods, UNIVERSAL and the surety company to recover various amounts of money due under
executed by and between the parties on February 12, 1960, provided these contracts.
among others, that "the first installment representing 10% of the amount or - In answer, UNIVERSAL claimed that the amounts of money sought to be collected are
P53,642.84 shall be paid within 24 mos. from the date of complete delivery not yet due and demandable.
thereof, the balance shall be paid in the manner herein stated as shown in - The surety company also contended that the action is premature, but set up a cross-
the Schedule of Payments: claim against UNIVERSAL for reimbursement of whatever amount of money it may
- TOTAL F.O.B. COST — P536,428.44 have to pay the plaintiff by reason of the complaint, including interest, and for the
- AMOUNT OF 1st INSTALLMENT (10% OF F.O.B. COST) — collection of accumulated and unpaid premiums on the bonds with interest thereon.
P53,642.84 - With leave of court first obtained, the surety company filed a third-party complaint
- DUE DATE OF 1st INSTALLMENT — May 8, 1961 against Pablo S. Sarmiento, one of the indemnitors in the indemnity agreements. The
- TERM: 10 EQUAL YEARLY INSTALLMENTS third-party defendant Pablo S. Sarmiento denied personal liability claiming that he
- RATE OF INTEREST: 3% PER ANNUM signed the indemnity agreements in question in his capacity as acting general
- (There’s a table of installments, but it basically provides for 10 manager of UNIVERSAL.
installments every May 8th, from 1962-1971, for P56,597.20 per - TC rendered the judgment in favor of Reparations Commission.
installment) - Hence, this appeal.
- To guarantee the faithful compliance with the obligations under said
contract, a performance bond in the amount of P53,643.00, with ISSUES w/ HOLDING:
UNIVERSAL as principal and the Manila Surety & Fidelity Co., Inc., as
surety, was executed in favor of the Reparations Commission. 1. W/N the first installments under the 3 contracts of conditional purchase and sale
- A corresponding indemnity agreement was executed to indemnify the surety of reparations goods were already due and demandable when the complaint was
company for any damage, loss charges, etc., which it may sustain or incur filed - YES
as a consequence of having become a surety upon the performance bond.
- The M/S UNIFISH 3 and M/S UNIFISH 4 - UNIVERSAL contends that:
8
 - There is an obscurity in the terms of the contracts in question which were the obligation of the surety company shall be only P43,643.00, instead of
caused by the plaintiff as to the amounts and due dates of the first P53,643.00.
installments which should have been first fixed before a creditor can - SC: The rules contained in Articles 1252 to 1254 of the Civil Code apply to a person
demand its payment from the debtor. To be explicit, counsel points to the owing several debts of the same kind to a single creditor.
Schedule of Payment attached to, and forming a part of, the contract for the - They cannot be made applicable to a person whose obligation as a mere
purchase and sale of the M/S UNIFISH 1 and M/S UNIFISH 2 which states surety is both contingent and singular, which in this case is the full and
that the amount of first installment is P53,642.84 and the due date of its faithful compliance with the terms of the contract of conditional purchase
payment is May 8, 1961. However, the amount of the first of the succeeding and sale of reparations goods.
itemized installments is P56,597.20 and the due date is May 8, 1962. Same - The obligation included the payment, not only of the first installment in the amount of
goes for the other two agreements for the remaining ships. P53,643.00, but also of the ten (10) equal yearly installments of P56,597.20 per
- SC: The terms of the contracts for the purchase and sale of the reparations vessels, annum. The amount of P10,000.00 was, indeed, deducted from the amount of
however, are very clear and leave no doubt as to the intent of the contracting parties. P53,643.00, but then the first of the 10 equal yearly installments had also accrued;
- Thus, in the contract concerning the M/S UNIFISH 1 and M/S UNIFISH 2, hence, no error was committed in holding the surety company to the full extent of its
the parties expressly agreed that the first installment representing 10% of undertaking.
the purchase price or P53, 642. 84 shall be paid within 24 months from the
date of complete delivery of the vessels or on May 8, 1961, and the balance 4. W/N third-party defendant Pablo S. Sarmiento is not personally liable having
to be paid in 10 equal yearly installments. merely executed the indemnity agreements in his capacity as acting general
- The amount of P56,597.20 due on May 8, 1962, which is also claimed to be manager of UNIVERSAL - NO
a "first installment," is but the first of the 10 equal yearly installments of the
balance of the purchase price, citing Reparations Commission vs. Northern - Pablo S. Sarmiento appears to have signed the indemnity agreement twice - the first,
Lines, Inc., et al in his capacity as acting general manager of UNIVERSAL, and the second, in his
- Viewing the contracts between the parties in the light of the foregoing: individual capacity. The indemnity agreements in question state the following, among
- The first installment on the M/S UNIFISH 1 and M/S UNIFISH 2 of the others:
amount of P53,642.84 was due on May 8, 1961, while the first installments - Besides, the "acknowledgment" stated that "Pablo S. Sarmiento for himself and on
on the M/S UNIFISH 3 and M/S UNIFISH 4, and the M/S UNIFISH 5 and M/ behalf of Universal Deep-Sea Fishing Corporation" personally appeared before the
S UNIFISH 6 in the amounts of P68,777.77 and P54,500.00 were due on notary and acknowledged that the document is his own free and voluntary act and
July 31, 1961 and October 17, 1961, respectively. deed.
- Accordingly, the obligation of UNIVERSAL to pay the first installments on
the purchase price of the 6 reparations vessels was already due and RULING: The judgment appealed from is hereby AFFIRMED with the modification that the
demandable when the present action was commenced on August 10, 1962. Universal Deep-Sea Fishing Corporation is further ordered to pay the Manila Surety & Fidelity
- Also due and demanded from UNIVERSAL were the first of the 10 Co., Inc., the amount of P7,251.42 for the premiums and documentary stamps on the
equal yearly installments on the balance of the purchase price of performance bonds. Appellants shall pay proportionate costs.
the M/S UNIFISH 1 and M/S UNIFISH 2 in the amount of
P56.597.20 and P72,565.68 on the M/S UNIFISH 3 and M/S
UNIFISH 4. The first accrued on May 8, 1962, while the second
fell due on July 31, 1962.

2. W/N TC erred in not awarding the Surety Company the amount of P7,251.42, as
premiums on the performance bonds - YES

- The payment of premiums on the bonds to the surety company had been expressly
undertaken by UNIVERSAL in the indemnity agreements executed by it in favor of the
surety company.
- The premium is the consideration for furnishing the bonds and the obligation to pay
the same subsists for as long as the liability of the surety shall exist.
- Hence, UNIVERSAL should pay the amount of P7,251.42 to the surety
company.

3. W/N TC erred in not applying the amount of P10,000.00, paid as down payment
by UNIVERSAL to the Reparations Commission, to the guaranteed indebtedness
- NO

- According to the surety company:

- Under Article 1254 of the Civil Code, where there is no imputation of
payment made by either the debtor or creditor, the debt which is the most
onerous to the debtor shall be deemed to have been satisfied, so that the
amount of P10,000.00 paid by UNIVERSAL as down payment on the
purchase of the M/S UNIFISH 1 and M/S UNIFISH 2 should be applied to
the guaranteed portion of the debt, thus releasing part of the liability; hence,
9
[74] SHAFER v. JUDGE ● RESPONDENT argues that a third party complaint is, under the rules, available only if
G.R. No. 78848 | November 14, 1988 | Padilla, J. the defendant has a right to demand contribution, indemnity, subrogation or any other
relief in respect of plaintiff's claim, and that that petitioner has no cause of action
SUMMARY: Shafer obtained a private car policy over his Ford Laser Car from Makati against the insurer until petitioner's liability shall have been determined by final
Insurance Co. Inc., for third party liability. While the policy was effective, an information for judgment.
reckless imprudence resulting in damage to property and serious physical injuries was
filed against Shafer. The owner of the other car filed a separate civil action for damages while ISSUE w/ HOLDING & RATIO:
the injured passenger did not reserve his right to file a separate action for damages. The W/N petitioner’s third party complaint against Makati Insurance should prosper. — YES.
respondent judge dismissed Shafer’s third party complaint against Makati Insurance on ● Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is
the ground that it was premature: unless Shafer is found guilty and sentenced to pay the primarily intended to provide compensation for the death or bodily injuries
offended party indemnity or damages, the 3rd party complaint is without cause of action. SC suffered by innocent third parties or passengers as a result of a negligent
reversed.
operation and use of motor vehicles.
● Where an insurance policy insures directly against liability, the insurer's liability
DOCTRINE: The liability of the insurance company under the Compulsory Motor Vehicle
accrues immediately upon the occurrence of the injury or event upon which the
Liability Insurance is for loss or damage. Where an insurance policy insures directly against
liability, the insurer’s liability accrues immediately upon the occurrence of the injury or liability depends, and does not depend on the recovery of judgment by the
event upon which the liability depends, and does not depend on the recovery of judgment injured party against the insured.
by the injured party against the insured. There is no need on the part of the insured to wait for ○ The general purpose of statutes enabling an injured person to proceed
the decision of the TC finding him guilty of reckless imprudence before being able to claim from directly against the insurer is to protect injured persons against the
the insurer. The injured for whom the contract of insurance is intended can also sue the insurer insolvency of the insured who causes such injury, and to give such injured
directly. person a certain beneficial interest in the proceeds of the policy, and
statutes are to be liberally construed so that their intended purpose may be
FACTS: accomplished.
● On 2 January 1985, petitioner Sherman Shafer obtained a private car policy, GA No. ● In the event that the injured fails or refuses to include the insurer as party
0889, over his Ford Laser car from Makati Insurance Company, Inc., for third party defendant in his claim for indemnity against the insured, the latter is not prevented
liability (TPL). by law to avail of the procedural rules intended to avoid multiplicity of suits.
● During the effectivity of the policy, an information for reckless imprudence ○ Third party complaints are allowed to minimize the number of lawsuits and
resulting in damage to property and serious physical injuries was filed against avoid the necessity of bringing two (2) or more actions involving the same
petitioner. subject matter. They are predicated on the need for expediency and the
○ “That on or about the seventeenth (17th) day of May 1985, in the City of avoidance of unnecessary lawsuits.
Olongapo, Philippines x x x the said Ford Laser car to hit and bump a ● Respondent insurance company's contention that the third party complaint
Volkswagen car bearing Plate No. NJE-338 owned and driven by Felino involves extraneous matter which will only clutter, complicate and delay the
llano y Legaspi, thereby causing damage in the total amount of P12,345.00, criminal case is without merit.
and as a result thereof one Jovencio Poblete, Sr. who was on board of the ○ The civil aspect of the offense charged, i.e., serious physical injuries
said Volkswagen car sustained physical injuries x x x causing deformity to allegedly suffered by Jovencio Poblete, Sr., was impliedly instituted with
the face.” the criminal case. Petitioner may thus raise all defenses available to him
● The owner of the damaged Volkswagen car filed a separate civil action against insofar as the criminal and civil aspects of the case are concerned.
petitioner for damages, while Jovencio Poblete, Sr., who was a passenger in the
Volkswagen car when allegedly hit and bumped by the car driven by petitioner, did RULING: WHEREFORE, the instant petition is GRANTED.
not reserve his right to file a separate civil action for damages.
● Upon motion, petitioner was granted leave by the former presiding judge of the trail
court to file a third party complaint against the herein private respondent, Makati
Insurance Company, Inc.
○ Insurance company, however, moved to vacate the order.
● On 24 April 1987, the court a quo issued an ORDER dismissing the third party
complaint on the ground that it was premature, based on the premise that unless the
accused (herein petitioner) is found guilty and sentenced to pay the offended party
(Poblete Sr.) indemnity or damages, the third party complaint is without cause of
action. It further stated that that the better procedure is for the accused (petitioner)
to wait for the outcome of the criminal aspect.
● PETITIONER argues that the dismissal of the third party complaint amounts to a
denial or curtailment of his right to defend himself in the civil aspect of the case.

10
[75] Perla Compania de Seguros v. CA 1. The car was insured against a malicious act such as theft. Therefore the “Theft” clause in the
G.R. No. 96452 | May 7, 1992 | Nocon, J. contract should apply and not the authorized driver clause. The risk against accident is different
from the risk against theft.
SUMMARY: The appellate court stated: The "authorized driver clause" in a typical insurance policy
The Lim spouses opened a chattel mortgage and bought a Ford Laser from Supercars for Php is in contemplation or anticipation of accident in the legal sense in which it should be
77,000 and insured it with Perla Compania de Seguros. The vehicle was stolen while Evelyn Lim understood, and not in contemplation or anticipation of an event such as theft. The distinction —
was driving it with an expired license. The spouses requested for a moratorium on payments but often seized upon by insurance companies in resisting claims from their assureds — between
this was denied by FCP, the assignee of rights over collection of the mortgage amount of the car. death occurring as a result of accident and death occurring as a result of intent may, by analogy,
The spouses also called on the insurance company to pay the balance of the mortgage due to apply to the case at bar.
theft but this was denied by the company due to the spouses’ violation of the Authorized Driver There was no connection between valid possession of a license and the loss of a
clause.Since the spouses didn’t pay the mortgage, FCP filed suit against them. The trial court vehicle. Ruling in a different way would render the policy a sham because the company can then
ruled in its favor ordering spouses to pay. The appellate court reversed their decision. FCP and easily cite restrictions not applicable to the claim.
Perla appealed to the SC. The SC ruled that the car was insured against a malicious act such as 2. The Supreme Court stated:
theft. Therefore the “Theft” clause in the contract should apply and not the authorized driver “The chattel mortgage constituted over the automobile is merely an accessory contract
clause. The risk against accident is different from the risk against theft. to the promissory note. Being the principal contract, the promissory note is unaffected
by whatever befalls the subject matter of the accessory contract. Therefore, the unpaid
DOCTRINE: balance on the promissory note should be paid, and not just the installments due and
The car was insured against a malicious act such as theft. Therefore the “Theft” clause payable before the automobile was carnapped, as erronously held by the Court of
in the contract should apply and not the authorized driver clause. The risk against accident is Appeals.”
different from the risk against theft. The "authorized driver clause" in a typical insurance policy is The court, however, construed the insurance, chattel mortgage, and promissory note as
in contemplation or anticipation of accident in the legal sense in which it should be understood, interrelated contracts, hence eliminating the payment of interests, litigation expenses, and
and not in contemplation or anticipation of an event such as theft. attorney’s fees stated in the promissory note. The promissory note required securing a chattel
mortage which in turn required opening an insurance contract. The insurance was made as an
FACTS: accessory to the principal contract, making sure that the value in the promissory note will be paid
● The Lim spouses opened a chattel mortgage and bought a Ford Laser from Supercars for even if the car was lost. The insurance company promised to pay FCP for loss or damage of the
Php 77,000 and insured it with Perla Compania de Seguros. property.
● The vehicle was stolen while Evelyn Lim was driving it with an expired license. The CA didn’t err in requiring Perla to pay the spouses, but the spouses must pay FCP for the
spouses requested for a moratorium on payments but this was denied by FCP Credit balance in the note.
Corporation, the assignee of rights over collection of the mortgage amount of the car.
● The spouses also called on the insurance company to pay the balance of the DISPOSITIVE:
WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require
mortgage due to theft but this was denied by the company due to the spouses’
private respondents to pay petitioner FCP the amount of P55,055.93, with legal interest from
violation of the Authorized Driver clause stating (driving with an expired license before
July 2, 1983 until fully paid. The decision appealed from is hereby affirmed as to all other
being carnapped):
respects. No pronouncement as to costs.
Any of the following:
SO ORDERED.
(a) The Insured
(b) Any person driving on the Insured's order, or with his permission.
Provided that the person driving is permitted, in accordance with the licensing or other laws
or regulations, to drive the Scheduled Vehicle, or has been permitted and is not disqualified
by order of a Court of Law or by reason of any enactment or regulation in that behalf.
● Since the spouses didn’t pay the mortgage, FCP filed suit against them. The trial court
ruled in its favor ordering spouses to pay. The appellate court reversed their decision. FCP
and Perla appealed to the SC.

ISSUE & HELD:

1.Was there grave abuse of discretion on the part of the appellate court in holding that private
respondents did not violate the insurance contract because the authorized driver clause is not
applicable to the "Theft" clause of said Contract? -NO.
2. Whether or not the loss of the collateral exempted the debtor from his admitted obligations
under the promissory note particularly the payment of interest, litigation expenses and attorney's
fees. -NO.

RATIONALE:

11
[76] VDA DE MAGLANA V. CONSOLACION • December 14, 1981: CFI ruled that Destrajo did not exercise sufficient diligence as the
G.R. No. 60506 | August 6, 1992 | Romero, J. operator of the jeepney
Topic: Compulsory Motor Vehicle Liability Insurance o Destrajo to pay petitioners P28,000 for loss of income, to pay P12,000 which
Petitioners: FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR, shall be deducted in the event judgment in the crim case against Into shall have
LEONILA M. MALLARI, GILDA ANTONIO and the minors LEAH, LOPE, JR., and ELVIRA, all been enforced, to pay P5,901.70 for funeral and burial expenses, to pay P5,000
moral damages which shall be deducted in the event of judgment against Into, to
surnamed MAGLANA, herein represented by their mother, FIGURACION VDA. DE MAGLANA
pay P3,000 as attorney's fees and to pay the costs of suit
Respondents: HONORABLE FRANCISCO Z. CONSOLACION, Presiding Judge of Davao City, o AFISCO is ordered to reimburse Destrajo whatever amounts the latter shall
Branch II, and AFISCO INSURANCE CORPORATION have paid only up to the extent of its insurance coverage
• Petitioners filed MFR for the second paragraph of the dispositive of the CFI decision;
SUMMARY: contends that AFISCO should not merely be held secondarily liable because the
Lope Maglana was on his way to his work station, driving a motorcycle. He met an accident that Insurance Code provides that the insurer's liability is "direct and primary and/or
resulted in his death. Thereafter, the heirs of the deceased filed an action against Destrajo and jointly and severally with the operator of the vehicle, although only up to the extent
the Afisco Insurance Corporation (AFISCO) for damages and attorney’s fees. The lower court of the insurance coverage"
rendered a decision finding that Destrajo had not exercised extraordinary diligence as the o The P20,000 coverage of the insurance policy issued by AFISCO should
operator of the jeepney and ordered him to pay for the damages. The second paragraph of the have been awarded in their favor
decision also ordered AFISCO to reimburse Destrajo whatever amounts the latter shall have • AFISCO: since the Insurance Code does not expressly provide for a solidary
paid only up to the extent of its insurance coverage, signifying only secondary liability. The heirs obligation, the presumption is that the obligation is joint
however, filed a motion for reconsideration with respect to the said second paragraph arguing • CFI: denied the MFR
o Since the insurance contract "is in the nature of suretyship, then the liability of the
that AFISCO should not merely be held secondarily liable because the Insurance Code provides
insurer is secondary only up to the extent of the insurance coverage"
that the insurer’s liability is “direct and primary and/or jointly and severally with the operator of • Petitioners filed a second MFR; denied. Thus this case was elevated to the Supreme Court.
the vehicle”, although only up to the extent of the insurance coverage. The Court held that the • Petitioners base their claim on the following provision in the insurance policy:
insurance company can be held directly liable. The direct liability of the insurer under indemnity “Sec. 1 — LIABILITY TO THE PUBLIC
contracts against third party liability does not mean that the insurer can be held solidarily liable 1. The Company will, subject to the Limits of Liability, pay all sums necessary to
with the insured and/or the other parties found at fault. The liability of the insurer is based on
discharge liability of the insured in respect of
contract; that of the insured is based on tort.
(a) death of or bodily injury to any THIRD PARTY
(b) . . . .
DOCTRINE: Where an insurance policy insures directly against liability, the insurer's liability
accrues immediately upon the occurrence of the injury or even upon which the liability depends, 2. . . . .
and does not depend on the recovery of judgment by the injured party against the insured. The 3. In the event of the death of any person entitled to indemnity under this Policy, the
reason behind the third party liability (TPL) of the Compulsory Motor Vehicle Liability Insurance Company will, in respect of the liability incurred to such person indemnify his
is to protect injured persons against the insolvency of the insured who causes such injury, and to personal representatives in terms of, and subject to the terms and conditions
give such injured person a certain beneficial interest in the proceeds of the policy. hereof.”

FACTS: ISSUE: W/N petitioners can hold AFISCO directly liable – YES
• Lope Maglana – an employee of the Bureau of Customs (BoC), stationed at Lasa, Davao
City RATIO:
• December 20, 1978: (early morning) Lope was on his way to his work station, driving a • SC: the provision on which petitioners base their claim leads to no other
motorcycle owned by the BoC conclusion but that AFISCO can be held directly liable by petitioners
o Met an accident at Km. 7 with a PUJ jeep (driven by Pepito Into, operated and o Shafer vs. Judge: "[w]here an insurance policy insures directly against
owned by defendant Destrajo) and died on the spot liability, the insurer's liability accrues immediately upon the occurrence of the
▪ The jeep was overtaking another passenger jeep that was going injury or even upon which the liability depends, and does not depend on the
towards the city poblacion and while overtaking, bumped the recovery of judgment by the injured party against the insured."
motorcycle driven by Lope; point of impact was on the lane of the • The reason behind the third party liability (TPL) of the Compulsory Motor
motorcycle and Lope was thrown from the road Vehicle Liability Insurance is "to protect injured persons against the insolvency
• The heirs of Lope Maglana (herein petitioners) then filed an action for damages and of the insured who causes such injury, and to give such injured person a certain
attorney's fees against operator Destrajo and the Afisco Insurance Corporation beneficial interest in the proceeds of the policy . . ."
(AFISCO) before the CFI Davao; an information for homicide thru reckless imprudence o Here, since petitioners received from AFISCO P5,000 under the no-fault
was also filed against Pepito Into clause, its liability is now limited to P15,000
o During the pendency of the civil case, Into was sentenced to suffer an • HOWEVER, AFISCO is not solidarily liable with Destrajo
indeterminate penalty of 1 year, 8 months and 1 day of prision correccional, as o Malayan Insurance Co., Inc. v. Court of Appeals: “While it is true that
minimum, to 4 years, 9 months and 11 days of prision correccional, as maximum, where the insurance contract provides for indemnity against liability to
with all the accessory penalties provided by law, and to indemnify the heirs of third persons, such third persons can directly sue the insurer,
Lope Maglana in the amount of P12,000 with subsidiary imprisonment in case of however, the direct liability of the insurer under indemnity contracts
insolvency, plus P5,000 moral and exemplary damages with costs against third party liability does not mean that the insurer can be held
▪ No appeal was interposed by Into who later applied for probation solidarily liable with the insured and/or the other parties found at
fault. The liability of the insurer is based on contract; that of the
12
 insured is based on tort… For if petitioner-insurer were solidarily liable
with… respondents by reason of the indemnity contract against third
party liability — under which an insurer can be directly sued by a third
party — this will result in a violation of the principles underlying
solidary obligation and insurance contracts.”
o In solidary obligations, the creditor may enforce the entire obligation
against one of the solidary debtors while in an insurance contract, the
insurer undertakes for a consideration to indemnify the insured
against loss, damage or liability arising from an unknown or
contingent event
▪ Thus the insurer which is liable only up to a certain amount under
the insurance contract cannot be made solidarily liable with the
insured for the entire obligation greater than that, otherwise, there
would be “an evident breach of the concept of solidary obligation"
• Here, petitioners cannot validly claim that AFISCO, whose liability under the
insurance policy is P20,000, can be held solidarily liable with Destrajo for the
total amount of P53,901.70 in accordance with the decision of the lower court
• Liability of AFISCO based on the insurance contract is direct but not solidary
with that of Destrajo which is based on Art. 2180, CC
o Petitioners have the option to either claim the P15,000 from AFISCO and
the balance from Destrajo or enforce the entire judgment from Destrajo
subject to reimbursement from AFISCO to the extent of the insurance
coverage

DISPOSITIVE: WHEREFORE, premises considered, the present petition is hereby GRANTED.

The award of P28,800.00 representing loss of income is INCREASED to P192,000.00 and the
death indemnity of P12,000.00 to P50,000.00.

13
[78] Equitable Insurance and Casualty Company, Inc. v. Rural Insurance and Surety covered by fire insurance Policy No. 6026, issued by plaintiff in behalf of Electric and Lamp
Company, Inc. Supplies (Mr. Pedro Casipe).
G.R. No. L-17436 | Jan 31, 1962 | Barrerra, J.
-On October 13, 1958, said stock was burned and the share of loss assumed by defendant as
Summary per reinsurance agreement with plaintiff was computed at P1,334.80 including adjuster's fee, for
Equitable Insurance and Rural Insurance entered into a reciprocal facultative reinsurance which plaintiff likewise sent a statement of account to defendant with the request that the same
agreement, wherein they agreed to cede to each other, by way of facultative reinsurance on be paid. Notwithstanding repeated demands, defendant refused and failed to pay plaintiffs.
policies of insurance or reinsurance issued by respective fire insurance departments. Equitable
reinsured with Rural certain stocks covered by fire insurance issued by Equitable in behalf of two -Plaintiff filed with the CFI a complaint against defendant for payment of the said sums.
companies. These stocks burned and Rural’s share of the loss was computed at more than Defendant filed Motion to Dismiss Article VIII of the Reinsurance Agreement between the parties
P4,000. Despite repeated demands, Rural refused to pay states that before a court action can be brought, the parties agreed to submit all disputes to a
board of arbitrators.
Doctrine
Under the Reinsurance Agreement, the requirement of submitting for decision to two arbitrators -CFI ruled in favor of plaintiff. CA elevated the case to the SC, no question of fact being involved.
or an umpire the matter of losses by fire or the liability of the parties arises only if and when the
same is disputed by one of the parties. It does not appear that Rural disputed Equitable’s claims. Issue and Ratio
Thus, Rural may not invoke that Subject of the insurance is property Insurance of a different 1. Is there a cause of action? YES
interest Insurance of the same interest The original insured has no interest in the contract of -Rural insurance insists that the trial court erred in failing to rule that plaintiff-appellee has no
reinsurance which is independent of the original contract of insurance causes of action against it, the matter not having been referred to the decision of two arbitrators
or umpire, which, it is claimed, is the condition precedent agreed upon in Article VIII of the
Insured is the party in interest in all the contracts The consent of the original insured (who is Reinsurance Agreement (See Notes) entered into between the parties.
hardly even aware of the reinsurance transaction) is not necessary. Insured has to give his
consent for double insurance to be allowed. It is contended that this agreement, not being contrary to law, moral or public policy but, on the
other hand, dictated by 'wisdom and propriety in insurance contracts because losses by fire can
duly be determined by competent men who have technical knowledge on how to determine
Provision losses by fire", non-compliance therewith is fatal to the claim of plaintiff-appellee.
Art. 1206, Civil Code
When only one prestation has been agreed upon, but the obligor may render another in -We find no merit in this contention. Under Reinsurance Agreement, it would seem clear that the
substitution, the obligation is called facultative. requirement of submitting for decision to two arbitrators or an umpire the matter of losses by fire
or the liability of the parties thereto arises only if and when the same is disputed by one of
The loss or deterioration of the thing intended as a substitute, through the negligence of the the parties. It does not appear in the instant case that appellant did dispute appellee's claims.
obligor, does not render him liable. But once the substitution has been made, the obligor is liable Consequently, Rural Insurance may not invoke said provision in avoidance of its liability to
for the loss of the substitute on account of his delay, negligence or fraud. (n) Equitable Insurance.

-The SC agrees agrees and adopts Trial Court decisions:

Facts It is true that paragraph (Article VIII) of said Reciprocal Facultative Reinsurance
-On November 11, 1957, plaintiff and defendant entered into a reciprocal facultative reinsurance Agreement required that the parties shall compromise by amicable settlement rather
agreement, wherein they agreed to cede to each other, by way of facultative reinsurance on than by court action'; and that the dispute should be referred to the decision of two
policies of insurance or reinsurance issued by their respective fire insurance departments on arbitrators and umpire. However, in this case, there is absolutely no dispute between
risks situated in the Philippines, subject to the stipulations of the agreement. the two parties, because in the stipulation of facts, the defendant has admitted that
plaintiff has paid its liability to the insured. Defendant admitted its liability as reinsurer,
-Pursuant to said agreement, plaintiff reinsured for P2,000.00 with defendant as per Reinsurance the amounts of which are not disputed. Said defendant has never questioned the
Application No. 58/038 and accepted by defendant on the same date, the stock covered by fire correctness of said amounts. Defendant has continued to ignore plaintiff's demands
insurance Policy No. 5880 issued by plaintiff. On July 4, 1958, the stock insured and covered by for reimbursement under the reinsurance policies.
said Policy No. 5880 was burned, and the share of the loss assumed by defendant as per
reinsurance agreement was computed at P2,024.87 including adjuster's fee, for which plaintiff -In the case of Buenaventura Maligad v. United Assurance Co., Inc., 55 O.G. 6041:
sent to defendant for payment by the latter, a statement of account.
“If in the course of the settlement of a loss, the action of the company or its agents
- Despite repeated demands by plaintiff, defendant refused and failed to pay the sum of amounts to a refusal to pay, the company will be deemed to have waived the condition
P2,024.87. precedent with reference to arbitration and a suit upon the policy will lie. (Chang v.
Assurance Corporation, 8 Phil. 399.) Emphasis supplied.”
-On March 24, 1958, plaintiff reinsured in the sum of P2,000.00 with defendant as per
Reinsurance Application No. 58/115 and accepted by defendant on the same date, stock

14
 2. Is there a facultative obligation? NO
-Rural Insurance claims that "the court a quo erred in failing to rule that in a facultative
obligation the right to choose an alternative remedy lies only with the debtor, who in this case is
the herein defendant-appellant", citing Article 1206 of the new Civil Code.

-No connection whatsoever between this article and the agreement subject of this action, except
the word "facultative" used in both.

-The term "facultative" is used in reinsurance contracts, and it is so used in this particular case,
merely to define the right of the reinsurer to accept or not to accept participation in the risk
insured. But once the share is accepted, as it was in the case at bar, the obligation is absolute
and the liability assumed thereunder can be discharged by one and only way — payment of the
share of the losses. There is no alternative nor substitute prestation.

Ruling
WHEREFORE, finding no error in the judgment appealed from of the trial court, the same is
hereby affirmed, with costs against the defendant-appellant. So ordered.

Notes:
ARTICLE VIII of the Reinsurance Agreement

In the event of any question arising as to the meaning of, or any way connected with
or relating to this Agreement, whether before or after its termination, the parties shall
endeavor to arrive at a satisfactory compromise by amicable settlement rather than by
court action. The dispute shall be referred to the decision of two arbitrators, of whom
one shall be appointed in writing by each of the parties within thirty (30) days after
having been required so to do by the other party in writing, and in case of
disagreement between the arbitrators, to the decision of the umpire to be appointed by
them in writing before entering on the reference. Each party shall submit its case with
all particulars within thirty days after their appointment. The seat of arbitration shall be
in Manila, Philippines, and the expenses of arbitration shall be borne in equal
proportion by the parties. The decision of the arbitrators or umpire, as the case may
be, shall be final and binding on both the Company and the Reinsurer. The arbitrators
and umpire shall not be bound by the strict rules of evidence and by judicial formalities
in making the award

15
[79] Fieldmen’s Insurance Co., Inc. v. Asian Surety & Ins. Co., Inc. 
 ! One of the risks reinsured with Fieldmen’s issued in favor of the Government Service
G.R. No. L-23447 | July 31, 1970 | Makalintal Insurance System (GSIS) became a liability when the insured property was burned on
Feb. 16, 1962. The duration of the policy is from Jul. 1, 1961 to Jul. 1, 1962.
Summary: ! Asian immediately notified Fieldmen’s of said fire loss. It also sent its reply stating that
Asian Surety (ceding company) and Fieldmen’s Insurance (reinsuring company) entered into 7 the Dec. 7 letter is not in accordance with the terms since there was no prior three
reinsurance agreements where Asian ceded to Fieldmen’s a specified portion of the amount of months’ notice. But they are willing to waive the provision that said treaties may be
insurance underwritten by Asian. In the stipulations, the agreements were to be in force until cancelled on Dec. 31st of any year, and will consider them cancelled at the end of the
cancelled by either party upon prior notice of at least 3 months by registered mail; the 3 months from Dec. 7.
cancellation to take effect as of December 31 of the year in which notice was given. Two ! Relying on the notice of termination from Asian, Fieldmen’s filed a petition for
agreements contained a stipulation that the ceded policies will continue to be in effect until their declaratory relief with the CFI of Manila to seek a declaration that all the reinsurance
expiration date. Fieldmen’s sent several letters to Asian with the intention to cancel their contracts with Asian had terminated as of Dec. 31, 1961.
agreement, to which Asian did not reply. One of the risk insured was burned. Asian notified ! Asian denied receiving Fieldmen’s Sept. 19 letter and argued that even assuming it
Fieldmen’s of the fire loss and acknowledged the letters and cancelling the agreements effective did, Fieldmen’s could not have terminated the reinsurance treaties on Dec. 31
on December 31, 1961. Fieldmen’s denied liability to the fire loss contending that the because the letter was merely an expression of Fieldmen’s desire to cancel the
reinsurance agreements were already cancelled. The RTC and CA upheld Asian’s position that treaties and not a formal notice of cancellation.
all the cessions made by it to Fieldmen’s prior to cancellation is in full force and effect until their o Even if the Sept. 19 letter is considered sufficient notice of cancellation,
expiry date. The Court found out that only 2 agreements (Facultative-Obligatory Reinsurance rendering the reinsurance agreements terminated as of Dec. 31, 1961, the
Treaty Fire and Personal Accident Reinsurance Treaty) contain the provisions that the cessions liability of Fieldmen’s on the policies or cessions issued under two of the
prior to the cancellation are in full force and effect until their expiry dates. Thus, Fieldmen’s is still said agreements (annexed A & B) prior to their cancellation continued to
liable to these two cessions. have full force and effect until their stated expiry dates.
! The RTC declared 6 of 7 reinsurance agreements in question cancelled as of Dec. 31,
Doctrine: 1961. It upheld Asian’s position that all cession of reinsurance made by it to
! Where the reinsurance contract contain provision which clearly and expressly Fieldmen’s prior to the cancellation of the reinsurance treaties continued in full force
recognize the continuing effectivity of policies ceded under them for reinsurance and effect until expiry dates.
notwithstanding the cancellation of the contracts themselves, their cancellation does ! CA affirmed the trial court’s decision. Both the RTC and the CA declared that the
not carry with it ipso facto the termination of all reinsurance cessions thereunder. Such cancellation of the reinsurance treaties was had not been challenged.
cessions continued to be in force until their respective dates of expiration.
Issue/Ratio:
Facts: W/N the cancellation of the reinsurance treaties had the effect of terminating the liability
! Asian Surety & Insurance Company, Inc. (Asian) and the Fieldmen’s Insurance of Fieldmen’s as reinsurer. – NO.
Company, Inc. (Fieldmen’s) entered into seven (7) reinsurance agreements or treaties ! Two reinsurance contracts contain provision which clearly and expressly recognize the
under the general terms of which: continuing effectivity of policies ceded under them for reinsurance notwithstanding the
o Asian as the ceding company cancellation of the contracts themselves.
o Fieldmen’s as the reinsuring company o Art. 10 of the Facultative-Obligatory Reinsurance Treaty Fire (Annex A)
o Specified portion of the amount of insurance underwritten by Asian upon provides that in the termination of the agreement, the liability of Fieldmen’s
payment to Fieldmen’s of a proportionate share of the gross rate of premium under current cessions shall continue in full force and effect until their
applicable with respect to each cession after deducting a commission. natural expiry.
o To take effect from certain specific dates o 4th paragraph of Art. VI of the Personal Accident Reinsurance Treaty (Annex
o To be in force until cancelled by either party upon previous notice of at least B) states that on the termination of the agreement from any cause whatever,
three (3) months by registered mail to the other party. the liability of the reinsurer (Fieldmen’s) under any current cession which are
▪ 3-month rule is for the final accounting of all cessions made when not cancelled in the ordinary course of business shall continue in full force
the reinsurance agreements are in force. until their expiry unless the Company (Asian) shall, prior to the 31st of
o Cancellation to take effect as of the 31st of December of the year in which December next following such notice, elect to withdraw the existing
the notice was given. cessions.
! Sept. 19, 1961. Fieldmen’s mailed a notice to Asian of its desire to be relieved from all ! There is clearly no merit in Fieldmen’s claim that their cancellation carried with it ipso
participation in its various treaties effective Dec. 31, 1961. Asian received the letter on facto the termination of all reinsurance cessions thereunder, with respect to the two
Sept. 25, 1961 but did not reply. reinsurance agreements. Such cessions continued to be in force until their respective
! Dec. 7, 1961. Fieldmen’s sent another letter to Asian expressing regrets at alleged dates of expiration.
violations committed by Asian against their treaties. Fieldmen’s reiterated that it o Fieldmen’s cannot avoid liability which arose by reason of the burning of the
considered itself no longer at risk for any reinsurance and/or cession given by Asian, property.
effective Dec. 31, 1961. Asian did not reply. ! With respect to the other 4 agreements, there is no useful purpose to be served by
! Feb. 7, 1962. Fieldmen’s sent another letter to Asian reminding of the Dec. 7 letter defining the respective rights and obligations of the parties since these agreements
regarding the cancellation of all the reinsurance treaties and cessions as of Dec. 31, have already been cancelled. It also does not appear that any claim by or liability in
1961.

16
 favor of the insured has actually arisen under any of the reinsurance cessions made
prior to such cancellation.
! It is significant to note in this connection:
o Asian’s answer concerning the right of either party to terminate the
reinsurance agreements upon at least three months’ notice made express
reference only to the provisions in the two agreements.
o The same provisions were relied upon as a special defense on the question
of Fieldmen’s continued liability.
o Asian’s prayer for relief was only with respect to those two agreements that
Asian asked for a declaration that the cessions on reinsurance issued prior
to their cancellation would continue in full force and effect until their natural
expiry.
! In other words, Asian was quite willing that no similar declaration be made with
respect to the other agreements, obviously because no risk reinsured pursuant thereto
had become an actual liability. There is no point in the prayer for declaratory judgment
since the other agreements have already been cancelled as of Dec. 31, 1961.
! Further, Asian is not guilty of any substantial breach of the contracts which would
warrant a rescission. Thus, Fieldmen’s insistence on its alternative prayer that all
cessions under the 6 reinsurance agreements be declared rescinded by reason of
certain violations cannot hold.

Ruling: Decision of CA AFFIRMED.

17
[80] Phil American Life Insurance Co v Auditor General • By the third paragraph of the same Article I, it is also stipulated that:
G.R No L-19255, 18 January 1968, Sanchez, J. o even though Philamlife "is already on a risk for its maximum retention under
policies previously issued, when new policies are applied for and issued
Summary of the Facts: [Philamlife] can cede automatically any amount, within the limits
Petitioner Philam Life and American International Insurance Co. (AIRCO) entered into a x x x specified, on the same terms on which it would be willing to accept the
risk for its own account, if it did not already have its limit of retention."
reinsurance treaty, where AIRCO agreed to reinsure the excess of life insurance as may be • Reinsurances under said reinsurance treaty of January 1, 1959 may also be
written by Philam Life (see facts for full stipulations). Pursuant to this, petitioners remitted around
had facultatively upon other cases pursuant to Article II thereof,
$610, 998.63, with the Central Bank of the Philippines collecting P268,747.48 as foreign whereby Airco's liability begins from acceptance of the risk.
exchange margin on such remittances. The Petitioner sought to have the latter amount refunded • These cases include those set forth in paragraph 2 of the treaty's Article I which
from the central bank, as they claim that such remittances are a pre-existing obligation that expressly excludes from automatic reinsurance the following:
should be exempt from the margin law. This is because the reinsurance treaty was constituted ➢ Any application for life insurance with Philamlife which, together with other
on January 1, 1959, while the Margin law only came into effect on July 19, 1959. papers containing information as to insurability of the risk, shows that "the
total amount of life insurance (including accidental death benefit) applied for
The Central Bank declared such remittances exempt from the margin law, but the auditor to or already issued by all companies [other life insurance companies which
general refused to pass in audit the refunds. Hence, this appeal before the Supreme Court. had previously accepted the risk] exceeds the equivalent of Five Hundred
Thousand Dollars ($500,000) United States currency;" and
The SC ruled in favor of the Respondent Auditor General. The court stated that while it is true ➢ Any life on which Philam life "retains for its own account less than its regular
that the reinsurance treaty was instituted before the margin law took effect, the contract never maximum limit of retention for the age, sex, plan, rating and occupation of
obligated Philam Life to make such payments via fixed insurance premiums. The court also the risk."
• Every life insurance policy reinsured under the aforecited agreement "shall be upon
stated that the exception would only apply to reinsurance policies or reinsurance cessions,
the yearly renewable term plan for the amount at risk under the policy reinsured."
which are different from reinsurance treaties (see “Doctrine” for full distinction). Thus, petitioner’s • Philamlife agrees to pay premiums for all reinsurances "on an annual premium basis."
appeal is denied. • It is conceded that no question ever arose with respect to the remittances made
by Philamlife to Airco before July 16, 1959, the date of approval of the Margin Law.
Doctrine: • The Central Bank of the Philippines collected the sum of P268,747.48 as foreign
exchange margin on Philamlife remittances to Airco purported totalling $610, 998.63
There should not be any misapprehension as to the distinction between a reinsurance treaty, on and made subsequent to July 16, 1959.
the one hand, and a reinsurance policy or a reinsurance cession, on the other. • Philamlife subsequently filed with the Central Bank a claim for the refund of the
• A reinsurance policy is thus a contract of indemnity one insurer makes with another to above sum of P268,747.48.
protect the first insurer from a risk it has already assumed. o The ground therefor was that the reinsurance premiums so remitted were
• In contradistinction, a reinsurance treaty is merely an agreement between two paid pursuant to the January 1, 1950 reinsurance treaty, and, therefore,
insurance companies whereby one agrees to cede and the were pre-existing obligations expressly exempt from the margin fee.
other to accept reinsurance business pursuant to provisions specified in the treaty. • On June 7, 1960, the Monetary Board resolved that:
• The practice of issuing policies by insurance companies includes, among other things, o "reinsurance contracts entered into and approved by the Central Bank
the issuance of reinsurance policies on standard risks and also on substandard risks before July 17, 1959 are exempt from the payment of the 35% foreign
under special arrangements. exchange margin, even if remittances thereof are made after July 17, 1959,"
• The lumping of the different agreements under a contract has resulted in the term because such remittances "are only made in the implementation of a mother
known to the insurance world as 'treaties.' contract, a continuing contract which is the reinsurance treaty."
• Such a treaty is, in fact, an agreement between insurance companies to cover the • The foregoing resolution notwithstanding, the Auditor of the Central Bank, on April 19,
different situations described: Reinsurance treaties and reinsurance policies are not 1961, refused to pass in audit Philam life's claim for refund.
synonymous. Treaties are contracts for insurance; reinsurance policies or cessions • On May 17, 1961, Philamlife sought reconsideration with the Auditor General.
are contracts of insurance." • On October 24, 1961, the request for reconsideration was denied.
• The Auditor General in effect expressed the view that the existence of the reinsurance
Full FACTS: treaty of January 1, 1950 did not place reinsurance premia - on reinsurance
• On January 1, 1950, Philippine American Life Insurance Company [Philamlife], a effected on or after the approval of the Margin Law on July 17, 1959 - out of the reach
domestic life insurance corporation, and American International Reinsurance of said statute.
Company [Airco] of Pembroke, Bermuda, a corporation organized under the laws of
the Republic of Panama, entered into an agreement - reinsurance treaty - which ISSUES/RATIOS:
provides in its paragraph 1, Article I, the following: W/N Philam’s Claim was covered by the exception provided in the margin law? NO.
o "ARTICLE I On and after the 1st day of January 1950, the Ceding Company
[Philamlife] agrees to reinsure with AIRCO the entire first excess of such life The thrust of petitioner's argument is that the premia remitted were in pursuance of its
insurance on the lives of persons as may be Written by the Ceding reinsurance treaty with Airco of January 1, 1959 a contract antedating the Margin Law, which
Company under direct application over and above its maximum limit of took effect only on July 16.
retention for life insurance, and AIRCO binds itself, subject to the to terms • The validity of such claim must be tested by the provisions of Section 3 of the Margin
and provisions of this agreement, to accept such reinsurances on the same Law quoted earlier in this opinion.
terms and for an amount not exceeding its maximum limit for automatic • Said Section expressly withholds the enforcement of the provisions of said Act on
acceptance of life reinsurance. x x x." "contractual obligations calling for payment of foreign exchange issued, approved and
18
 outstanding as of the date this Act takes effect and the extension thereof, with the
same terms and conditions as the original contractual obligations."
• True, the reinsurance treaty precedes the Margin Law by over nine years.
• Nothing in that treaty, however, obligates Philamlife to remit to Airco a fixed, certain,
and obligatory sum by way of reinsurance premiums.
• All that the reinsurance treaty provides on this point is that Philamlife "agrees to
reinsure." The treaty speaks of a probability; not a reality.
• For, without it reinsurance, no premium is due. Of course the reinsurance treaty lays
down the duty to remit premiums - if any reinsurance is effected on the covenants in
that treaty written.
• So it is that the reinsurance treaty per se cannot give rise to a contractual obligation
calling for the payment of foreign exchange "issued, approved and outstanding as of
the date this Act (Republic Act 2609] takes effect."
• For an exemption to come into play, there must be a reinsurance policy or, as in the
reinsurance treaty provided, a "reinsurance cession" which may be automatic or
facultative.
There should not be any misapprehension as to the distinction between a reinsurance treaty, on
the one hand, and a reinsurance policy or a reinsurance cession, on the other.
• A reinsurance policy is thus a contract of indemnity one insurer makes with another to
protect the first insurer from a risk it has already assumed.
• In contradistinction, a reinsurance treaty is merely an agreement between two
insurance companies whereby one agrees to cede and the
other to accept reinsurance business pursuant to provisions specified in the treaty.
• The practice of issuing policies by insurance companies includes, among other things,
the issuance of reinsurance policies on standard risks and also on substandard risks
under special arrangements.
• The lumping of the different agreements under a contract has resulted in the term
known to the insurance world as 'treaties.'
• Such a treaty is, in fact, an agreement between insurance companies to cover the
different situations described: Reinsurance treaties and reinsurance policies are not
synonymous. Treaties are contracts for insurance; reinsurance policies or cessions
are contracts of insurance."

Philamlife's obligation to remit reinsurance premiums becomes fixed and definite upon the
execution of the reinsurance cession.
• Because, for every life insurance policy ceded to Airco, Philamlife agrees to pay
premium.
• It is only after a reinsurance cession is made that payment of reinsurance premium
may be exacted, as it is only after Philamlife seeks to remit that reinsurance premium
that the obligation to pay the margin fee arises.
• Upon the premise that the margin fee of P268,747.48 was collected on remittances
made on reinsurance effected on or after the Margin Law took effect, refund thereof
does not come within the coverage of the exemption circumscribed in Section 3 of the
said law.
Ruling:
For the reasons given, the petition for review is hereby denied, and the ruling of the Auditor
General of October 24, 1961 denying refund is hereby affirmed.
Costs against petitioner.
SO ORDERED.

19
Separate Opinions: Filipino people, could by 1953 be rightfully considered as an infringement of the non-impairment
clause, as the economy had in the meanwhile considerably changed for the better. There is no
Fernando, J., Concurring (Opinion copied here verbatim) clearer instance then of the process of harmonization and balancing which is incumbent upon
the judiciary to undertake whenever a regulatory measure under the police power is assailed as
Let me make clear at the outset that I join the rest of my colleagues in giving assent to violative of constitutional guarantees, whether of non-impairment, due process or equal
protection, all of which are intended to safeguard property rights.
the opinion of the Court distinguished by the usual high standard invariably associated with the
pen of Justice Sanchez. No possible objection exists either as to the statement of the legal issue In the opinion of Justice Bautista Angelo in Rutter v. Esteban, there was this categorical
posed or the result arrived at. declaration: "There are at least three cases where the Supreme Court of the United States
declared the moratorium laws violative of the contract clause of the Constitution because the
This opinion deals solely with the possible unconstitutional application of Section 3 of the period granted to debtors as a relief was found unwarranted by the contemplated
Law in view of the command of the non-impairment clause. It is undeniable that the claim made emergency." 8 Further on, in his opinion, was the following: "In addition, we may cite leading state
by petitioner Philamlife as to its applicability cannot be sustained. It is equally accurate to affirm court decisions which practically involved the same ruling and which reflect the tendency of the
that "the State may, through its police power, adopt whatever economic policy may reasonably courts towards legislation involving modification of mortgage or monetary contracts which
be deemed to promote public welfare, and to enforce that policy by legislation adapted to its contains provisions that are deemed unreasonable or oppressive." 9
purpose." In that sense necessarily, the guarantee against non-impairment as the majority
opinions so aptly state "does not bar a proper exercise of the police power." It may be out of excess caution, but I fell that no such overtone or nuance should be
considered as emanating from our decision today, the effect of which would be to diminish the
Such a statement provokes further thought. It cannot be said without rendering nugatory force and cogency of the Rutter holding insofar as the continued vitality of the non-impairment
the constitutional guarantee of non-impairment, and for that matter both the equal protection and clause in appropriate situations is concerned.
due process clauses which equally serve to protect property rights, that at the mere invocation of
the police power, the objection on non-impairment grounds automatically loses force. Here, as in 3. The opinion of the Court is strengthened and fortified by a citation of three leading
other cases where governmental authority may trench upon property rights, the process of decisions of the United States Supreme Court, Home Building & Loan Association v. Blaisdell,
10 Nebbia v. New York,11and Norman v. Baltimore and Ohio Railroad Co. 12
balancing, adjustment or harmonization is called for.
It is not then the formulation of the applicable constitutional principle which, as above All of the above decisions reflect the view that an enactment of a police power measure
stated, has been set forth with clarity and accuracy that invites further scrutiny. It is rather does not per se call for the overruling of objections based on either due process or non-
the process by which the disposition of a controversy whenever the protection of the contract impairment grounds. There must be that balancing, or adjustment, or harmonization of the
clause is sought that, to my mind, needs additional emphasis. Hence this concurring opinion. conflicting claims posed by an exercise of state regulatory power on the one hand and assertion
of rights to property, whether of natural or of juridical persons, on the other. That is the only way
1. The Constitution provides: No law impairing the obligation of contracts shall be by which the constitutional guarantees may serve the high ends that call for their inclusion in the
passed. 1 The above constitutional provision is self-explanatory. This Court had occasion once to Constitution and thus effectively preclude any abusive exercise of governmental authority.
look upon it as implementing the constitutional right to freedom of contract. 2 A similar provision
exists in the Constitution of the United States as a restriction against any state legislation of that Parenthetically, it may be observed that the above three decisions, the Blaisdell case
character. 3 It serves as an added protection to property rights. That such is its aim and intent is upholding the validity of the Minnesota Mortgage Moratorium Law, the Nebbia case sustaining
made clear by an excerpt from the opinion of Chief Justice Hughes in the leading case of Home the constitutionality of a price-fixing statute to protect the dairy industry of New York dealing as it
Building & Loan Association v. Blaisdell: 4 "In the construction of the contract clause, the debates does with such a vital but perishable commodity, as milk, and the Norman decision affirming a
in the Constitutional Convention are of little aid. But the reasons which led to the adoption of that lower court decree, deciding that the Joint Resolution of June 5, 1933 of the American Congress
clause, and of the other prohibitions of section 10 of article 1, are not left in doubt and have to the effect, that, a requirement as a payment in gold or in a particular kind of coin or currency is
frequently been described with eloquent emphasis. The widespread distress following the against public policy and that every obligation theretofore or thereafter incurred should be
revolutionary period and the plight of debtors had called forth in the States an ignoble array of discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment
legislative schemes for the defeat of creditors and the invasion of contractual obligations. is legal tender for public and private debts, all deal with emergency legislation necessitated by
Legislative interferences had been so numerous and extreme that the conference essential to the grave economic situation then confronting the United States in the thirties, faced as she was
prosperous trade had been undermined and the utter destruction of credit was threatened. "The with a major business depression. The Margin Law, 13 which called for interpretation in this case
sober people of America was convinced that some 'thorough reform' was needed which would was likewise a response to an economic problem, perhaps not as grave but sufficiently serious
'inspire a general prudence and industry, and give a regular course to the business of society.' in character.
The Federalist, No. 44. It was necessary to interpose the restraining power of a central authority But enough of generalities. In the opinion of the Blaisdell case, penned by the then Chief
in order to secure the foundations even of 'private faith.'" The framers of the Constitutional Justice Hughes, there was this understandable stress on balancing or harmonizing, which is
Convention chose to incorporate such a provision in our Constitution. Our people voiced their called for in litigations of this character. Thus: "The policy of protecting contracts against
agreement. It should not be reduced to a barren form of words. impairment presupposes the maintenance of a government by virtue of which contractual
2. Rutter v. Esteban5 lends support to such an approach. In that leading case, the relations are worthwhile - a government which retains adequate authority to secure the peace
continued operation and enforcement of the Moratorium Act 6 which allowed an eight-year period and good order of society. This principle of harmonizing the constitutional prohibition with the
of grace for the payment of pre-war obligations on the part of debtors who suffered as a necessary residium of state power has had progressive recognition in the decisions of this
consequence of World War II was, in a 1953 decision, held "unreasonable and oppressive, and Court." 14 Also to the same effect: "Undoubtedly, whatever is reserved of state power must be
should not be prolonged a minute longer" for being violative of the constitutional provision consistent with the fair intent of the constitutional limitation of that power. The reserved power
prohibiting the impairment of the obligation of contracts "and, therefore, . . . should be declared cannot be construed so as to destroy the limitation, nor is the limitation to be construed to
null and void and without effect." 7 This is one conspicuous instance then, where notwithstanding destroy the reserved power in its essential aspects. They must be construed in harmony with its
the admission earlier in the opinion that police power could be relied upon to sustain its validity other. This principle precludes a construction which would permit the State to adopt as its policy
at the time of its enactment in 1948, in view of the serious economic condition faced by the the repudiation of debts or the destruction of contracts or the denial of means to enforce them.
country upon liberation and the state of penury that then affidavit afflicted a greater portion of the But it does not follow that conditions may not arise in which a temporary restraint of enforcement
20
may be consistent with the spirit and purpose of the constitutional provision and thus be found to
be within the range of the reserved power of the State to protect the vital interests of the
community." 15 Further on, Chief Justice Hughes likewise stated: "It is manifest from this review
of our decisions that there has been a growing appreciation of public needs and of the necessity
of finding ground for a rational compromise between individual rights and public welfare." 16
It was also Chief Justice Hughes, who spoke for the Court in Norman v. Baltimore and
Ohio Railroad Co. What was emphasized there by him reflected with fidelity this particular
approach. Thus: "Despite the wide range of the discussion at the bar and the earnestness with
which the arguments against the validity of the Joint Resolution have been pressed, these
contentions necessarily are brought, under the dominant principles to which we have referred, to
a single and narrow point. That point is whether the gold clauses do constitute an actual
interference with the monetary policy of the Congress in the light of its broad power to determine
that policy. Whether they may be deemed to be such an interference depends upon an
appraisement of economic conditions and upon determinations of questions of fact. With respect
to those conditions and determinations, the Congress is entitled to its own judgment. We may
inquire whether its action is arbitrary or capricious, that is whether it has reasonable relation to a
legitimate end. If it is an appropriate means to such an end, the decision of the Congress as to
the degree of the necessity for the adoption of that means, is final." 17
It was Justice Roberts' turn to announce the opinion of the Court of Nebbia v. New York.
According to him: "The Fifth Amendment, in the field of federal activity, and the Fourteenth, as
respects State action, do not prohibit governmental regulation for the public welfare. They merely
condition the exertion of the admitted power, by securing that the end shall be accomplished by
methods consistent with due process. And the guaranty of due process, as has often been held,
demands only that the law shall not be unreasonable, arbitrary or capricious, and that the means
selected shall have a real and substantial relation to the object sought to be attained. It results
that a regulation valid for one sort of business, or in given circumstances, may be invalid for
another sort, or for the same business under other circumstances, because the reasonableness
of each regulation depends upon the relevant facts." 18 That a process of balancing or
harmonization is the medium through which the requirement of reasonableness could be met
was stressed later in his opinion by Justice Roberts in these words: "It is clear that there is no
closed class or category of business affected with a public interest, and the function of courts in
the application of the Fifth and Fourteenth Amendments is to determine in each case whether
circumstances vindicate the challenged regulation as a reasonable exertion of governmental
authority or condemn it as arbitrary or discriminatory. The phrase 'affected with a public interest'
can, in the nature of things, mean no more than that an industry, for adequate reason, is subject
to control for the public good." 19
4. If emphasis be therefore laid, as this concurring opinion does, on the pressing and
inescapable need for such an approach whenever a possible collision between state authority
and an assertion of constitutional right to property may exist, it is not to depart from what sound
constitutional orthodoxy dictates. It is rather to abide by what it compels. In litigations of this
character then, perhaps much more so than in other disputes, where there is a reliance on a
constitutional provision, the judiciary cannot escape what Holmes fitly referred to as the
sovereign prerogative of choice, the exercise of which might possibly be impugned if there be no
attempt, however light, at such an effort of adjusting or reconciling the respective claims of state
regulatory power and constitutionally protected rights.

21
[81] Artex Development Co., Inc., v Wellington Insurance Co., Inc. a third person not a party to the contract. The intent of the contracting parties to
GR No. L-29508 | June 27, 1973 benefit third party by means of such stipulations pour autrui must clearly expressed
Teehankee, J. • Artex, not being a party or privy to defendant Wellington’s reinsurance contracts,
therefore, could not directly demand enforcement of such insurance contracts.
Quick Summary: Wellington insured Artex. Artex burned. Wellington paid pero kulang. Defendant-appellant's contention that the insured should be deemed have agreed to
Reinsurers paid some of the kulang, but the contract was only between reinsurer and original look solely to the reinsurers for indemnity case of loss, since it was evident that with its
insurer (Wellington) so Artex can only make singil Wellington since Artex not party to contract of mere P500,000. paid-up capital stock, it had to secure reinsurance coverage the over
reinsurer and Wellington. Yup court said Artex can only make singil to one it has a contract with, P24-million fire insurance coverage of the policy issued by it to plaintiff-insured, is
aka Wellington. Privity of contract. So Wellington pls pay P397k manifestly untenable.

FACTS:
• Wellington insured the buildings, stocks, and machinery of Artex against loss or DISPOSITIVE:
damage by fire or lightning for P24.3M. On August 2, 1963, the properties were ACCORDINGLY, as prayed for by Artex in brief, the judgment of the lower court is affirmed, with
reinsured for P800k and on May 12, 1963, Wellington insured Artex against business the modification that the remaining liability of Wellington to Artex in accordance with the
interruption for P5.2M. "collateral agreement" of April 10, 1969 is fixed at P397,813.00 with 12% interest per annum
• September 22, 1963: everything burned down huhuhu. Notice of loss was given to until 10 April 1969, attorney's fees of 15% of the recovery, and cost of su
Wellington, total property loss amounting to P10M and business interruption loss P3M.
o Wellington paid P6.4M for the property loss and P1.8 on its business
interruption loss leaving a balance of P3.6M and P1.7M respectively
• (April 2, 1968) CFI: Wellington to pay Artex the balance of P3.6M property loss and
P1.7M business interruption loss. it is no defense for the insurer as against insured
that the insurer had obtained reinsurance from other companies to cover its liability.
• May 29, 1969: Artex filed manifestation: “in view of the Deeds of Discharge and
Collateral Agreement, the only remaining liability subject of litigation shall be that
proportion of the loss reinsured with or through Alexander and Alexander, Inc. of NY,
USA namely P397k—the rest having been paid and settled”
o Amended documents: “Artex acknowledges receipt of P3.6M paid by Minet
on behalf of Wellington in full and final settlement of all claims Artex may
have against Wellington…”
• Upon the parties' joint motion dated May 22, 1969 for temporary suspension of the
proceedings by virtue of such payment, the Court per its resolution of June 30, 1969
resolve to suspend the proceedings until July 30, 1969. The Court also noted
Wellington’s manifestation dated June 18, 1969, to the effect that "the statement in
Artex’s Manifestation that the only remaining amount of its claimant subject of litigation
is the proportion of the loss reinsured wit Alexander and Alexander, Inc. of New York,
U.S.A. in the amount of P397,813.00 because the reinsurers of Wellington made
additional partial payments, is true and correct but without prejudice to the legal
question presented in Wellington’s brief."
• August 8, 1969: Artex filed brief, prayed for affirmance of CFI judgment with
modification (amount adjusted to P397k)

ISSUE: WoN Artex’s cause of action should have been directed against the reinsurers instead of
Wellington (No)

RATIO
• Since there is no privity of contract between the insured and the reinsurers, Artex can
only move for enforcement of its insurance contract with its insurer Wellington.
• Unless there is a specific grant in, or assignment of, reinsurance contract in favor of
the insured or a manifest intention of the contracting parties to the insurance contrary
to grant such benefit or favor to the insured, not being privy to the reinsurance
contract, has no cause of action against the reinsurer. It is expressly provided in
section 91 the Insurance Act that "(T)he original insured has no interest in a contract of
insurance.”
• NC 1311: "Contracts take effect only between the parties, their assigns and
heirs" (with the heir being "not liable beyond the value of the property he received from
the decedent,") and provides for the exception of stipulations pour autrui or in favor of

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