Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc (151 SCRA 339) PDF

9/25/2017 SUPREME COURT REPORTS ANNOTATED VOLUME 151
VOL. 151, JUNE 30, 1987 339

Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc.
*
No. L-47369. June 30, 1987.
JOSEPH COCHINGYAN, JR. and JOSE K.

VILLANUEVA, petitioners, vs. R & B SURETY AND
INSURANCE COMPANY, INC., respondent.
Civil Law; Obligations and Contracts; Novation defined.—

Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one
which terminates it, either by changing its object or principal
conditions, or by substituting a new debtor in place of the old one,
or by subrogating a third person to the rights of the creditor.
Novation through a change of the object or principal conditions of
an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the
creditor is described as subjective (or personal) novation.
Novation may also be both objective and subjective (mixed) at the
same time. In both objective and subjective novation, a dual
purpose is achieved—an obligation is extinguished and a new one
is created in lieu thereof.
Same; Same; Same; Novation is never presumed.—If objective
novation is to take place, it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished,
or that the new obligation be on every point incompatible with the
old one. Novation is never presumed: it must be established either
by the discharge of the old debt by the express terms of the new
agreement,
_______________
* FIRST DIVISION.
340
340 SUPREME COURT REPORTS ANNOTATED

http://central.com.ph/sfsreader/session/0000015eb8b51c5a591c267e003600fb002c009e/t/?o=False 1/17
Cochingyan, Jr. vs. R&B Surety and lnsurance Co., Inc.
or by the acts of the parties whose intention to dissolve the old

obligation as a consideration of the emergence of the new one
must be clearly discernible.
Same; Same; Same; If old debtor is not released, no novation
occurs and the third person who assumed the obligation becomes a
codebtor or surety or a co-surety.—Again, if subjective novation by
a change in the person of the debtor is to occur, it is not enough
that the juridical relation between the parties to the original
contract is extended to a third person. It is essential that the old
debtor be released from the obligation, and the third person or
new debtor take his place in the new relation. If the old debtor is
not released, no novation occurs and the third person who has
assumed the obligation of the debtor becomes merely a co-debtor
or surety or a co-surety.
Same; Same; Same; Novation is not implied when the parties
to the new obligation expressly negated the lapsing of the old
obligation.—Neither can the petitioners anchor their defense on
implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete
incompatibility between the old and the new obligation (and
nothing else) would sustain a finding of novation by implication.
But where, as in this case, the parties to the new obligation
expressly recognize the continuing existence and validity of the
old one, where, in other words, the parties expressly negated the
lapsing of the old obligation, there can be no novation. The issue
of implied novation is not reached at all.
Same; Same; Same; Article 2079 of the Civil Code, not
applicable; Case at bar.—The Indemnity Agreement speaks of the
several indemnitors “apply[ing] jointly and severally (in solidum)
to the [R & B Surety]—to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of
[P400,000.00] for the faithful compliance of the terms and
conditions set forth in said SURETY BOND—”. This part of the
Agreement suggests that the indemnitors (including the
petitioners) would become co-sureties on the Security Bond in
favor of PNB. The record, however, is bereft of any indication that
the petitioners-indemnitors ever in fact became cosureties of R &
B Surety vis-a-vis the PNB. The petitioners, so far as the record
goes, remained simply indemnitors bound to R & B Surety but not
to PNB, such that PNB could not have directly demanded
payment of the Principal Obligation from the petitioners. Thus,
we do not see how Article 2079 of the Civil Code—which provides
in part that “[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty”—could apply in
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VOL. 151, JUNE 30. 1987 341
the instant case. The petitioner-indemnitors are, as it were,

secondtier parties so far as the PNB was concerned and any
extension of time granted by PNB to any of the first-tier obligors
(PAGRICO, R & B Surety and the trustor[s]) could not prejudice
the second-tier parties.
Same; Same; Same; Same; Theory behind Art 2079 is that an
extension of time given to the principal debtor by the creditor
without the surety’s consent would deprive the latter of his right to
pay the creditor and to be immediately subrogated to the creditor’s
remedies against the principal debtor upon original maturity.—
The theory behind Article 2079 is that an extension of time given
to the principal debtor by the creditor without the surety’s
consent would deprive the surety of his right to pay the creditor
and to be immediately subrogated to the creditor’s remedies
against the principal debtor upon the original maturity date. The
surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period. The underlying rationale is
not present in the instant case.
Same; Same; Same; Indemnity clauses held enforceable and
not against any public policy.—The last issue can be disposed of
quickly, Clauses (b) and (c) of the Indemnity Agreements (quoted
above) allow R & B Surety to recover from petitioners even before
R & B Surety shall have paid the PNB. We have previously held
similar indemnity clauses to be enforceable and not violative of
any public policy. The petitioners lose sight of the fact that the
Indemnity Agreements are contracts of indemnification not only
against actual loss but against liability as well. While in a
contract of indemnity against loss an indemnitor will not be liable
until the person to be indemnified makes payment or sustains
loss, in a contract of indemnity against liability, as in this case,
the indemnitor’s liability arises as soon as the liability of the
person to be indemnified has arisen without regard to whether or
not he has suffered actual loss. Accordingly, R & B Surety was
entitled to proceed against petitioners not only for the partial
payments already made but for the full amount owed by
PAGRICO to the PNB.
APPEAL from the decision of the Court of First Instance of

Manila, Br. 24,
The facts are stated in the opinion of the Court.

342

FELICIANO, J.:
This case was certified to us by the Court of Appeals in its

resolution dated 11 November 1977 as one involving only
questions of law and, therefore, falling within the exclusive
appellate jurisdiction of this Court under Section 17,
Republic Act 296, as amended.
In November 1963, Pacific Agricultural Suppliers, Inc.
(PAGRICO; applied for and was granted an increase in its
line of credit from P400,000.00 to P800,000.00 (the
“Principal Obligation”), with the Philippine National Bank
(PNB). To secure PNB’s approval, PAGRICO had to give a
good and sufficient bond in the amount of P400,000.00,
representing the increment in its line of credit, to secure its
faithful compliance with the terms and conditions under
which its line of credit was increased. In compliance with
this requirement, PAGRICO submitted Surety Bond No.
4765, issued by the respondent R & B Surety and
Insurance Co., Inc. (“R & B Surety”) in the specified
amount in favor of the PNB. Under the terms of the Surety
Bond, PAGRICO and R & B Surety bound themselves
jointly and severally to comply with the “terms and
conditions of the advance line [of credit] established by the
[PNB].” PNB had the right under the Surety Bond to
proceed directly against R & B Surety “without the
necessity of first exhausting the assets” of the principal
obligor, PAGRICO. The Surety Bond also provided that R
& B Surety’s liability was not to be limited to the principal
sum of P400,000.00, but would also include “accrued
interest” on the said amount “plus all expenses, charges or
other legal costs incident to collection of the obligation [of R
& B Surety]” under the Surety Bond.
In consideration of R & B Surety’s issuance of the Surety
Bond, two identical indemnity agreements were entered
into with R & B Surety: (a) one agreement dated 23
December 1963 was executed by the Catholic Church Mart
(CCM) and by petitioner Joseph Cochingyan, Jr.; the latter
signed not only as President of CCM but also in his
personal and individual capacity; and (b) another
agreement dated 24 December 1963 was executed by
PAGRICO, Pacific Copra Export Inc.
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VOL. 151, JUNE 30, 1987 343

(PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr,

Villanueva signed both as Manager of PAGRICO and in his
personal and individual capacity; Mr. Liu signed both as
President of PACOCO and in his individual and personal
capacity.
Under both indemnity agreements, the indemnitors
bound themselves jointly and severally to R & B Surety to
pay an annual premium of P5,103.05 and “for the faithful
compliance of the terms and conditions set forth in said
SURETY BOND for a period beginning x x x x until the
same is CANCELLED and/or DISCHARGED.” The
Indemnity Agreements further provided:
“(b) INDEMNITY:—To indemnify the SURETY COMPANY for

any damage, prejudice, loss, costs, payments, advances and
expenses of whatever kind and nature, including [of] attorney’s
fees, which the CORPORATION may, at any time, become liable
for, sustain or incur, as consequence of having executed the
abovementioned Bond, its renewals, extensions or substitutions
and said attorney’s fees [shall] not be less than twenty [20%] per
cent of the total amount claimed by the CORPORATION in each
action, the same to be due, demandable and payable, irrespective
of whether the case is settled judicially or extrajudicially and
whether the amount has been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED
HEREWITH:—The said indemnities will be paid to the
CORPORATION as soon as demand is received from the Creditor
or upon receipt of Court order or as soon as it becomes liable to
make payment of any sum under the terms of the above-
mentioned Bond, its renewals, extensions, modifications or
substitutions, whether the said sum or sums or part thereof, have
been actually paid or not.
We authorize the SURETY COMPANY, to accept in any case
and at its entire discretion, from any of us, payments on account
of the pending obligations, and to grant extension to any of us, to
liquidate said obligations, without necessity of previous
knowledge of [or] consent from the other obligors.
x x x x x x x x x
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY.—Any payment or disbursement made by the
SURETY COMPANY on account of the above-mentioned Bonds,
its renewals, extensions or substitutions, either in the belief that
the SURETY COMPANY was obligate[d] to make such payment

or in the belief
344

that said payment was necessary in order to avoid greater losses

or obligations for which the SURETY COMPANY might be liable
by virtue of the terms of the above-mentioned Bond, its renewals,
extensions or substitutions, shall be final and will not be disputed
by the undersigned, who jointly and severally bind themselves to
indemnify the SURETY COMPANY of any and all such payments
as stated in the preceding clauses.
x x x x x x x x x
When PAGRICO failed to comply with its Principal

Obligation to the PNB, the PNB demanded payment from
R & B Surety of the sum of P400,000.00, the full amount of
the Principal Obligation. R & B Surety made a series of
payments to PNB by virtue of that demand totalling
P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to
petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva
for reimbursement of the payments made by it to the PNB
and for a discharge of its liability to the PNB under the
Surety Bond. When petitioners failed to heed its demands,
R & B Surety brought suit against Joseph Cochingyan, Jr.,
Jose K. Villanueva and Liu Tua Beh in the Court of First
Instance of Manila, praying principally that judgment be
rendered:
“b. Ordering defendants to pay jointly and severally, unto the

plaintiff, the sum of P20,412.20 representing the unpaid
premiums for Surety Bond No. 4765 from 1965 up to 1968,
and the additional amount of P 5,103.05 yearly until the
Surety Bond No. 4765 is discharged, with interest thereon
at the rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto
the plaintiff the sum of P400,000.00 representing the total
amount of the Surety Bond No. 4765 with interest thereon
at the rate of 12% per annum on the amount of P70,000.00
which had been paid to the Phil. National Bank already,
the interest to begin from the month of September, 1966;
x x x
Petitioner Joseph Cochingyan, Jr. in his answer

maintained that the Indemnity Agreement he executed in
favor of R & B Surety: (i) did not express the true intent of
the parties thereto in that he had been asked by R & B
Surety to execute the In-
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VOL. 151, JUNE 30, 1987 345

demnity Agreement merely in order to make it appear that

R & B Surety had complied with the requirements of the
PNB that credit lines be secured; (ii) was executed so that
R & B Surety could show that it was complying with the
regulations of the Insurance Commission concerning
bonding companies; (iii) that R & B Surety had assured
him that the execution of the agreement was a mere
formality and that he was to be considered a stranger to
the transaction between the PNB and R & B Surety; and
(iv) that R & B Surety was estopped from enforcing the
Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer
that. (i) he had executed the Indemnity Agreement in favor
of R & B Surety only “for accomodation purposes” and that
it did not express their true intention; (ii) that the
Principal Obligation of PAGRICO to the PNB secured by
the Surety Bond had already been assumed by CCM by
virtue of a Trust Agreement entered into with the PNB,
where CCM represented by Joseph Cochingyan, Jr.
undertook to pay the Principal Obligation of PAGRICO to
the PNB; (iii) that his obligation under the Indemnity
Agreement was thereby extinguished by novation arising
from the change of debtor under the Principal Obligation;
and (iv) that the filing of the complaint was premature,
considering that R & B Surety filed the case against him as
indemnitor although the PNB had not yet proceeded
against R & B Surety to enforce the latter’s liability under
the Surety Bond.
Petitioner Cochingyan, however, did not present any
evidence at all to support his asserted defenses. Petitioner
Villanueva did not submit any evidence either on his
“accomodation” defense. The trial court was therefore
constrained to decide the case on the basis alone of the
terms of the Trust Agreement and other documents
submitted in evidence.
In due 1 time, the Court of First Instance of Manila,
Branch 24 rendered a decision in favor of R & B Surety,
the dispositive portion of which reads as follows;
_______________
1 With then Judge Ricardo C. Puno presiding.
346

“Premises considered, judgment is hereby rendered: (a) ordering

the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to
pay, jointly and severally, unto the plaintiff the sum of
400,000,00, representing the total amount of their liability on
Surety Bond No. 4765, and interest at the rate of 6% per annum
on the following amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28,1966;
On P4,000.00 from December 14,1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 22, 1967;
On P8,000.00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000.00 from February 26,1968
until full payment; (b) ordering said defendants to pay, jointly
and severally, unto the plaintiff the sum of P20,412.00 as the
unpaid premiums for Surety Bond No. 4765, with legal interest
thereon from the filing of plaintiff’s complaint on August 1, 1968
until fully paid, and the further sum of P4,000.00 as and for
attorney’s fees and expenses of litigation which this Court deems
just and equitable.
There being no showing the summons was duly served upon
the defendant Liu Tua Beh who has filed no answer in this case,
plaintiff’s complaint is hereby dismissed as against defendant Liu
Tua Beh without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose
K. Villanueva.
Not satisfied with the decision of the trial court, the

petitioners took this appeal to the Court” of Appeals which,
as already noted, certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had

extinguished, by novation, the obligation of R & B
Surety to the PNB under the Surety Bond which, in
turn, extinguished the obligations of the petitioners
under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of
the Surety Bond so as to release petitioners from
their obligation
347
VOL. 151, JUNE 30, 1987 347

as indemnitors thereof as they did not give their

consent to the execution of the Trust Agreement;
and
3. whether or not the filing of this complaint was
premature since the PNB had not yet filed a suit
against R & B Surety for the forfeiture of its Surety
Bond.
We address these issues seriatim.

1. The Trust Agreement referred to by both petitioners
in their separate briefs, was executed on 28 December 1965
(two years after the Surety Bond and the Indemnity
Agreements were executed) between: (1) Jose and Susana
Cochingyan, Sr., doing business under the name and style
of the Catholic Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB
official, as Trustee; and (3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as
follows:
‘WHEREAS, the TRUSTOR has guaranteed a bond in the amount

of P400,000.00 issued by the R & B Surety and Insurance Co. (R
& B) at the instance of Pacific Agricultural Suppliers, Inc.
(PAGRICO) on December 21, 1963, in favor of the BENEFICIARY
in connection with the application of PAGRICO for an advance
line of P400,000.00 to P800,000.00;
‘WHEREAS, the TRUSTOR has also guaranteed a bond issued
by the Consolacion Insurance & Surety Co.. Inc.
(CONSOLACION) in the amount of P900,000.00 in favor of the
BENEFICIARY to secure certain credit facilities extended by the
BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);
‘WHEREAS, the PAGRICO and the PACOCO have defaulted in
the payment of their respective obligations in favor of the
BENEFICIARY guaranteed by the bonds issued by the R & B and

the CONSOLACION, respectively, and by reason of said default,
the BENEFICIARY has demanded compliance by the R & B and
the CONSOLACION of their respective obligations under the
aforesaid bonds;
‘WHEREAS, the TRUSTOR is, therefore, bound to comply with
his obligation under the indemnity agreements aforementioned
executed by him in favor of R & B and the CONSOLACION,
respectively and in order to forestall impending suits by the
BENEFICIARY against said companies, he is willing as he hereby
agrees to pay the
348

obligations of said companies in favor of the BENEFICIARY in the

total amount off 1,300,000 without interest from the net profits
arising from the procurement of reparations consumer goods
made thru the allocation of WARVETS;
x x x
‘1. TRUSTOR hereby constitutes and appoints Atty. TOMAS

BESA as TRUSTEE for the purpose of paying to the
BENEFICIARY Philippine National Bank in the manner stated
hereunder, the obligations of the R&B under the R&B Bond No.
G4765 for P400,000.00 dated December 23, 1963, and of the
CONSOLACION under The Consolacion Bond No. G-5938 of June
3, 1964 for P900,000.00 or the total amount of P1,300,000.00
without interest from the net profits arising from the
procurement of reparations consumer goods under the
Memorandum of Settlement and Deeds of Assignment of
February 2, 1959 through the allocation of WARVETS;
x x x
‘6. THE BENEFICIARY agrees to hold in abeyance any action

to enforce its claims against R & B and CONSOLACION, subject
of the bond mentioned above. In the meantime that this TRUST
AGREEMENT is being implemented, the BENEFICIARY hereby
agrees to forthwith reinstate the R & B and the CONSOLACION
as among the companies duly accredited to do business with the
BENEFICIARY and its branches, unless said companies have
been blacklisted for reasons other than those relating to the
obligations subject of the herein TRUST AGREEMENT;'
x x x
“9. This agreement shall not in any manner release the R & B
and CONSOLACION from their respective liabilities under the
bonds mentioned above.’ ” (Italics supplied)
There is no question that the2

Surety Bond has not been
cancelled or fully discharged by payment of the Principal
Obligation. Unless, therefore, the Surety Bond has been
extinguished by another means, it must still subsist.
3
And
so must the supporting Indemnity Agreements.
_______________
2 R & B Surety had earlier made partial payments thereon to PNB.

3 Manila Surety & Fidelity Co. v. Villarama. 107 Phil. 891, 899 (1960).
349
VOL. 151, JUNE 30, 1987 349

We are unable to sustain petitioners’ claim that the Surety

Bond and their respective obligations under the Indemnity
Agreements were extinguished by novation brought about
by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent
one which terminates it, either by changing its object or
principal conditions, or by substituting a new debtor in
place of the old one, or4 by subrogating a third person to the
rights of the creditor. Novation through a change of the
object or principal conditions of an existing obligation is
referred to as objective (or real) novation. Novation by the
change of either the person of the debtor or of the creditor
is described as subjective (or personal) novation. Novation
may also be both objective and subjective (mixed) at the
same time. In both objective and subjective novation, a
dual purpose is achieved—an obligation 5
is extinguished
and a new one is created in lieu thereof.
If objective novation is to take place, it is imperative
that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new6
obligation be on every point incompatible with the old one.
Novation is never presumed: it must be established either
by the discharge of the old debt by the express terms of the
new agreement, or by the acts of the parties whose
intention to dissolve the old obligation as a consideration 7of
the emergence of the new one must be clearly discernible.
Again, if subjective novation by a change in the person

of the debtor is to occur, it is not enough that the juridical
relation between the parties to the original contract is
extended to a third person. It is essential that the old
debtor be released from the obligation, and the third person
or new debtor take his place in the new relation. If the old
debtor is not released, no novation occurs and the third
person who has assumed the obligation of the debtor
becomes merely a co-debtor or surety
_______________
4 De Cortes v. Venturanza, 79 SCRA 709, 722–23 (1977).

5 Id. at 723.
6 Zapanta v. Rotaeche, 21 Phil. 154, 159 (1912).
7 E.g., Tui Siuco v. Habana, 45 Phil. 707, 713 (1924); Martinez v.
Cavives, 25 Phil. 581 (1913).
350

8
or a co-surety.
Applying the above principles to the instant case, it is at
once evident that the Trust Agreement does not expressly
terminate the obligation of R & B Surety under the Surety
Bond. On the contrary, the Trust Agreement expressly
provides for the continuing subsistence of that obligation
by stipulating that “[the Trust Agreement] shall not in any
manner release” R & B Surety from its obligation under the
Surety Bond.
Neither can the petitioners anchor their defense on
implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of
complete incompatibility between the old and the new
obligation (and nothing 9 else) would sustain a finding of
novation by implication. But where, as in this case, the
parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in
other words, the parties expressly negated the lapsing of
the old obligation, there can be no novation. The issue of
implied novation is not reached at all.
What the trust agreement did was, at most, merely to
bring in another person or persons—the Trustor[s]—to
assume the same obligation that R & B Surety was bound
to perform under the Surety Bond. It is not unusual in
business for a stranger to a contract to assume obligations
thereunder; a contract of suretyship or guarantee is the

classical example. The precise legal effect is the increase of
the number of persons liable to the obligee, and 10
not the
extinguishment of the liability of 11
the first debtor. Thus, in
Magdalena Estates vs. Rodriguez, we held that:
“[t]he mere fact that the creditor receives a guaranty or accepts

payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall
be released from responsibility, does not constitute a novation,
and the creditor can still enforce the obligation against the
original debtor.”
_______________
8 Duñgo v. Lopena, 6 SCRA 1007, 1015–16 (1962).

9 Guerrero v. Court of Appeals, 29 SCRA 791, 798 (1969).
10 Duñgo v. Lopena, 6 SCRA 1007, at 1016 (1962).
11 18 SCRA 967, at 972 (1966).
351
VOL. 151, JUNE 30, 1987 351

In the present case, we note that the Trustor under the

Trust Agreement, the CCM, was already previously bound
to R&B Surety under its Indemnity Agreement. Under the
Trust Agreement, the Trustor also became directly liable to
the PNB. So far as the PNB was concerned, the effect of the
Trust Agreement was that where there had been only two,
there would now be three obligors directly and solidarily
bound in favor of the PNB: PAGRICO, R & B Surety and
the Trustor. And the PNB could proceed against any of the
three, in any order or sequence. Clearly, PNB never
intended to release, and never did release, R & B Surety.
Thus, R & B Surety, which was not a party to the Trust
Agreement, could not have intended to release any of its
own indemnitors simply because one of those indemnitors,
the Trustor under the Trust Agreement, became also
directly liable to the PNB.
2. We turn to the contention of petitioner Jose K.
Villanueva that his obligation as indemnitor under the 24
December 1963 Indemnity Agreement with R & B Surety
was extinguished when the PNB agreed in the Trust
Agreement “to hold in abeyance any action to enforce its
claims against [R & B Surety]”.
The Indemnity Agreement speaks of the several

indemnitors “apply[ing] jointly and severally (in solidum)
to the [R & B Surety]—to become SURETY upon a
SURETY BOND demanded by and in favor of [PNB] in the
sum of [P400,000.00] for the faithful compliance of the
terms and conditions set forth in said SURETY BOND—.”
This part of the Agreement suggests that the indemnitors
(including the petitioners) would become co-sureties on the
Security Bond in favor of PNB. The record, however, is
bereft of any indication that the petitioners-indemnitors
ever in fact became co-sureties of R & B Surety vis-a-vis
the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but
not to PNB, such that PNB could not have directly
demanded payment of the Principal Obligation from the
petitioners. Thus, we do not see how Article 2079 of the
Civil Code—which provides in part that “[a]n extension
granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty”—could apply in
the instant case.
352

The petitioner-indemnitors are, as it were, second-tier

parties so far as the PNB was concerned and any extension
of time granted by PNB to any of the first-tier obligors
(PAGRICO, R & B Surety and the trustor[s]) could not
prejudice the secondtier parties.
There is another reason why petitioner Villanueva’s
contention must fail. PNB’s undertaking under the Trust
Agreement “to hold in abeyance any action to enforce its
claims” against R & B Surety did not extend the maturity
of R & B Surety’s obligation under the Surety Bond. The
Principal Obligation had in fact already matured, along
with that of R & B Surety, by the time the Trust
Agreement was entered into. Petitioners’ obligations under
the Indemnity Agreements had, in turn, already similarly
matured, for those obligations were to mature “as soon as
[R & B Surety] became liable to make payment of any sum
under the terms of the [Surety Bond]—whether the said
sum or sums or part thereof have been actually paid or not.”
Thus, the situation was that precisely envisaged in Article
2079:
“[t]he mere failure on the part of the creditor to demand payment

after the debt has become due does not of itself constitute any
extension of time referred to herein.” (Italics supplied)
The theory behind Article 2079 is that an extension of time

given to the principal debtor by the creditor without the
surety’s consent would deprive the surety of his right to
pay the creditor and to be immediately subrogated to the
creditor’s remedies against the principal debtor upon the
original maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the
extended period. The underlying rationale is not present in
the instant case. As this Court has held,
“mere delay or negligence in proceeding against the principal will

not discharge a surety unless there is between the creditor and the
principal debtor a valid and binding agreement therefor, one
which tends to prejudice [the surety] or to deprive it of the power of
obtaining indemnity by presenting a legal objection for the time,
to the prosecu
353
VOL. 151, JUNE 30, 1987 353

12
tion of an action on the original security.”
In the instant case, there was nothing to prevent the

petitioners from tendering payment, if they were so
minded, to PNB of the matured obligation on behalf of R &
B Surety and thereupon becoming subrogated to such
remedies as R & B Surety may have against PAGRICO.
3. The last issue can be disposed of quickly, Clauses (b)
and (c) of the Indemnity Agreements (quoted above) allow
R & B Surety to recover from petitioners even before R & B
Surety shall have paid the PNB. We have previously held
similar indemnity clauses 13to be enforceable and not
violative of any public policy.
The petitioners lose sight of the fact that the Indemnity
Agreements are contracts of indemnification 14
not only
against actual loss but against liability as well. While in a
contract of indemnity against loss an indemnitor will not be
liable until the person to be indemnified makes payment or
sustains loss, in a contract of indemnity against liability, as
in this case, the indemnitor’s liability arises as soon as the
liability of the person to be indemnified has arisen without 15
regard to whether or not he has suffered actual loss.
Accordingly, R & B Surety was entitled to proceed against

petitioners not only for the partial payments already made
but for the full amount owed by PAGRICO to the PNB.
Summarizing, we hold that:
(1) The Surety Bond was not novated by the Trust

Agree
_______________
12 Bank of Philippine Islands v. Albaladejo y Ccmpania, 53 Phil. 141, at

145–146 (1929); underscoring supplied.
13 Security Bank v. Globe Assurance, 58 Off. Gaz. 3708 (30 April 1962);
Cosmopolitan Insurance v. Reyes, 15 SCRA 258, 261 (1965); Alto Surety v.
Aguilar, G.R. No. L-5625, March 16, 1954.
14 Guerrero v. Court of Appeals, 29 SCRA 791, 797 [1969], this case
involves an indemnification clause similar to the Indemnity Agreements
under consideration. See also Alto Surety & Insurance Co. v. Aguilar, L-
5625, March 16, 1954.
15 Guerrero v. Court of Appeals, 29 SCRA 791 (1969); Associated
Insurance & Surety Co. v. Chua, 7 SCRA 52, 54 (1963); Alto Surety &
Insurance Co. v. Andan, 100 Phil. 403, 406 (1956).
354

ment. Both agreements can co-exist. The Trust

Agreement merely furnished to PNB another party
obligor to the Principal Obligation in addition to
PAGRICO and R & B Surety.
(2) The undertaking of the PNB to “hold in abeyance
any action to enforce its claim” against R & B
Surety did not amount to an “extension granted to
the debtor” without petitioners’ consent so as to
release petitioners from their undertaking as
indemnitors of R & B Surety under the Indemnity
Agreements; and
(3) Petitioners are indemnitors of R & B Surety against
both payments to and liability for payments to the
PNB. The present suit is therefore not premature
despite the fact that the PNB has not instituted any
action against R & B Surety for the collection of its
matured obligation under the Surety Bond.
WHEREFORE, the petitioners’ appeal is DENIED for lack

of merit and the decision of the trial court is AFFIRMED in
toto. Costs against the petitioners.
SO ORDERED.
Yap (Chairman), Narvasa, Melencio-Herrera, Cruz,

Gancayco and Sarmiento, JJ., concur.
Appeal denied. Decision affirmed.
——o0o——
355
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9/25/2017 SUPREME COURT REPORTS ANNOTATED VOLUME 151

VOL. 151, JUNE 30, 1987 339

JOSEPH COCHINGYAN, JR. and JOSE K.

Civil Law; Obligations and Contracts; Novation defined.—

340 SUPREME COURT REPORTS ANNOTATED

Cochingyan, Jr. vs. R&B Surety and lnsurance Co., Inc.

or by the acts of the parties whose intention to dissolve the old

VOL. 151, JUNE 30. 1987 341

Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc.

the instant case. The petitioner-indemnitors are, as it were,

APPEAL from the decision of the Court of First Instance of

The facts are stated in the opinion of the Court.

342 SUPREME COURT REPORTS ANNOTATED

This case was certified to us by the Court of Appeals in its

VOL. 151, JUNE 30, 1987 343

(PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr,

“(b) INDEMNITY:—To indemnify the SURETY COMPANY for

the SURETY COMPANY was obligate[d] to make such payment

344 SUPREME COURT REPORTS ANNOTATED

that said payment was necessary in order to avoid greater losses

When PAGRICO failed to comply with its Principal

“b. Ordering defendants to pay jointly and severally, unto the

Petitioner Joseph Cochingyan, Jr. in his answer

VOL. 151, JUNE 30, 1987 345

demnity Agreement merely in order to make it appear that

the dispositive portion of which reads as follows;

1 With then Judge Ricardo C. Puno presiding.

346 SUPREME COURT REPORTS ANNOTATED

“Premises considered, judgment is hereby rendered: (a) ordering

Not satisfied with the decision of the trial court, the

1. whether or not the Trust Agreement had

VOL. 151, JUNE 30, 1987 347

as indemnitors thereof as they did not give their

We address these issues seriatim.

‘WHEREAS, the TRUSTOR has guaranteed a bond in the amount

BENEFICIARY guaranteed by the bonds issued by the R & B and

348 SUPREME COURT REPORTS ANNOTATED

obligations of said companies in favor of the BENEFICIARY in the

‘1. TRUSTOR hereby constitutes and appoints Atty. TOMAS

‘6. THE BENEFICIARY agrees to hold in abeyance any action

There is no question that the2

2 R & B Surety had earlier made partial payments thereon to PNB.

VOL. 151, JUNE 30, 1987 349

We are unable to sustain petitioners’ claim that the Surety

Again, if subjective novation by a change in the person

4 De Cortes v. Venturanza, 79 SCRA 709, 722–23 (1977).

350 SUPREME COURT REPORTS ANNOTATED

thereunder; a contract of suretyship or guarantee is the

“[t]he mere fact that the creditor receives a guaranty or accepts

8 Duñgo v. Lopena, 6 SCRA 1007, 1015–16 (1962).

VOL. 151, JUNE 30, 1987 351

In the present case, we note that the Trustor under the

The Indemnity Agreement speaks of the several

352 SUPREME COURT REPORTS ANNOTATED

The petitioner-indemnitors are, as it were, second-tier

“[t]he mere failure on the part of the creditor to demand payment

The theory behind Article 2079 is that an extension of time

“mere delay or negligence in proceeding against the principal will

VOL. 151, JUNE 30, 1987 353