[G.R. No. 8147. October 26, 1914.] G. URRUTIA & CO., plaintiff-appellant, vs.

AMALIA MORENO and LEON REYES, sheriff of Ambos Camarines, defendants-appellees.

Rafael de la Sierra, for appellant. Robert E. Manly, for appellee Amalia Moreno. No appearance for the other appellee. SYLLABUS 1.SUBROGATION; RIGHT OF SURETY TO REDEEM LAND SOLD ON EXECUTION. Where a judgment has been obtained jointly against a principal and his surety and real estate of the principal has been sold under execution issued upon said judgment and the surety, in order to avoid the sale of his own property, steps forward and pays the judgment, he does not thereby become entitled, under section 464 of the Code of Civil Procedure, to redeem the lands of the principal sold under execution. 2.EXECUTION SALE; PERSONS ENTITLED TO REDEEM. The only persons who are entitled to redeem real estate sold under execution are the judgment debtor, or his successor in interest in the whole or any part of the property, and a creditor having a lien by attachment, judgment, or mortgage on the property sold or on some part thereof, subsequent to that under which the property was sold.

DECISION

MORELAND, J p: This case comes before us upon an agreed statement of facts, as follows: "1.Mendezona & Co., a partnership, in liquidation, obtained a judgment on a bond in the Court of First Instance of Manila in civil cause No. 3326 against Mariano Moreno, as principal, and against Amalia Moreno, Camilo Moreno, and Rafael Serra, as sureties, for the sum of P18,154.24, with interest at 6 per cent per annum from the 11th day February, 1905; together with costs. Mendezona & Co. on the 2d day of July, 1908, by an instrument in writing, sold and transferred said judgment to G. Urrutia & Co. "2.On the 1st day of July, 1908, the sheriff sold under execution issued upon the judgment described in the preceding paragraph one house belonging to Mariano Moreno, described in the first paragraph of the complaint, to Mendezona & Co. for the sum of P2,500. At the same time and under the same execution the sheriff sold seven parcels of land belonging to said Mariano Moreno, described in the second paragraph of the complaint, to said Mendezona & Co. for the various sums stated in the complaint, amounting in all to P2,710. Under the same execution there were also sold other lands belonging to Mariano Moreno and to his sureties, among them lands belonging to Amalia Moreno, those belonging to the latter selling for P5,250. "3.The clerk of the Court of First Instance of Manila on the 24th of June, 1908, issued an execution upon a judgment in civil cause No. 4905 in an action entitled G. Urrutia & Co. vs. Mariano Moreno, said judgment being for the sum of P27,185.90, with interest from the 31st of July, 1906, at 9 per cent per annum. Said G. Urrutia & Co. presented said execution to the registrar of real estate titles of the Province of Ambos Camarines on the 24th of July of the same year, who entered in his daily registry of property at folio 483, entry No. 6411, the following annotation: " 'Don Antonio V. Herrero, agent and attorney for G. Urrutia & Co., presents at 4:30 of the afternoon of this day an execution issued in cause No. 4905 in the Court of First Instance of Manila begun by G. Urrutia & Co. as plaintiff against Mariano Moreno as defendant, a judgment wherein [which] was entered by Judge Powell in favor of the plaintiff company; said presentation of said execution being made for the purpose of making a levy

upon all of the real estate which according to the index of the registry of property belongs to said Mariano Moreno, said company desiring at the same time to levy upon and attach the right of redemption therein which said Mariano Moreno has according to section 464 of the Code of Civil Procedure in each and every one of said parcels of land which appears in his name, it appearing that all of said parcels are announced for public sale on the 27th of the present month. Nueva Caceres, 24th of July, 1908. (Sgd.) Tomas Flordeliza. Antonio V. Herrero.' "The registrar made a preventive annotation of said execution in the books and pages corresponding to the lands described in paragraphs 1 and 2 of the complaint. "4.Doa Amalia Moreno, as surety of said Mariano Moreno, and subrogated to the rights of Mendezona & Co. and its successors in interest, delivered to the defendant sheriff, Leon Reyes, the sum for which the lands of Mariano Moreno described in the complaint had been sold, together with interest at 1 per cent per month to the 16th of June and the 22d of July, 1909, and said sheriff executed to said Amalia Moreno two documents to the effect that the said Amalia Moreno had redeemed the said lands as such surety and under said subrogation within the legal period. "5.No other creditor of Mariano Moreno, nor any other person, has redeemed the said lands described in the complaint. "6.G. Urrutia & Co., on its own behalf and as successors in interest to Mendezona & Co., refused to receive the sum delivered by Amalia Moreno to the sheriff for the redemption of the lands of Mariano Moreno and refuses to recognize the validity of such redemption and alleges that Amalia Moreno had and has no right to redeem nor to retain possession of the said lands of Mariano Moreno, nor to be subrogated in the rights of Mendezona & Co. and its successor in interest. "7.Doa Amalia Moreno is now and has been since the month of July, 1909, in possession of the lands described in the complaint, pretending that she is the owner of the same and alleging that having been obliged to pay as surety of said Mariano Moreno the sum of P5,796.66 for the satisfaction of the judgment against him, she was subrogated in all of the rights which pertain to Mendezona & Co. or to its assigns with regard to the said lands to the extent of the money paid by her. "8.The amount paid by Amalia Moreno for the redemption of said lands described in the complaint is in the hands of the defendant sheriff, Leah Reyes." Upon this statement the learned trial court held that Amalia Moreno was entitled under the law to redeem the premises belonging to Mariano Moreno which were sold under the judgment held by Mendezona & Co. This appeal is from that judgment. The question presented for our determination is whether or not a surety against whom a judgment has been obtained jointly with the principal can redeem the real estate belonging to the principal which was sold by virtue of an execution issued upon said judgment, the surety having been obliged to contribute to the payment thereof. It does not appear from the record whether the judgment was fully satisfied by the sale of the properties described in the stipulation of facts. Whether it was or not we do not consider important, although the claim that it was not perhaps gave rise to the contention that the case of Somes vs. Molina (15 Phil. Rep., 133), is decisive of this case. Whether the judgment was fully paid by the sale under execution does not affect in any way the right to redeem, whereas in the Somes case it was the decisive question. In that case we held that subrogation rests upon purely equitable grounds and will not be enforced against superior equities; and that it ought not to be allowed to the plaintiff in that case because it would work an injustice to the creditor. For the purpose of showing its inapplicability to the present case, we incorporate a memorandum which, while not added as a part of the opinion in that case, was before the court and was part of the reasoning by which the final decision was reached. "Subrogation ought not to be allowed to the plaintiff because it would work an injustice to the creditor. The defendant Molina, in making Somes pay under the appeal bond, merely took advantage of a right; which Somes gave him. Can Molina, in thus exercising that legal right, be made to suffer in his relations with De la Riva? Can one be prejudiced for rightfully taking what the law gives him? No act of Molina injured Somes. If the latter has suffered any loss it is because of his own act in signing the bond in question. What Molina did was merely to take advantage of a right which Somes had already given him and for the exercise of which Molina had already paid a valuable and adequate consideration. The bond in question, so far as Somes is concerned, is not without consideration; the consideration for the principal indebtedness of De la Riva is the consideration also for the secondary obligation of Somes as surety. Molina had a right, except for the intervention of the law of appeal, to take advantage of judgment No. 3402, which he had secured against De la Riva, and proceed to collect it forthwith. Every presumption was in favor of its validity and he had the undoubted right to proceed at once to

its collection, except for the code provisions relating to appeals. They provide that when a judgment-debtor shall appeal from the judgment against him, the judge of the court from which the appeal is taken may require him to give a bond, with sufficient sureties, conditioned that, in case the judgment is affirmed by the appellate court, he will see that it is paid. This bond is required by the judge when he believes it necessary for the protection of the judgment-creditor. By this provision the judgment-creditor, by being obliged to forbear collection of the judgment he has, is deprived of certain rights, and, in compensation for and the protection of those rights, he is given a bond by the judgment-debtor by which he shall be assured of the payment of his judgment should it be affirmed by the appellate court. All this indicates clearly and necessarily that the law regards the forbearance of the judgment-creditor as a valuable and adequate consideration for the obligation of the judgment-debtor and the sureties incurred under the bond in question. If this were not so, and, if the judgment-creditor were not, by his forbearance, giving a valuable consideration, then the law would be giving him something for nothing, in that it would be requiring his protection at the hands of the judgment-debtor and his sureties without the judgmentcreditor doing anything to warrant it. This the law never does. That forbearance to prosecute a judgment to collection is a valuable and adequate consideration upon which to found an obligation is recognized in the jurisprudence of every country, and the law, in requiring a bond on appeal as a prerequisite to this forbearance, recognizes fully the valuable and adequate character of such forbearance as a consideration for that bond. "The result of all of this is that, when the bond is executed and the creditor is obliged to forego the prosecution of his judgment, the transaction is closed; the creditor has paid his consideration and, as a result thereof, the surety has, incurred his obligation. Now, to compel the surety to fulfill that obligation does not require any new consideration on the part of the judgment-creditor; nor does it place him under a new or additional obligation. The consideration for what the surety does when he pays was given by the creditor when he withheld the prosecution of his judgment, even though that was done by mandate of the law. It ought to be evident that no new obligation is incurred by the creditor in requiring the surety to do the very thing for which the original consideration was given by the creditor. Therefore, if subrogation is allowed in this case and the surety is permitted to share with the creditor in the debtor's property pro rata, we are making the creditor pay again for the privilege of collecting from the surety on an obligation the consideration of which had already once been paid by the creditor. When the creditor withholds his rights to collect and awaits the law's delays, and the resulting risks, for an opportunity to prosecute the appeal from the judgment which he has obtained in order that he may realize upon it, and incurs the expenses incident thereto, is it then just to say to him that he must divide the benefits which the law gives him for this waiting, this expense, and this risk, with the very man who has caused it all? The weapon which the law gave the creditor for his own protection ought not now to be placed in the hands of his enemies for use against him. "When the creditor's obligation against the debtor is fully paid, then the surety will have his subrogation to the rights of the creditor in this judgment, and he may then take it and collect it against the debtor whenever opportunity may offer. "It is evident that if subrogation is allowed in this case the creditor will be injured. He has already collected judgment No. 3402 from the plaintiff's surety, Somes. This he had a right to do because he had long before paid the consideration for the privilege of doing that very thing. There remains of the judgment-debtor's property not enough to pay the two remaining judgments now held by the judgment-creditor against him. If now Somes is allowed to be subrogated and share under judgment No. 3402 with the judgment-creditor in said property, pro rata, it is evident that the creditor will be injured; for, the property of the debtor, which ought to be divided between two judgments, will be divided among three. Bearing in mind the fact that the creditor has already paid for the privilege of making Somes pay judgment No. 3402, why should he pay again for that same privilege by permitting Somes to share in property which rightfully belongs to him?" This additional exposition of the Somes case shows that it is not authority in the case before us. Here the question is one of redemption rather than one between the creditor and the surety. The former right is granted by statute and its provisions define specifically and clearly the persons who are entitled to exercise it. Section 464 of the Code of Civil Procedure reads: "Who may redeem. Property sold subject to redemption, as provided in the last section, or any part sold separately, may be redeemed in the manner hereinafter provided, by the following persons, or their successors in interest: "1.The judgment debtor, or his successor in interest in the whole or any part of the property; "2.A creditor having a lien by attachment, judgment, or mortgage on the property sold, or on some part thereof, subsequent to that on which the property was sold.

"Persons mentioned in the second subdivision of this section are termed redemptioners." From these provisions it is clear that in order to be able to redeem, the defendant Amalia Moreno must be either the judgment-debtor or his successor in interest or must hold a lien by judgment or mortgage upon the premises to be redeemed, which lien is subsequent to the lien of the judgment under which the property to be redeemed was sold. Passing without comment the word "lien," as it has been defined by this court, we observe instantly when we ask the question whether or not the defendant Amalia Moreno falls within the first class entitled under the section to redeem, that she does not fall within that class unless her contribution to the payment of the judgment against her principal is sufficient in law to substitute her in the place of the judgment-debtor or to make her his successor in interest to the extent of conferring upon her the right to redeem We are of the opinion that she does not occupy the place of the judgment-debtor in this or any sense. The right of redemption is a right belonging to the debtor and cannot be taken away from him without authorization of law. If the surety upon payment of the judgment were to be substituted in his place and allowed to redeem as such, the right of the judgmentdebtor would be thereby destroyed or, better said, would be exercised by another and he would be unable to exercise it thereafter himself. The surety has no right directly to take the property of his principal whose debt he has paid or assisted in paying unless he is expressly authorized to do so by law or has pursued the courses necessary under the law to that end. Courts are not authorized, generally speaking, to take rights from one person and give them to another without notice to the person from whom they are taken and an opportunity to be heard. Not being the judgment debtor or his successor in interest in short, not representing him in such a way as to be able to exercise his right relative to the redemption, defendant's claim under the first class must fail. We arrive at the same conclusion when we consider whether the defendant falls within the second class. As a general proposition it is true that when a surety pays a. judgment which has been obtained jointly against him and his principal, he is subrogated to the rights of the creditor (not the debtor) in the judgment and may execute that judgment against his principal in the same manner and with the same effect as the creditor could have executed it; and it is a rule laid down by some courts that the judgment is kept alive and subsists as a lien in favor of the surety paying it. This principle of subrogation, however, does not aid the surety in this case. The judgment, to the rights in which she is subrogated, is the same judgment that the creditor held. Its lien is the same as to time. The code, however, requires, before the right of redemption can be exercised, that the person who exercises it must be the owner of a judgment the lien of which issubsequent to the Judgment under which the sale of the property to be redeemed was made. This is the particular provision which prevents the defendant from exercising the right of redemption under the second class even though we concede to her the benefits of the widest doctrine of subrogation. The language of the statute is plain. It needs no interpretation or construction. Our duty, then, is simply to apply it. Applying it, we exclude the defendant from the class known as redemptioners. It is, therefore, adjudged that the defendant Amalia Moreno has no right to redeem the lands belonging to Mariano Moreno sold under judgment obtained against him by Mendezona & Co. and referred to in the stipulation of facts; and that the attempt to redeem and all of the acts performed in relation thereto by said defendant are without force or effect against the plaintiff. The judgment is reversed, without costs in this instance. Nothing in this decision shall be understood as preventing Amalia Moreno from redeeming her own lands that were sold under execution, provided she has not done so, and her right to do so still subsists.

[G.R. No. L-43862. January 13, 1989.] MERCANTILE INSURANCE CO., INC., plaintiff-appellee, vs. FELIPE YSMAEL, JR., & CO. INC., defendants-appellants. SYLLABUS 1.CIVIL LAW; CREDIT TRANSACTION; INDEMNITY AGREEMENT; STIPULATION ALLOWING SURETY TO RECOVER EVEN BEFORE THE CREDITOR IS PAID, ENFORCEABLE. The question as to whether or not under the Indemnity Agreement of the parties, the Surety can demand indemnification from the principal, upon the latter's default, even before the former has paid to the creditor, has long been settled by this Court in the affirmative. The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors." (Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA 528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625, March 16, 1954). 2.ID.; OBLIGATIONS AND CONTRACTS CONSIDERED LAW BETWEEN THE CONTRACTING PARTIES SO LONG AS THEY ARE NOT CONTRARY TO LAW; MORALS, GOOD CUSTOMS. Contracts are respected as the law between the contracting parties (Henson v.

IAC, 148 SCRA 11 [1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197 [1980]) It is settled that the parties may establish such stipulations, clauses, terms and conditions as they may want to include, and as long as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them (Herrera v. Petrophil Corp., 146 SCRA [1986]. 3.ID.; ID.; CONTRACTS INTERPRETED ACCORDING TO THEIR LITERAL MEANING. Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intentment. It is a basic and fundamental rule in the interpretation of contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of the stipulation shall control. 4.ID.; ID.; OBLIGATIONS OF THE PARTIES UNDER AN INDEMNITY AGREEMENT. The indemnity agreement was not executed for the benefit of the creditors; it was rather for the benefit of the surety and if the latter thought it necessary in its own interest to impose this stipulation, and the indemnitors voluntarily agreed to the same, the court should respect the agreement of the parties and require them to abide by their contract. (Security Bank v. Globe Assurance, 107 Phil. 733 [1960]. 5.ID.; ID.; PRINCIPAL DEBTOR IN INDEMNITY AGREEMENT, JOINTLY AND SEVERALLY LIABLE. It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are simultaneously the same persons who executed the Indemnity Agreement. Thus, the position occupied by them is that of a principal debtor and indemnitor at the same time, and their liability being joint and several with the plaintiff-appellee's, the Philippine National Bank may proceed against either for fulfillment of the obligation as covered by the Surety bonds. There is, therefore, no principle of guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not apply. 6.ID.; ID.; ATTORNEYS FEES; AWARD OF 15% IN INDEMNITY AGREEMENT, RULED REASONABLE. As to the attorney's fees, it has been squarely ruled by this Court that the award of fifteen (15) per cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, 15 SCRA 528 [1965]).

DECISION

BIDIN, J p: This is an appeal from the decision * dated October 30, 1971 of the Court of First Instance of Manila (now Regional Trial Court) in Civil Case No. 82168 entitled "Mercantile Insurance Co., Inc. (herein referred to as the plaintiff-appellee) vs. Felipe Ysmael, Jr. &. Co., Inc., et al (hereinafter referred to as the defendant-appellant) ordering defendants-appellants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr., to pay jointly and severally to the plaintiff the sum of P100,000.00 plus 15% thereof as attorney's fees, and costs. On appeal to the Court of Appeals, this case which involves only a question of law, was certified to this Court. The factual milieu of this case as found by the trial court is as follows: "Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed an application for an overdraft line of P1,000,000.00 and credit line of P1,000,000.00 with the Philippine National Bank. The latter was willing to grant credit accommodation of P2,000,000.00 applied for provided that the applicant shall have filed a bond in the sum of P140,000.00 to guarantee the payment of the said amount. Accordingly, on March 6, 1967, Felipe Ysmael, Jr. & Co., Inc., represented by Felipe Ysmael filed surety bond No. G(16) 007 of Mercantile Insurance Co., Inc. in the sum of P100,000.00 (Exh. A). On December 4, 1967, Felipe Ysmael Jr. & Co., Inc. as principal and the Mercantile Insurance Co., Inc. executed another surety bond MERICO Bond No. G(16)0030 in the sum of P40,000.00. It is the condition in both bonds that if the principal Felipe Ysmael, Jr. & Co., Inc. shall perform and fulfill its undertakings with the Philippine National Bank, then these surety bonds shall be null and void (Exh. B). "As security and in consideration of the execution of the surety bonds, exhibits A and B, Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, Inc. represented by Felipe Ysmael, Jr. as president and in his personal capacity executed with the plaintiff Mercantile Insurance Co., Inc. an indemnity agreement (Exh. D) wherein the defendants Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. bound themselves jointly and severally to indemnify the plaintiff, hold save it harmless from and against any and all payments, damages, costs, losses,

penalties, charges and expenses which said company as surety (relative to MERICO Bond No. 0007) shall incur or become liable to pay plus an additional amount as attorney's fees equal to 20% of the amount due to the company, Paragraph 3 of the indemnity agreement expressly provides: cdrep '3)ACCRUAL OF ACTION: Notwithstanding the provisions of the next preceding paragraph, where the obligation involves a liquidated amount for the payment of which the company has become legally liable under the terms of the obligation and its suretyship undertaking or by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY a term or extension for payment of the latter's demand the full amount necessary to discharge the COMPANY's aforesaid liability irrespective of whether or not payment has actually been made by the COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the undersigned or either of them by court action or otherwise to enforce payment even prior to making payment to the obligee which may hereafter be done by the COMPANY.' "On September 6, 1967, Gabriel Daza, Jr., Edgardo L. Tordesillas and Augusto Torres in their official capacities and the defendants executed another indemnity agreement (Exh. E) with the plaintiff in consideration of the surety bond (referring to MERICO Bond No. G (16) 0030. In the indemnity agreement (Exh. E) the same provisions of paragraph 3 found in exhibit D is provided for. "By agreement dated September 5, 1967 (Exh. C), the amount of the Bond was reduced by P40,000.00 so that the total liability of the plaintiff to the Philippine National Bank in view of the aforesaid reduction is P100,000.00 (Exh. C), P60,000.00 on Surety Bond No. 0007 plus P40,000.00 on Surety Bond No. 0030. "In view of the failure of the defendants to pay the overdraft and credit line with the Philippine National Bank demanded from the Mercantile Insurance Co., Inc. settlement of its obligation under surety bonds No. (G-16) 0007 for P60,000.00 which expired on March 6, 1970 and No. G (-16) 0030 for P40,000.00 which expired since September 4, 1968 (Exh. P) otherwise drastic measures for collection to protect the interest of the bank would be taken. Attached to the demand letter is a statement of account. "By letter of December 17, 1970, the Legal Department of plaintiff company wrote a letter of demand to the defendants (Exhs. G and H) inviting their attention to the letter of demand of the Philippine National Bank sent to the plaintiff and demanding from the defendants the settlement of said account. These letters were received as shown by the registry return receipts (Exhs. G-2 and H-2). Since the defendants failed to settle their obligation with the Philippine National Bank, on February 10, 1971, plaintiff brought the present action." Instead of filing their answer, the defendants (appellants herein) filed a motion to DISMISS, which motion was subsequently denied. Thereafter, the defendants filed their answer and the case was set for pre-trial. On the date scheduled for pre-trial, the defendants and their counsel failed to appear, thus on motion of the plaintiff, they were declared in default and plaintiff was allowed to present its evidence ex-parte. Upon motion for reconsideration filed by the defendants, the case was ordered re-opened and the case was scheduled for reception of defendant's evidence. Thereafter, the parties were required to submit their respective memoranda and the case was submitted for decision. On October 30, 1971, the trial court rendered its decision, the dispositive part of which reads: cdrep "WHEREFORE, in view of the foregoing considerations, judgment is rendered for the plaintiff and the defendants are ordered to pay jointly and severally the plaintiff the sum of P100,000.00 plus the further sum of 15% thereof in the concept of reasonable attorney's fees and the costs. "Plaintiff upon payment of this judgment, shall deliver the sum of P100,000.00 to the Philippine National Bank in partial satisfaction of the obligation of the defendants to said Bank.

"SO ORDERED." (Record on Appeal, p. 96) Said decision was appealed to the Court of Appeals on questions of facts and law. Acting on the appeal and finding that the only question raised therein involves a question of law, the Court of Appeals by resolution ** dated April 29, 1976, certified the same to this Court, for proper disposition (Rollo, pp. 62-63).

This Court, thru its First Division by Resolution dated May 31, 1978, resolved to have the case docketed and declared the same submitted for decision (Rollo, p. 65). The defendants-appellants raised the following assignments of errors in the Court of Appeals: I THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR LACK OF CAUSE OF ACTION, THE COMPLAINT BEING PREMATURE BECAUSE THE PLAINTIFF HAS PAID NOTHING ON THE SURETY BONDS AND HAS SUFFERED NO ACTUAL DAMAGE. II "THE LOWER COURT ERRED IN NOT DECLARING THAT PARAGRAPH 3 OF THE INDEMNITY AGREEMENTS IS VOID. III CONSEQUENTLY, THE TRIAL COURT ERRED IN ORDERING THE DEFENDANTS-APPELLANTS TO PAY JOINTLY AND SEVERALLY TO THE PLAINTIFF THE SUM OF P100,000.00 PLUS THE FURTHER SUM OF 15% THEREOF IN THE CONCEPT OF REASONABLE ATTORNEY'S FEES AND THE COSTS." (Brief for Defendants-Appellants, CA, pp. 1-2). The crux of the controversy is whether or not the surety can be allowed indemnification from the defendants-appellants, upon the latter's default even before the former has paid to the creditor. cdrep There is no dispute that the overdraft line of P1,000,000.00 and the credit line of P1,000,000.00 applied for by the defendant was granted by the Philippine National Bank on the strength of the two surety bonds denominated as MERICO Bond No. G(16) 0007 for one hundred thousand pesos (Exh. A) and MERICO Bond No. G(16) 0030 for forty thousand pesos (Exh. B), later reduced as above stated on September 5, 1967 (Exh. C) by P40,000.00 or a total amount of P100,000.00. As security and in consideration of the execution of the surety bonds, the defendants executed with the plaintiff identical indemnity agreements (Exhs. D and E) which provide, among others that payment of indemnity or compensation may be claimed irrespective of whether or not plaintiff company has actually paid the same. Defendants-appellants maintain that the complaint is premature and that paragraph 3 of the indemnity agreements is void for being contrary to law, public policy and good morals. They argued that to allow plaintiff surety (appellee herein) to receive indemnity or compensation for something it has not paid in its capacity as surety would constitute unjust enrichment at the expense of another. (Brief for Defendants-Appellants, CA, p. 6). To bolster their contention, defendants-appellants argue that it is an indispensable requisite for an action to prosper, that the party bringing the action must have a cause of action against the other party; and that for a cause of action to be ripe for litigation, there must be both wrongful violation and damages; all of which are not present in the case at bar because plaintiff-appellee has not suffered any injury whatsoever, notwithstanding the demand sent to it by the Philippine National Bank, nor has plaintiff-appellee made a single actual payment to said bank. Hence, to allow plaintiff-appellee to recover from them something which it has not paid in its capacity as surety would violate the fundamental principle which states NEMOCUM ALTERIUS DETRIMENTO LOCOPLETARI POTEST (No person should unjustly enrich himself at the expense of another). [Defendants-Appellants' Brief, pp. 7-8; 49]. The question as to whether or not under the Indemnity Agreement of the parties, the Surety can demand indemnification from the principal, upon the latter's default, even before the former has paid to the creditor, has long been settled by this Court in the affirmative. It has been held that: "The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors." (Cosmopolitan Ins. Co., Inc. v. Reyes, 15 SCRA 528 [1965] citing; Security Bank v. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; Alto Surety and Ins. Co., v. Aguilar, et al., G.R. No. L-5625, March 16, 1954).

Hence, appellants contention that the action of the appellee (surety company) is premature or that the complaint fails to state a cause of action because the surety has not paid anything to the bank, cannot be sustained (Cosmopolitan Ins. Co., Inc. v. Reyes, supra). In fact, such contention is belied not only by the allegations in the complaint but also by the agreement entered into between the appellants and the appellee in favor of the bank. The records show that the cause of action is distinctly set forth in the complaint, the pertinent portion of which states: "6.That defendants, by virtue of the two Surety Bonds (Annexes "A" and "B") were extended by the Philippine National Bank, a credit accommodation in the sum of TWO MILLION (P2,000,000.00) PESOS; "7.That the Philippine National Bank is demanding and collecting from the plaintiff the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS which is the defendants' account with the said bank that is secured and covered by the above-mentioned bonds (Annexes "A" and "B"); "8.That under the terms of the Indemnity Agreements (Annexes "D" and "E") more particularly paragraph 3, plaintiff may forthwith proceed against the defendants to impose payment, even prior to making payment to the Philippine National Bank; "9.That notwithstanding series of demands made by plaintiff, the defendants failed and refused to pay the Philippine National Bank the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS;" "10.That on account of defendants' default, plaintiff becomes liable to the Philippine National Bank in the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS;" (Record on Appeal, p. 2.) Correspondingly, it is readily apparent that said cause of action was derived from the terms of the Indemnity Agreement, paragraph 3 thereof, as above quoted. By virtue of the provisions of the Indemnity Agreement, defendants-appellants have undertaken to hold plaintiff-appellee free and harmless from any suit, damage or liability which may be incurred by reason of non-performance by the defendants-appellants of their obligation with the Philippine National Bank. The Indemnity Agreement is principally entered into as security of plaintiff-appellee in case of default of defendants-appellants; and the liability of the parties under the surety bonds is joint and several, so that the obligee PNB may proceed against either of them for the satisfaction of the obligation. (Brief for Plaintiff-Appellee, p. 7). prcd II Defendants-appellants have, by virtue of the Indemnity Agreement, given the plaintiff-appellee the prerogative of filing an action even prior to the latter's making any payment to the Philippine National Bank. Contracts are respected as the law between the contracting parties (Henson v. IAC, 148 SCRA 11 [1987], citing Castro v. CA, 99 SCRA 722 [1980] and Escano v. CA, 100 SCRA 197 [1980]) It is settled that the parties may establish such stipulations, clauses, terms and conditions as they may want to include, and as long as such agreements are not contrary to law, morals, good customs, public policy or public order, they shall have the force of law between them (Herrera v. Petrophil Corp., 146 SCRA [1986]. Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intentment (Ibid.). It is a basic and fundamental rule in the interpretation of contracts that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of the stipulation shall control. In the case at bar, there is no dispute as to meaning of the terms of the Indemnity Agreement. The only bone of contention is whether or not such terms are null and void as defendants-appellants would have this Court declare. A careful analysis of the contract in question will show that the provisions therein do not contravene any law or public policy much less do they militate against the public good. In fact, as shown above, they are fully sanctioned by well-established jurisprudence. Having voluntarily entered into such contract, the appellants cannot now be heard to complain. Their indemnity agreement have the force and effect of law. Elucidating further on the obligations of the parties in agreements of this nature, this Court ruled:

". . . The indemnity agreement was not executed for the benefit of the creditors; it was rather for the benefit of the surety and if the latter thought it necessary in its own interest to impose this stipulation, and the indemnitors voluntarily agreed to the same, the court should respect the agreement of the parties and require them to abide by their contract." (Security Bank v. Globe Assurance, 107 Phil. 733 [1960]. III Finally, the trial court did not err in ordering defendants-appellants to pay jointly and severally the plaintiff the sum of P100,000.00 plus 15% as attorney's fees. It must be stressed that in the case at bar, the principal debtors, defendants-appellants herein, are simultaneously the same persons who executed the Indemnity Agreement. Thus, the position occupied by them is that of a principal debtor and indemnitor at the same time, and their liability being joint and several with the plaintiff-appellee's, the Philippine National Bank may proceed against either for fulfillment of the obligation as covered by the Surety bonds. There is, therefore, no principle of guaranty involved and, therefore, the provision of Article 2071 of the Civil Code does not apply. Otherwise stated, there is no more need for the plaintiffappellee to exhaust all the properties of the principal debtor before it may proceed against defendants-appellants. As to the attorney's fees, it has been squarely ruled by this Court that the award of fifteen (15) per cent for cases of this nature is not unreasonable (Cosmopolitan Insurance Co., Inc. v. Reyes, supra).

WHEREFORE, the decision appealed from is hereby AFFIRMED.

[G.R. No. L-20199. November 23, 1965.] THE COSMOPOLITAN INSURANCE CO., INC., plaintiff-appellee, vs. ANGEL B. REYES, defendant-appellant.

M. Perez Cardenas and Apolonio Abola for plaintiff-appellee. Francisco de la Fuente for defendant-appellant. SYLLABUS 1.SURETYSHIP; RIGHT OF SURETY TO DEMAND FROM THE INDEMNITORS EVEN BEFORE PAYING THE CREDITORS. The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors. (Security Bank vs. Globe Assurance, 58 Off. Gaz. 3708, April 30, 1962.) 2.ATTORNEY'S FEES; FIFTEEN PERCENT ATTORNEY'S FEES, REASONABLE. The award of fifteen (15) per cent attorney's fees in the present case is not unreasonable. In the case of Cruz vs. Court of Industrial Relations, et al., G. R. No. L-18277, August 31, 1963, this Court sustained the award of attorney's fees to the petitioner computed at thirty per cent (30%) as reasonable.

DECISION

REGALA, J p:

This is an appeal from a decision of the Court of First Instance of Manila and certified to us by the Court of Appeals as it involves only a question of law, ordering appellant Angel B. Reyes to pay the appellee Cosmopolitan Insurance Co., Inc., the sum of P10,645.38 plus fifteen (15) per cent thereof, for attorney's fees. Indeed, the question presented is whether, under the Indemnity Agreement of the parties, the appellee, as surety, can demand indemnification from appellant Reyesas principal, upon the latter's default, even before the former has paid to the creditor. It appears that appellee Cosmopolitan Insurance Co., Inc., filed a bond in favor of the Collector of Internal Revenue to secure the payment in stated installments of the total amount of P25,422.85, which appellant Reyes owed for income tax for the years 1950, 1951, 1952 and 1953. In consideration of the bond, appellant Reyes in turn signed an Indemnity Agreement whereby he bound himself, among other things, "2)INDEMNITY: To indemnify the COMPANY upon its demand and keep it indemnified for and to hold and save it harmless from and against, any and all payments, damages, costs, losses, penalties, charges and expenses of whatever kind and nature which the COMPANY as such surety shall or may, at any time make, sustain, incur and/or suffer or for which it has or may become liable to the obligee, and to pay an additional amount as attorney's fees equal to 20% of the amount due to the COMPANY by virtue hereof which in no case shall be less than P50.00 and which shall be payable whether or not the case be extra-judicially settled, it being understood that demand made upon anyone of the undersigned herein is admitted as demand made on all of the signatories hereof; "3)ACCRUAL OF ACTION: Notwithstanding the provisions of the next preceding paragraph where the obligation involves a liquidated amount for the payment of which the COMPANY has become legally liable under the terms of the obligation and its suretyship undertaking, or by the demand of the obligee or otherwise and the latter has merely allowed the COMPANY a term or extension for payment of the latter's demand the full amount necessary to discharge the COMPANY'S aforesaid liability irrespective of whether or not payment has actually been made by the COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the undersigned or either or them by court action or otherwise to enforce payment, even prior to making payment to the obligee which may hereafter be done by the COMPANY;" It is not denied that because of appellant Reyes' failure the amount of P10,645.38 became due and that, as a result, appellee Cosmopolitan Insurance Co., Inc., became liable on its bond. Appellant Reyes assails, however, the validity of paragraph 3 of the Indemnity Agreement, which he contends is contrary to public policy. He argues that under Article 2071 of the Civil Code, when the debt has become demandable "the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor" but not an action for indemnification. Elucidating further, the appellant raises the point that there is absolutely no authority in any existing law allowing any person in his capacity as guarantor, as in this case, to obtain, to recover, or to receive by way of money judgment from the debtor the amount due to the creditor. The appellant further argues: What security does appellant have, once the amount has been received by appellee from appellant, that the same would be paid to the Collector of Internal Revenue? All these points are squarely answered by the doctrine or principle laid down by this Court in the case of Security Bank vs. Globe Assurance, 58 Off. Gaz. 3708 (April 30, 1962), where a similar indemnity agreement of the parties is involved. In this case, the Supreme Court held that: "The stipulation in the indemnity agreement allowing the surety to recover even before it paid the creditor is enforceable. In accordance therewith, the surety may demand from the indemnitors even before paying the creditors." In the case of Alto Surety and Insurance Co., Inc. vs. Aguilar, et al., G. R. No. L-5625, March 16, 1954, the Court laid down the following ruling:

"The contention of appellant's that the action of appellee (surety company) is premature or that complaint fails to state a cause of action because it does not allege that the appellee has paid to the bank the balance of their obligation, cannot be sustained. This is belied not only by the allegations of the complaint but also by the agreement entered into between the appellants and the appellee in favor of the bank. Thus it appears from the complaint that the renewed promissory note became due and payable on May 27, 1950 without the spouses having paid any amount on the account in spite of the repeated demands, as a consequence of which plaintiff surety became liable to pay the bank the amount of P1,150.00 plus interests, under the terms of the Indemnity Agreement, the liability of the former as surety became immediately demandable upon occurrence of the latter's (spouses) default." Even after analyzing the provisions of the contract entered into between the parties, we are of the opinion that they do not in any way militate against the public good or that they are contrary to the policy of the law. The other point raised by the appellant is that the attorney's fees awarded to the plaintiff are unreasonable or unconscionable. This is also untenable. It is significant that the appellant did not raise the issue of attorney's fees in his answer. Furthermore, we are of the opinion that the award of fifteen (15) per cent attorney's fees in this case is not unreasonable. In fact, in one case before the court of Industrial Relations (Cruz vs. Court of Industrial Relations et al., G.R. No. L-18277, August 31, 1963), this Court sustained the award of attorney's fees to the petitioner computed at thirty (30) per cent, as reasonable. IN VIEW OF THE FOREGOING, the decision of the Court of First Instance is hereby affirmed. Without costs. Bengzon, C . J ., Bautista Angelo, Concepcion, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ ., concur. Barrera and Reyes, J.B.L., JJ ., are on leave.

[G.R. No. L-36488. July 25, 1983.] CAPITAL INSURANCE SURETY CO., INC., herein represented by its General Agent, the PAN AMERICAN INSURANCE AGENCIES, INC.,plaintiff-appellant, vs. RONQUILLO TRADING and JOSE L. BAUTISTA, defendants-appellees.

Aristorenas, Relova & Enriquez Law Office for plaintiff-appellant. Josefino Corpuz for defendants-appellees. SYLLABUS 1.SURETYSHIP; SURETY; RIGHTS AND LIABILITY DEPENDENT UPON THE STIPULATION IN THE SURETY BOND; CASE AT BAR. It must be noted that in the surety bond it is stipulated that the "Liability of surety on this bond will expire on May 5, 1963 and said bond will be cancelled 15 days after its expiration, unless surety is notified of any existing obligations thereunder." Under this stipulation the bond expired on the stated date and the phrase "unless surety is notified of any existing obligations thereunder" refers to obligations incurred during the term of the bond. 2.ID.; ID.; TERMINATION OF CONTRACT UNDER ITS TERMS; PAYMENT OF PREMIUM BY PRINCIPAL CEASES DESPITE PENDENCY OF SUIT TO ENFORCE LIABILITY OF SURETY BOND THAT ACCRUED BEFORE ITS EXPIRATION. Obviously, the duration of the bond is for twelve (12) months or fraction thereof, while this bond or any renewal or substitution is in effect." Since the appellees opted not to renew the contract they cannot be obliged to pay the premiums. More specifically, where contract of surety is terminated under its terms, the liability of the principal for premiums after such termination ceases notwithstanding the pendency of a lawsuit to enforce a liability that accrued during its stipulated lifetime.

DECISION

GUTIERREZ, JR., J p: Before us for review is a decision of the Court of First Instance of Manila affirming a judgment of the City Court of Manila dismissing the plaintiff-appellant's complaint for sum of money. The case was originally appealed to the Court of Appeals but was certified to us on a finding that only questions of law are raised. Capital Surety and Insurance Co., Inc., thru its general agent, executed and issued a surety bond in the amount of $14,800.00 or its peso equivalent in behalf of Ronquillo Trading and in favor of S.S. Eurygenes, its master, and/or its agents, Delgado Shipping Agencies. The bond was a guarantee for any additional freight which may be determined to be due on a cargo of 258 surplus army vehicles consigned from Pusan, Korea to the Ronquillo Trading on board the S.S. Eurygenes and booked on said vessel by the Philippine Merchants Steamship Company, Inc. LLphil In consideration for the issuance by the appellant of the aforesaid surety bond the appellees executed an indemnity agreement whereby among other things, they jointly and severally promised to pay the appellant the sum of P1,827.00 in advance as premium and documentary stamps for each period of twelve months while the surety bond was in effect. On April 30, 1963 or about five (5) days before the expiration of the liability on the bond, P.D. Marchessini and Co., Ltd. and Delgado Shipping Agencies, Inc., filed Civil Case No. 53853 in the Court of First Instance of Manila against the Philippine Merchants Steamship Co., Inc., Jose L. Bautista, doing business under the name and style of "Ronquillo Trading", and the herein appellant Capital Insurance & Surety Co., Inc. for the sum of $14,800.00 or its equivalent in Philippine currency, the loss they allegedly suffered as a direct consequence of the failure of the defendants to load the stipulated quantity of 406 U.S. surplus army vehicles. The appellant was made party defendant because of the bond it posted in behalf of the appellees. Upon the expiration of the 12 months life of the bond, the appellant made a formal demand for the payment of the renewal premiums and cost of documentary stamps for another year in the amount of P1,827.00. The appellees refused to pay, contending that the liability of the appellant under the surety bond accrued during the period of twelve months the said bond was originally in force and before its expiration and that the defendants-appellees were under no obligation to renew the surety bond. The appellant, therefore, filed a complaint to recover the sum of P1,827.00 against the appellees in the City Court of Manila. A earlier stated, the city court rendered judgment absolving the appellees from the complaint. The appellant appealed the judgment to the Court of First Instance of Manila where the decision of the city court was affirmed and the complaint dismissed. Its motion for reconsideration having been denied, appellant filed the instant appeal with the following lone assignment of error: LLjur "THE TRIAL COURT ERRED IN HOLDING THAT ONCE SURETY'S LIABILITY UNDER THE BOND HAS ACCRUED, DEFENDANTS-APPELLEES ARE UNDER NO OBLIGATION TO PAY THE PREMIUMS AND COSTS OF DOCUMENTARY STAMPS FOR THE SUCCEEDING PERIOD THAT IT IS IN EFFECT." The appellant contends that the conclusion of the trial court that "once surety's liability under the bond has accrued, defendants are under no obligation to pay the premiums and cost of documentary stamps for the succeeding period that it is in effect by reason of existing obligation of surety under the bond" is erroneous because it contradicts the provision of the indemnity agreement which provides: "PREMIUMS. As consideration for the Surety, the undersigned, jointly and severally, agree to pay the COMPANY the sum of ONE THOUSAND EIGHT HUNDRED ONLY (P1800.00) PESOS, Philippine Currency, in advance or premium thereof for every . . . twelve (12) months or fraction thereof, while this bond or any renewal or substitution thereof is in effect." According to the appellant, it can be deduced that the payment of renewal premiums should depend upon the life and effectivity of the bond and not on the accrual of its liability. It states that as long as the bond is in full force and effect, the principal should pay the corresponding renewal premium and should continue to do so even if the liability on the bond has accrued, otherwise, surety companies will be at the mercy of their principals because while their liability continues to subsist as long as their accrued liability is

not determined, or as long as the court has not determined their liability, which may take years, the principals pay no consideration for the use of their bond. And if the case is decided against appellant thereby holding its bond liable, it must pay the face value of its bond, and yet it is barred from collecting any consideration for the use of its bond during the pendency of the case. The appellees countered that the only purpose of Civil Case No. 53853 was to enforce a liability which existed even before the bond was executed. The bond was given to secure payment by appellees of such additional freight as would already be due on the cargo when it actually arrived in Manila. The bond was not executed to secure an obligation or liability which was still to arise after its twelve month life. While it is true that the lower court held that the bond was still in effect after its expiry date, the effectivity was not due to a renewal made by the appellees but because the surety bond provided that "the liability of the surety will not expire if, as in this case, it is notified of an existing obligation thereunder". The meaning of the bond's still being in effect is that, the suit on the bond instituted by the obligees prior to the expiration of the "liability" thereunder was only for the purpose of enforcing that liability and amounted to notice to appellant of an already existing or accrued liability so as not to let that liability lapse or expire and thereby bar enforcement. We agree with the contention of the appellees. It must be noted that in the surety bond it is stipulated that the "Liability of surety on this bond will expire on May 5, 1963 and said bond will be cancelled 15 days after its expiration, unless surety is notified of any existing obligations thereunder." Under this stipulation the bond expired on the stated date and the phrase "unless surety is notified of any existing obligations thereunder" refers to obligations incurred during the term of the bond. LLpr Furthermore, under the Indemnity Agreement, the appellees "agree to pay the COMPANY the sum of ONE THOUSAND EIGHT HUNDRED ONLY (P1,800.00) Pesos, Philippine Currency, in advance as premium thereof for every twelve (12) months or fraction thereof, while this bond or any renewal or substitution thereof is in effect." Obviously, the duration of the bond is for "every twelve (12) months or fraction thereof, while this bond or any renewal or substitution is in effect." Since the appellees opted not to renew the contract they cannot be obliged to pay the premiums. More specifically, where a contract of surety is terminated under its terms, the liability of the principal for premiums after such termination ceases notwithstanding the pendency of a lawsuit to enforce a liability that accrued during its stipulated lifetime. WHEREFORE, the appeal is dismissed for lack of merit. The decision of the court a quo is affirmed. SO ORDERED. [G.R. No. L-13873. January 31, 1963.] GENERAL INSURANCE and SURETY CORPORATION, petitioner, vs. REPUBLIC OF THE PHILIPPINES and CENTRAL LUZON EDUCATIONAL FOUNDATION, INC., respondents.

Guido Advincula for petitioner. Solicitor General for respondents. SYLLABUS 1.SURETYSHIP; ACCRUAL OF ACTION FROM EXECUTION OF BOND IN PRESENT CASE; PRESCRIPTION OF ACTION BASED ON WRITTEN CONTRACTS. By the terms of the bond, the surety guaranteed to the Government compliance by the Foundation with all obligations, including the payment of the salaries of its teachers and employees, "past, present and future." Before the execution of the bond, the Foundation was already indebted to two of its teachers for past salaries. When the bond, therefore, was executed, the right of the Government to proceed against it on account of the unpaid salaries of said teachers accrued. The fact that the action was filed one year after the expiration of the bond does not militate against the action, because actions based on written contracts prescribe in ten years. (Article 1144, par. 1, Civil Code.) 2.ID.; ID.; SIXTY-DAY NOTICE IN PRESENT BOND NOT A PERIOD OF PRESCRIPTION OF ACTION. The 60-day notice required in the bond in question is not a period of prescription of action. If at all, it is a limitation on the right of the surety to withdraw.

3.ID.; ID.; GOVERNMENT, NOT THE TEACHERS, THE PROPER PARTY IN PRESENT CASE. The filing by the Government of an action on a bond on account of its violation by the principal in not paying the salaries of two of its teachers, cannot be assailed on the ground that the teachers were not the parties to the bond nor beneficiaries of a stipulation pour autrui, because the action is not one by the teachers against the surety, but one brought by the Government to hold the surety liable on its bond for the same has been violated when the principal failed to comply "with all obligations, including the payment of salaries of its teachers, past, present, and future." 4.ID.; ID.; PENAL NATURE OF BOND. A bond, which is penal in nature, may be forfeited for its full amount of P10,000.00 although the amount involved in connection with its violation is considerably much less, pursuant to Article 1226 of the Civil Code, which provides that in obligations with penal clause the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated without need of proving damages because one of the primary purposes of a penalty clause is to avoid such necessity. (Art. 1228, Civil Code; Lambert vs. Fox, 26 Phil. 588; Palacios vs. Municipality of Cavite, 12 Phil. 140; Manila Racing Club vs. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the principal obligation gives rise to the right to the penalty. (IV Tolentino, Civil Code of the Philippines, p. 247.)

DECISION

REGALA, J p: On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General Insurance and Surety Corporation posted in favor of the Department of Education a bond, the terms of which read as follows: "KNOW ALL MEN BY THESE PRESENTS: WHEREAS, the Department of Education has required the Central Luzon Educational Foundation, Inc., operating the Sison & Aruego Colleges, of Urdaneta, Pangasinan, Philippines an institution of learning to file a bond to guarantee the adequate and efficient administration of said school or college and the observance of all regulations prescribed by the Secretary of Education and compliance with all obligations, including the payment of the salaries of all its teachers and employees, past, present, and future, and the payment of all other obligations incurred by, or in behalf of said school; NOW, THEREFORE, in compliance with said requirement, we, CENTRAL LUZON EDUCATIONAL FOUNDATION, INC., operating the Sison and Aruego Colleges, represented by Dr. Jose Aruego, its Vice-Chairman, as principal, and the GENERAL INSURANCE AND SURETY CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the Philippines, as surety, are held end firmly bound, jointly and firmly, unto the Department of Education of the Republic of the Philippines in the sum of TEN THOUSAND PESOS (P10,000.00) Philippine currency, for the payment thereof we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally firmly by these presents; WHEN the Secretary of Education is satisfied that said institution of learning had defaulted in any of the foregoing particulars, this bond may immediately thereafter be declared forfeited and for the payment of the amount above-specified, we bind ourselves, our heirs, executors, successors, administrators, and assigns, jointly and severally. We further bind ourselves, by these presents, to give the Department of Education at least sixty (60) days notice of the intended withdrawal or cancellation of this bond, in order that the Department can take such action as may be necessary to protect the interests of such teachers, employees or creditors of the school and of the Government. LIABILITY of Surety under this bond will expire on June 15, 1955, unless sooner revoked. IN WITNESS WHEREOF, we signed this present guaranty at the City of Manila, Philippines, this 15th day of May, 1954."

On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego executed an indemnity agreement binding themselves jointly and severally to indemnify the surety of "any damages, prejudices, loss, costs, payments, advances and expenses of whatever kind and nature, including attorney's fees and legal costs, which the COMPANY may, at any time sustain or incur, as well as to reimburse to said COMPANY all sums and amounts of money which the COMPANY or its representatives shall or may pay or cause to be paid or become liable to pay, on account of or arising from the execution of the above mentioned Bond." On June 25, 1954, the surety advised the Secretary of Education that it was withdrawing and cancelling its bond. Copies of the letter were sent to the Bureau of Private Schools and to the Central Luzon Educational Foundation, Inc. It appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and to H.B. Arandia, in the sum of P820.00, or a total of P1,505.64. Demand for the above amount having been refused, the Solicitor General, in behalf of the Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the Court of First Instance of Manila on July 11, 1956. In due to surety the Foundation and prayed that the complaint be dismissed and that it be indemnified by the Foundation of any amount it might be required to pay the Government, plus attorney's fees. For its part, the Foundation denied the cross-claim and contended that, because Remedios Laoag owed Fr. Cinense the amount of P820.65, there was no basis for the action; that the bond is illegal and that the Government has no capacity to sue. The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruego on the basis of the indemnity agreement. While admitting the allegations of the third-party complaint, Sison and Aruego claimed that because of the cancellation and withdrawal of the bond, the indemnity agreement ceased to be of force and effect. Hearing was held and on December 18, 1956, the Court of First Instance rendered judgment holding the principal and the surety jointly and severally liable to the Government in the sum of P10,000.00 with legal interest from the date of filing of the complaint, until the sum is fully paid and ordering the principal to reimburse the surety whatever amount it may be compelled to pay to the Government by reason of the judgment, with costs against both principal and the surety. The surety filed a motion for reconsideration and a request to decide the third party complaint which the trial court denied. On appeal, the Court of Appeals rendered a decision, the dispositive portion of which reads: "WHEREFORE, the appealed judgment is hereby modified in the following manner: "(a)Ordering Central Luzon Educational Foundation, Inc., and General Insurance and Surety Corporation to pay jointly and severally the Republic of the Philippines the sum of P10,000.00, plus costs and legal interests from July 11, 1956 until fully paid; and "(b)Ordering Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M. Aruego to reimburse, jointly and severally, the General Insurance and Surety Corporation of all amounts it may be forced to pay the Republic of the Philippines by virtue of this judgment, plus costs and P2,000 for counsel's fees." From this decision, the surety appealed to this Court by way of certiorari, raising questions of law. 1 In its first four assignments of error, the surety contends that it was no longer liable on its bond after August 24, 1954 (when the 60day notice of cancellation and withdrawal ended) or, at the latest, after June 15, 1955. For support, the Surety invokes the following provisions of the bond: "WE further bind ourselves, by these presents to give the Department of Education at least sixty (60) days notice of the intended withdrawal or cancellation of this bond, in order that the Department can take such action as may be necessary to protect the interest of such teacher, employees Creditor to the government. "LIABILITY of the Surety under this bond will expire on June 15, 1955, unless sooner revoked."

On the other hand, the Government contends that since the salaries of the teachers were due and payable when the bond was still in force, the surety has become liable on its bond from the moment of its execution on May 15, 1954. We agree with this contention of the Government.

It must be remembered that, by the terms of the bond, the surety guaranteed to the Government "compliance (by the Foundation) with all obligations, including the payment of the salaries of its teachers and employees, past, present and future, and the payment of all other obligations incurred by, or in behalf of said school." Now, it is not disputed that even before the execution of the bond, the Foundation was already indebted to two of its teachers for past salaries. From the moment, therefore, the bond was executed, the right of the Government to proceed against the bond accrued because since then, there has been violation of the terms of the bond regarding payment of past salaries of teachers at the Sison and Aruego Colleges. The fact that the action was filed only on July 11, 1956 does not militate against this position because actions based on written contracts prescribe in ten years. (Art. 1144, par. 1, Civil Code). The surety also cites our decision in the cases of Jollye vs. Barcelon and Luzon Surety Co., Inc., 68 Phil. 164 and National Rice and Corn Corp. (NARIC) vs. Rivera, et al., G.R. No. L-4023, February 29, 1952. But there is nothing in these cases that supports the proposition that the liability of a surety for obligations arising during the life of a bond ceases upon the expiration of the bond. In the Jollye case, the bond provided: "Whereas, the above bounded principal, on 13th day of February, 1933 entered into an agreement with H. P. L Jollye of Manila, P.I., to fully and faithfully refund to said Mr. H.P.L. Jollye the above stated sum of P7,500 representing the purchase price of the 75 shares of the capital stock of the North Electric Company (certificate No. 38) paid by said Mr. H.P.L. Jollye to the undersigned principal, Mr. Emeterio Barcelon, in the event the title thereto of said Mr. Barcelon is invalidated by any judgment which may be rendered by the court of Cavite against Vicente Diosomito or in the event that any of the warranties contained in that certain deed of sale executed by the undersigned principal on this 13th day of February, 1933, be invalidated, a copy of which is hereto attached and made an integral part hereof, marked Exhibit A." According to the bond, "the liability of Luzon Surety Company, Inc., under this bond will expire twelve (12) months from date hereof." The date referred to was February 13, 1933. This Court absolved the surety of liability because the acts for which the bond was posted happened after its expiration. Thus, We held in that case: ". . . The acts provided therein by reason of which the contract of suretyship was executed could have taken place within the stipulated period of twelve months. Hence, the parties fixed that period exactly at twelve months, limiting thereby the obligation of the appellee to answer for the payment to the appellant of the aforesaid sum of P7,500 to not more than the stipulated period. . . ." Here, on the other hand, the right of the Government to collect on the bond arose while the bond was in force, because, as earlier noted, even before the execution of the bond, the principal had already been in debt to its teachers. Neither does the NARIC case support the surety's position. In that case, the bond provided that "This bond expires on March 20th, 1949 and will be cancelled TEN DAYS after the expiration, unless the surety is notified of any existing obligation thereunder, or unless the surety renews or extends it in writing for another term." and We held that giving notice of existing obligation was a condition precedent to further liability of the surety and that in default of such notice, liability on the bond automatically ceased. Similarly, in the case of Santos, et al. vs. Mejia, et al., G.R. No. L-6383, December 29, 1953, the bond provided that "Liability of the surety on this bond will expire on THIRTY DAYS and said bond will be cancelled 10 DAYS after its expiration unless surety is notified of any existing obligation thereunder."

and We held that the surety could not be held liable because the bond was cancelled when no notice of existing obligations was given within ten days. In the present case, there is no provision that the bond will be cancelled unless the surety is notified of any claim and so no condition precedent has to be complied with by the Government before it can bring an action. Indeed, the provision of the bond in the NARIC and Santos cases that it would be cancelled ten days after its expiration unless notice of claim was given was inserted precisely because, without such a provision, the surety's liability for obligations arising while the bond was in force would subsist even after its expiration. Thus, in Pao Chuan Wek vs. Nomorosa, 54 O.G. No. 11, 3490, We held that under a provision that the surety "will not be liable for any claim not discovered and presented to the company within three months from the expiration of this bond and that the obligee hereby waives his right to file any court action against the surety after the termination of the period of three months above mentioned," the giving of notice is a condition precedent to be complied with. And suppose this action were filed while the bond was in force, as the surety would have the Government do, but the same remained pending after June 15, 1955, would the surety suggest that the judgment that may be rendered in such action could not longer be enforced against it because the bond says that its liability under it has expired? And what of the provision on 60-day notice? The surety urges that all actions on the bond must be brought within that period or they would all be barred. The surety misread the provision. The 60-day notice is not a period of prescription of action. The provision merely means that the surety can withdraw as in fact it did in this case even before June 15, 1955 provided it gave notice of its intention to do so at least 60 days in advance. If at all, the condition is a limitation on the right of the surety to withdraw rather than a limitation of action on the bond. This is clear also from the Manual of Information of Private Schools 2 which states that "The bond furnished by a school may not be withdrawn by either or both of the bondsmen except by giving the Director of Private Schools sixty days notice." In its fifth assignment of error, the surety contends: 1. That the bond is void for being contrary to public policy insofar as it requires the surety to pay P10,000.00 regardless of the amount of the salaries of the teachers. 3 It is claimed that to enforce forfeiture of the bond for the full amount would be to allow the Government to enrich itself since the unpaid salaries of the teachers amount to P1,318.84 only. 2.That, under Article 1311 of the Civil Code, 4 since teachers of Sison and Aruego Colleges are not parties to the bond, "the bond is not effective and binding upon the obligors (principal and surety) as far as it guarantees payment of the 'past salaries' of the teachers of said school." This is the same as saying that the surety is not liable to teachers of Sison and Aruego Colleges because the latter are not parties to the bond nor are they the beneficiaries of a stipulation pour autrui. But this argument is based on the false premise that the teachers are trying to enforce the obligation of the bond, which is not the case here. This is not an action filed by the teachers against the surety. This is an action brought by the Government, of which the Department of Education is an instrumentality, to hold the surety liable on its bond for the same has been violated when the principal failed to comply "with all obligations, including the payment of salaries of its teachers, past, present and future." There is nothing against public policy in forfeiting the bond for the full amount. The bond is penal in nature. Article 1226 of the Code states that in obligation with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary, and the party to whom payment is to be made is entitled to recover the sum stipulated without need of proving damages because one of the primary purposes of a penalty clause is to avoid such necessity. (Art. 1228, Civil Code. Lambert vs. Fox, 26 Phil. 588; Palacios vs. Municipality of Cavite, 12 Phil. 140; Manila Racing Club vs. Manila Jockey Club, 69 Phil. 55). The mere non-performance of the principal obligation gives rise to the right to the penalty (IV Tolentino, Civil Code of the Philippines 247.) In its first and second "alternative assignments of error," the surety contends that it was released from its obligation under the bond when on February 4, 1955, Remedios Laoag and the Foundation agreed that the latter would pay the former's salaries, which were then already due, on March 1, 1955. In support of this proposition, the surety cites Article 2079 of the Code which provides as follows: "An extension granted to the debtor by the creditor with out the consent of the guarantor extinguishes the guaranty. . . ."

But the above provision does not apply to this case. The supposed extension of time was granted not by the Department but by the Department of Education or the Government but by the teachers. As already stated, the creditors on the bond are not the teachers but the Department of Education or the Government. Even granting that an extension of time was granted without the consent of the surety, still that fact would not help the surety, because as earlier pointed out, the Foundation was also in arrears in the payment of the salaries of H. B. Arandia. The case of Arandia alone would be enough basis for the Government to proceed against the bond. Lastly, in its third and fourth "alternative assignments of error," the surety contends that it cannot be made to answer for more than the unpaid salaries of H. B. Arandia, which it claimed amounted to P720.00 only, because Article 2054 states that

"A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. "Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor." What We said about the penal nature of the bond would suffice to dispose of this claim. For whatever may be the amount of salaries due the teachers, the fact remains that the condition of the bond was violated and so the surety became liable for the penalty provided for therein. WHEREFORE, the decision of the Court of Appeals is hereby affirmed, with costs against the surety. Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Makalintal, JJ ., concur. Bengzon, C . J ., took no part. [G.R. No. 46534. October 16, 1939.] J. V. HOUSE, petitioner, vs. SIXTO DE LA COSTA, JUDGE OF FIRST INSTANCE OF MANILA, BRANCH V, ET AL., respondents.

Yuseco, Arteche and Abdon for petitioner. Antonio Gonzalez for respondents.

SYLLABUS SURETYSHIP AND GUARANTY; RELEASE OF SURETY FROM ITS OBLIGATION. The petitioner and C. P. B., under the agreement of September 1st, substantially altered their juridical relations as to the properties discharged from attachment and for the delivery of which Far Eastern Surety & Insurance Co., Inc., was a surety, which alteration necessarily released the latter from its obligations as such surety. The properties discharged from attachment having been turned over to the petitioner and thereafter public sold and adjudicated to him under the said agreement, the obligation of C. P. B. to return the priorities to the Sheriff, in satisfaction of the judgment in favor of the petitioner, was extinguished and compliance therewith became impossible by petitioner's own act, thereby resulting in the release of the surety from its obligation to pay the value of said properties (articles 1184 an(l 1817 of the Civil Code.)

DECISION

AVANCEA, J p:

The petitioner, plaintiff in a civil case against C. P. Bush And George Upton for the recovery of a sum of money, obtained a preliminary attachment of certain properties of the latter. Three days thereafter, Bush and Upton secured the discharge of the attachment of these properties by filing a bond posted by Far Eastern Surety & Insurance Co., Inc., on August 25, 1934, for P2,000, the condition of the bond being that, should the plaintiff and petitioner House obtain a judgment against C. P. Bush, the latter would return to the Sheriff of Manila the properties discharged from attachment and, should he fail to do so, the Far Eastern Surety & Insurance Co., Inc., would pay the value thereof. On September 1st following, the petitioner House and C. P. Bush entered into an agreement, without the knowledge or consent of the Far Eastern Surety & Insurance Co., Inc., whereby Bush delivered to the petitioner, together with other properties, those discharged from attachment to be sold at public auction. The petitioner was the highest bidder in this sale and the properties were adjudicated to him. Eventually the petitioner obtained judgment against C. P. Bush for the amount of P2,000, and the same not having been satisfied, he asked for execution against Far Eastern Surety & Insurance Co., Inc., as Surety of C. P. Bush in the discharge of the properties from the attachment. The court denied this petition. The petitioner alleges that the court exceeded and abused its discretion in so ruling. From the foregoing it appears that the petitioner and C. P. Bush, under the agreement of September 1st, substantially altered their juridical relations as to the properties discharged from attachment and for the delivery of which Far Eastern Surety & Insurance Co., Inc., was a surety, which alteration necessarily released the latter from its obligations as such surety. The properties discharged from attachment having been turned over to the petitioner and thereafter publicly sold and adjudicated to him under the said agreement, the obligation of C. P. Bush to return the properties to the Sheriff, in satisfaction of the judgment in favor of the petitioner, was extinguished and compliance therewith became impossible by petitioner's own act, thereby resulting in the release of the surety from its obligation to pay the value of said properties (articles 1184 and 1847 of the Civil Code). The petition is denied, with the Costs to the petitioner. So ordered. Villa-Real, Imperial, Diaz, Laurel, Concepcion, and Moran, JJ., concur.