Suretyship

SECTIONS 177-180, TITLE 4

THE INSURANCE CODE
 Contract of Suretyship

It is an agreement whereby a party (surety)

guarantees the performance by another party
(principal/obligor) of an obligation or undertaking in
favor of a third party (obligee).
 Parties to a Contract of Suretyship

Principal/Obligor Surety Obligee

It includes official recognizances, stipulations bonds
or undertakings issued by any company by virtue
and under the provisions of Act No. 536, as amended
by Act No. 2206
The contract of surety is evidenced by a writing
called “surety bond” which is essentially a promise
to guarantee the debt or obligation of the obligor.
 Nature of Liability of Surety

The liability of the surety or sureties shall be:

1. Solidary – joint and several with the obligor;
2.Limited or fixed – limited to the amount of
the bond; or
3.Contractual – it is determined strictly by the
terms of the contract of suretyship in relation
to the principal contract between the obligor
and the obligee.
To indemnify the surety against loss, the obligor
executes a third contract in favor of the surety. This
contract is called an “Indemnity Agreement.”
 Suretyship vs. Property Insurance
Suretyship
It is an accessory contract.
There are 3 parties: the surety,
obligor/debtor, and the
obligee/creditor.
More of a credit accommodation with
the surety assuming primary liability.
Surety is entitled to reimbursement
from the principal and his guarantors
for the loss it may suffer under the
contract.
Property Insurance
The principal contract itself.
There are only two parties: insurer and
insured.
Generally a contract of indemnity.
No right of recovery for the loss the
insurer may sustain except when the
insurer is entitled to subrogation.
 Suretyship
A bond may be cancelled by or with the
consent of the obligee or by the
commissioner or by the court.
Requires acceptance of the obligee
before it becomes valid and enforceable.
A risk-shifting device, the premium paid
being in the nature of a service fee.
Property Insurance
May be cancelled unilaterally either by
the insured or by the insurer on
grounds provided by law.
Does not need acceptance of any third
party.
A risk-distributing device, the premium
paid being considered a ratable
contribution to a common fund.
 Suretyship vs. Guaranty
Suretyship
Surety assumes liability as a regular
party.
Surety is primarily liable.
Surety is not entitled to the benefit of
exhaustion of the debtor’s assets.
Guaranty
Liability of guarantor depends upon an
independent agreement to pay if the
primary debtor fails to do so.
Guarantor is secondarily liable.
Guarantor has this right to have all the
property of the debtor and legal
remedies against the debtor first
exhausted before he can be compelled
to pay the creditor.
Rules of Payment of Premiums in Suretyship

1. The premium becomes a debt as soon as the

contract of suretyship is perfected and delivered to
the obligor;
2. The contract of suretyship shall not be valid and
binding unless and until the premium therefore has
been paid;
3. Where the obligee has accepted the bond, it shall be
valid and enforceable notwithstanding that the
premium has not been paid;
4. If the contract of suretyship is not accepted by, or
filed with the obligee, the surety shall collect only a
reasonable amount;
5. If the non-acceptance of the bond be due to the
fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by the
surety; and
6. In the case of continuing bond, the obligor shall pay
the subsequent annual premium as it falls due until
the contract is cancelled.
The premium is the consideration for furnishing the
bond or the guaranty and the obligation to pay the
same subsists for as long as the liability of the surety
shall exist.
 Types of Surety Bonds

1. Contract Bonds
These are connected with construction and supply contracts.
They are for the protection of the owner against a possible
default by the contractor or his possible failure to pay
materials, men, laborers, and sub-contractors. The surety
answers for the failure of the principal to perform in
accordance with the terms and specifications of the contract.
There may be 2 bonds:
a. Performance bond – one covering the faithful
performance of the contract; and
b. Payment bond – one covering the payment of laborers
and material men.
2. Fidelity Bonds
They pay an employer for loss growing out of a
dishonest act of his employee. They are classified as:
a. Industrial bond – one required by private
employers to cover loss through dishonesty of
employees; and
b. Public official bond – one required of public
officers for the faithful performances of their
duties and as a condition of entering upon the
duties of their offices.
3. Judicial Bonds
They are those which are required in connection
with judicial proceedings.
Examples are injunction bonds, attachment bonds,
replevin bonds, bail bonds, and appeal bonds.
The purpose is to indemnify the adverse party
against damages resulting from the proceeding.
 Questions

1. S (surety company) issued in favor of C (obligee) a surety bond to

secure the faithful compliance by P (obligor) of his obligations to
C as C’s distributor. The bond provides that it shall be liable in
case of non-payment of any De Luxe Precious Marketing (DLPM)
account in favor of C and the non-remittance of any collections
due from any account booked by DLPM.

C failed to collect from P for purchases made by DLPM which the

latter failed to pay. S alleged as a defense that the bond of DLPM
was issued in favor of P and not in favor of DLPM.

Q: Is the surety bond liable?

A: Yes. The condition of the bond explicitly provides
for S’s liability in case of non-payment of any
DLPM account. (Edward Keller, Ltd. vs.
Workmen’s Insurance Co.)
2. Under the terms of the contract of suretyship, the
obligation of S (surety) is that D (principal) pay C
(creditor) the loan and the interest thereon, and that
S shall be relieved of its obligation when the loan
secured is paid. In the contract, C was given the right
to sue D, or the latter and S at the same time.

Q: Can D excuse himself from the payment of the

premium in the bond upon the failure or refusal of S
to pay the loan and interest?
A: No. S did not promise D that it will pay the loan
contracted by D for the latter’s benefit. Such a
promise is not implied by law either. D, therefore,
cannot claim that there has been a breach on the
part of S of any obligation it has made or
undertaking under the suretyship contract.
(Arranz vs. Manila Fidelity & Surety Co.)
3. S issued a surety bond in behalf of D in favor of C, in consideration of which D
and E executed an indemnity agreement whereby, among other things, they
severally promised to pay S in advance the premium for each period of 12
months while the surety bond or any renewal thereof was in effect. About 5
days before the expiration of the liability on the bond, C filed a civil case against
S and D for the loss C allegedly suffered as a direct consequence of the failure of
D to comply with its contract.

Upon the expiration of the 12-month life of the bond, S made a demand for the
payment of the renewal premiums. According to S, as long as the bond is in full
force and effect, the principal (D) should pay the corresponding renewal
premium, for if the case is decided against S, 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.

Q: Is D liable to pay the renewal premiums?

A: No, since D opted not to renew the contract. 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. (Capital Insurance & Surety Co. vs.
Ronquillo Trading)
4. Fumitechniks Corporation, represented by Apostol, had applied for and was issued
a surety bond by First Lepanto-Taisho Insurance Corporation for the amount of
P15,700,000.00. As stated in the attached rider, the bond was in compliance with
the requirement for the grant of a credit line with Chevron Philippines, Inc. to
guarantee payment of the cost of fuel products withdrawn within the stipulated time
in accordance with the terms and conditions of agreement between Chevron and
Fumitechniks. When Fumitechniks defaulted on its obligation, Chevron notified
First Lepanto-Taisho of Fumitechniks’ unpaid purchases. First Lepanto-Taisho
thereafter demanded to Fumitechniks the submission of a copy of the agreement
secured by the bond, together with copies of documents such as delivery receipts.
Fumitechniks, however, denied that it executed such an agreement with Chevron,
thus no copy of such agreement could be submitted. Because of this, Chevron sued
First Lepanto-Taisho for the payment of unpaid oil and petroleum purchases made
by Fumitechniks.

Q: Is the surety liable to the creditor in absence of a written contract with the
principal?
A: No. Sec. 176 of the Insurance Code is clear that a surety contract
should be read and interpreted together with the contract
entered into between the creditor and the principal. A surety
contract is merely a collateral one, its basis is the principal
contract or undertaking which it secures. Necessarily, the
stipulations in such principal agreement must at least be
communicated or made known to the surety. Having accepted
the bond, Chevron as creditor must be held bound by the recital
in the surety bond that the terms and conditions of its
distributorship contract be reduced in writing or at the very least
communicated in writing to the surety. Such non-compliance by
the Chevron impacts not on the validity or legality of the surety
contract but on the creditor’s right to demand performance.
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