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RepublicofthePhilippines
SUPREMECOURT
Manila
ENBANC
G.R.No.L13873January31,1963
GENERALINSURANCEandSURETYCORPORATION,petitioner,
vs.
REPUBLICOFTHEPHILIPPINESandCENTRALLUZONEDUCATIONALFOUNDATION,INC.,respondents.
GuidoAdvinculaforpetitioner.
OfficeoftheSolicitorGeneralforrespondents.
REGALA,J.:
On May 15, 1954, the Central Luzon Educational Foundation, Inc. and the General Insurance and Surety
CorporationpostedinfavoroftheDepartmentofEducationabond,thetermsofwhichreadasfollows:
KNOWALLMENBYTHESEPRESENTS:
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
administrationofsaidschoolorcollegeandtheobservanceofallregulationsprescribedbythe
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
otherobligationsincurredby,orinbehalfofsaidschool.
NOW, THEREFORE, in compliance with said requirement, we, CENTRAL LUZON
EDUCATIONAL FOUNDATION, INC., operating the Sison and Aruego Colleges, represented
Dr. Jose Aruego, its ViceChairman, as principal, and the GENERAL INSURANCE AND
SURETY CORPORATION, a corporation duly organized and existing under and by virtue the
laws of the Philippines, as surety, are held and 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,andassigns,jointlyandseverallyfirmlybythese
presents
WHENtheSecretaryofEducationissatisfiedthatsaidinstitutionoflearninghaddefaultedin
any of the foregoing particulars, this bond may immediately thereafter be declared forfeited
andforthepaymentoftheamountabovespecified,webindourselves,ourheirs,executors,
successors,administrators,andassigns,jointlyandseverally.
We further bind ourselves, by these presents, to give the Department of Education at least
sixty(60)daysnoticeoftheintendedwithdrawalorcancellationofthisbond,inorderthatthe
Department can take such action as may be necessary to protect the interests of such
teachers,employeesorcreditorsoftheschoolandoftheGovernment.
LIABILITYofSuretyunderthisbondwillexpireonJune15,1955,unlesssoonerrevoked.
IN WITNESS WHEREOF, we signed this present guarranty at the City of Manila, Philippines,
this15thdayofMay,1954.
On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M.

On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc., Teofilo Sison and Jose M.
Aruegoexecutedanindemnityagreementbindingthemselvesjointlyandseverallytoindemnifythesuretyof"any
damages, prejudices, loss, costs, payments, advances and expenses of whatever kind and nature, including
attorney'sfeesandlegalcosts,whichtheCOMPANYmay,atanytimesustainorincur,aswellastoreimburseto
saidCOMPANYallsumsandamountsofmoneywhichtheCOMPANYoritsrepresentativesshallormaypayor
cause to be paid or become liable to pay, on account of or arising from the execution of the above mentioned
Bond."
OnJune25,1954,thesuretyadvisedtheSecretaryofEducationthatitwaswithdrawingandcancellingitsbond.
CopiesoftheletterweresenttotheBureauofPrivateSchoolsandtotheCentralLuzonEducationalFoundation,
Inc.
It appears that on the date of execution of the bond, the Foundation was indebted to two of its teachers for
salaries,towit:toRemediosLaoag,inthesumofP685.64,andtoH.B.Arandia,inthesumofP820.00,oratotal
ofP1,505.64.
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 time, the surety filed its answer in which it set up special defenses and a crossclaim against the
Foundation and prayed that the complaint be dismissed and that it be indemnified by the Foundation of any
amountitmightberequiredtopaytheGovernment,plusattorney'sfees.
For its part, the Foundation denied the crossclaim 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
Governmenthasnocapacitytosue.
The surety also filed a thirdparty complaint against Teofilo Sison and Jose M. Aruego on the basis of the
indemnityagreement.Whileadmittingtheallegationsofthethirdpartycomplaint,SisonandAruegoclaimedthat
because of the cancellation and withdrawal of the bond, the indemnity agreement ceased to be of force and
effect.
HearingwasheldandonDecember18,1956,theCourtofFirstInstancerenderedjudgmentholdingtheprincipal
andthesuretyjointlyandseverallyliabletotheGovernmentinthesumofP10,000.00withlegalinterestfromthe
date of filing of the complaint, until the sum is fully paid and ordering the principal to reimburse the surety
whateveramountitmaybecompelledtopaytotheGovernmentbyreasonofthejudgment,withcostsagainst
bothprincipalandthesurety.
Thesuretyfiledamotionforreconsiderationandarequesttodecidethethirdpartycomplaintwhichthetrialcourt
denied.
Onappeal,theCourtofAppealsrenderedadecision,thedispositiveportionofwhichreads:
WHEREFORE,theappealedjudgmentisherebymodifiedinthefollowingmanner:
(a)OrderingCentralLuzonEducationalFoundation,Inc.,andGeneralInsuranceandSuretyCorporationto
pay jointly and severally the Republic of the Philippines the sum of P10,000.00, plus costs and legal
interestsfromJuly11,1956untilfullypaidand
(b)OrderingCentralLuzonEducationalFoundation,Inc.,TeofiloSisonandJoseM.Aruegotoreimburse,
jointlyanseverally,theGeneralInsuranceandSuretyCorporationofallamountsitmaybeforcedtopay
theRepublicofthePhilippinesbyvirtueofthisjudgment,pluscostsandP2,000.00forcounsel'sfees.
Fromthisdecision,thesuretyappealedtothisCourtbywayofcertiorari,raisingquestionsoflaw.1
Initsfirstfourassignmentsoferror,thesuretycontendsthatitwasnolongerliableonitsbondafterAugust24,
1954(whenthe60daynoticeofcancellationandwithdrawalended),or,atthelatest,afterJune15,1955.For
support,thesuretyinvokesthefollowingprovisionsofthebond:
WE,furtherbindourselves,bythesepresentstogivetheDepartmentofEducationatleastsixty(60)days
noticeoftheintendedwithdrawalorcancellationofthisbond,inorderthattheDepartmentcantakesuch
action as may be necessary to protect the interest of such teachers, employees, Creditors to the
government.
LIABILITYoftheSuretyunderthisbondwillexpireonJune15,1955,unlesssoonerrevoked.

LIABILITYoftheSuretyunderthisbondwillexpireonJune15,1955,unlesssoonerrevoked.
Ontheotherhand,theGovernmentcontendsthatsincethesalariesoftheteachersweredueandpayablewhen
the bond was still in force, the surety has become liable on its bond from the moment of its execution on May
15,1954.
WeagreewiththiscontentionoftheGovernment.
Itmustberememberedthat,bythetermsofthebondthesuretyguaranteedtotheGovernment"compliance(by
the Foundation) with all obligations, including the payment of the salaries of its teachers and employees, past,
presentandfuture,andthepaymentofallotherobligationsincurredby,orinbehalfofsaidschool."Now,itisnot
disputedthatevenbeforetheexecutionofthebondtheFoundationwasalreadyindebtedtotwoofitsteachers
forpastsalaries.Fromthemoment,therefore,thebondwasexecuted,therightoftheGovernmenttoproceed
against the bond accrued because since then, there has been violation of the terms of the bond regarding
paymentofpastsalariesofteachersattheSisonandAruegoColleges.Thefactthattheactionwasfiledonlyon
July11,1956doesnotmilitateagainstthispositionbecauseactionsbasedonwrittencontractsprescribeinten
years. (Art. 1144, par. 1, Civil Code). The surety also cites our decision in the case of Jollye v. Barcelon and
LuzonSuretyCo.,Inc.,68Phil.164andNationalRice&CornCorp.(NARIC)v.Rivera,etal.,G.R.No.L4023,
February29,1952.Butthereisnothinginthesecasesthatsupportsthepropositionthattheliabilityofasuretyfor
obligationsarisingduringthelifeofabondceasesupontheexpirationofthebond.
IntheJollyecase,thebondprovided:
Whereas,theaboveboundedprincipal,on13thdayofFebruary,1933enteredintoanagreementwithH.
P.L.JollyeofManila,P.I.,tofullyandfaithfullyrefundtosaidMr.H.P.L.Jollyetheabovestatedsumof
P7,500representingthepurchasepriceofthe74sharesofthecapitalstockoftheNorthElectricCompany
(certificateNo.38)paidbysaidMr.H.P.L.Jollyetotheundersignedprincipal,Mr.EmeterioBarcelon,in
theeventofthetitletheretoofsaidMr.Barcelonisinvalidatedbyanyjudgementwhichmayberenderedby
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,acopyofwhichisheretoattachedandmadeanintegralparthereof,marketExhibitA.
Wherefore,thepartiesrespectfullypraythattheforegoingstipulationoffactsbeadmittedandapprovedby
this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not
coveredbythisstipulationoffacts.
1wph1.t

Accordingtothebond,"theliabilityofLuzonSuretyCompany,Inc.underthisbondwillexpire(12)monthsfrom
datehereof."ThedatereferredtowasFebruary13,1933.ThisCourtabsolvedthesuretyofliabilitybecausethe
actsforwhichthebondwaspostedhappenedafteritsexpiration.Thus,Weheldinthatcase:
...Theactsprovidedthereinbyreasonofwhichthecontractofsuretyshipwasexecutedcouldhavetaken
place within the stipulated period 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
aforesaidsumofP7,500.00tonotmorethanthestipulatedperiod....
Here,ontheotherhand,therightoftheGovernmenttocollectonthebondarosewhilethebondwasinforce,
because,asearliernoted,evenbeforetheexecutionofthebond,theprincipalhadalreadybeenindebtedtoits
teachers.
NeitherdoestheNARICcasesupportthesurety'sposition.Inthatcase,thebondprovidedthat
This bond expires on March 20th, 1949 and will be cancelled TEN DAYS after the expiration, unless the
suretyisnotifiedofanyexistingobligationthereunder,orunlessthesuretyrenewsorextendsitinwriting
foranotherterm.
andWeheldthatgivingnoticeofexistingobligationwasaconditionprecedenttofurtherliabilityofthesuretyand
thatindefaultofsuchnotice,liabilityonthebondautomaticallyceased.
Similarly,inthecaseofSantos,et.al.v.Mejia,etal.,G.R.No.L6383,December29,1953, the bond provided
that
LiabilityofthesuretyonthisbondwillexpireinTHIRTEENDAYSandsaidbondwillbecancelled10DAYS
afteritsexpirationunlesssuretyisnotifiedofanyexistingobligationthereunder.
andWeheldthatthesuretycouldnotbeheldliablebecausethebondwascancelledwhennonoticeofexisting

andWeheldthatthesuretycouldnotbeheldliablebecausethebondwascancelledwhennonoticeofexisting
obligationswasgivenwithintendays.
Inthepresentcase,thereisnoprovisionthatthebondwillbecancelledunlessthesuretyisnotifiedofanyclaim
andsonoconditionprecedenthastobecompliedwithbytheGovernmentbeforeitcanbringanaction.Indeed,
theprovisionofthebondintheNARICandSantoscasesthatitwouldbecancelledtendaysafteritsexpiration
unlessnoticeofclaimwasgivenwasinsertedpreciselybecause,withoutsuchaprovision,thesurety'sliabilityfor
obligationsarisingwhilethebondwasinforcewouldsubsistevenafteritsexpiration.
Thus,inPaoChuanWekv.Nomorosa,54O.G.No.11,3490,Weheldthatunderaprovisionthatthesurety"will
notbeliableforanyclaimnotdiscoveredandpresentedtothecompanywithinthreemonthsfromtheexpiration
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
compliedwith.
Andsupposethisactionwerefiledwhilethebondwasinforce,asthesuretywouldhavetheGovernmentdo,but
the same remained pending after June 15, 1955, would the surety suggest that the judgment that may be
renderedinsuchactioncouldnolongerbeenforcedagainstitbecausethebondsaysthatitsliabilityunderithas
expired?
Andwhatoftheprovisionon60daynotice?Thesuretyurgesthatallactionsonthebondmustbebroughtwithin
that period or they would all be barred. The surety misread the provision. The 60day notice is not a period of
prescriptionofaction.Theprovisionmerelymeansthatthesuretycanwithdrawasinfactitdidinthiscase
evenbeforeJune15,1955provideditgavenoticeofitsintentiontodosoatleast60daysinadvance.Ifatall,the
conditionisalimitationontherightofthesuretytowithdrawratherthanalimitationofactiononthebond.Thisis
clearalsofromtheManualofInformationforPrivateSchools2whichstatesthat"Thebondfurnishedbyaschool
maynotbewithdrawnbyeitherorboththebondsmenexceptbygivingtheDirectorofPrivateSchoolssixtydays
notice."
Initsfifthassignmentoferror,thesuretycontends:
1. That the bond is void for being contrary to public policy insofar as it requires the surety to pay P10,000.00
regardlessoftheamountofthesalariesoftheteachers.3Itisclaimedthattoenforceforfeitureofthebondforthe
fullamountwouldbetoallowtheGovernmenttoenrichitselfsincetheunpaidsalariesoftheteachersamountto
P1,318.84only.
2.That,underArticle1311oftheCivilCode,4sinceteachersofSisonandAruegoCollegesarenotpartiestothe
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
beneficiariesofastipulationpourautrui. But this argument is based on the false premise that the teachers are
tryingtoenforcetheobligationofthebond,whichisnotthecasehere.Thisisnotanactionfiledbytheteachers
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"withallobligations,includingthepaymentofsalariesofitsteachers,past,presentandfuture."
There is nothing against public policy in forfeiting the bond for the 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
damagesandthepaymentofinterestsincaseofnoncompliance,ifthereisnostipulationtothecontrary,andthe
partytowhompaymentistobemadeisentitledtorecoverthesumstipulatedwithoutneedofprovingdamages
because one of the primary purposes of a penalty clause is to avoid such necessity. (Art. 1228, Civil Code
Lambertv.Fox,26Phil.588Palaciosv.MunicipalityofCavite,12Phil.140ManilaRacingClubv.ManilaJockey
Club,69Phil.55).Themerenonperformanceoftheprincipalobligationgivesrisetotherighttothepenalty,(IV
Tolentino,CivilCodeofthePhilippines,p.247.)
In its first and second "alternative assignments of error," the surety contends that it was released from its
obligationunderthebondwhenonFebruary4,1955,RemediosLaoagandtheFoundationagreedthatthelatter
wouldpaytheformer'ssalaries,whichwerethenalreadydue,onMarch1,1955.Insupportofthisproposition,
thesuretycitesArticle2079oftheCodewhichprovidesasfollows:
An extension granted to the debtor by the creditor without 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

But the above provision does not apply to this case. The supposed extension of time was granted not by the
DepartmentofEducationortheGovernmentbutbytheteachers.Asalreadystated,thecreditorsonthebondare
nottheteachersbuttheDepartmentofEducationortheGovernment.
Evengrantingthatanextensionoftimewasgrantedwithouttheconsentofthesurety,stillthatfactwouldnothelp
thesurety,becauseasearlierpointedout,theFoundationwasalsoarrearsinthepaymentofthesalariesofH.B.
Arandia.ThecaseofArandiaalonewouldbeenoughbasisfortheGovernmenttoproceedagainstthebond.
Lastly,initsthirdandfourth"alternativeassignmentsoferror,"thesuretycontendsthatitcannotbemadeanswer
formorethantheunpaidsalariesofH.B.Arandia,whichitclaimedamountedtoP720.00only,becauseArticle
2054statesthat
A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the
amountandtheonerousnatureoftheconditions.
Shouldhehaveboundhimselfformore,hisobligationsshallbereducedtothelimitsofthatofthedebtor.
WhatWesaidaboutthepenalnatureofthebondwouldsufficetodisposeofthisclaim.Forwhatevermaybethe
amount of salaries due the teachers, the fact remains that the condition of the bond was violated and so the
suretybecameliableforthepenaltyprovidedfortherein.
WHEREFORE,thedecisionoftheCourtofAppealsisherebyaffirmed,withcostsagainstthesurety.
Padilla,BautistaAngelo,Labrador,Concepcion,Reyes,Barrera,Parades,DizonandMakalintal,JJ.,concur.
Bengzon,C.J.,tooknopart.
Footnotes
1CentralLuzonEducationalFoundation,Inc.,TeofiloSisonandJoseM.AruegoalsoappealedtothisCourt

butwedismissedtheirappealinG.R.No.L14119forhavingbeenfiledoutoftime.
2PreparedbytheDepartmentofEducationpursuanttoActNo.2706.
3Article1183statesthatimpossibleconditions,thosecontrarytogoodcustomsorpublicpolicyandthose

prohibitedbylawshallannultheobligationwhichdependsuponthem.
4Contractstakeeffectonlybetweentheparties,theirassignsandheirs,exceptincasewheretherights

andobligationsarisingfromthecontractarenottransmissiblebytheirnature,orbystipulationorby
provisionoflaw.Theheirisnotliablebeyondthevalueofthepropertyhereceivedfromthedecedent.
Ifacontractshouldcontainsomestipulationinfavorofathirdperson,hemaydemanditsfulfillment
provided he communicated his acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting parties must have clearly and
deliberatelyconferredafavoruponathirdperson.
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