CASE DIGEST: Gilat Satellite v. United Coconut


FACTS: On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications equipment, accessories, spares, services and software, at a total purchase price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB General Insurance Co., Inc.s surety bond dated 3 December 1999, in favor of GILAT.During the period between September 1999 and June 2000, GILAT shipped and delivered to One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading. All of the equipment (including the software components for which payment was secured by the surety bond, was shipped by GILAT and duly received by One Virtual. Under an endorsement dated December 23, 1999, the surety issued, with One Virtuals conformity, an amendment to the surety bond, Annex A thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of May 30, 2000 in accordance with the payment schedule to the surety bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter for payment of the said amount of US$400,000.00. No part of the amount set forth in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment installment date of 30 November 2000 of the surety bond, prompting GILAT to send a second demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses and which letter was received by the defendant surety on January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant complaint.

On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint against respondent UCPB General Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses. After due hearing, the RTC rendered its Decision for the plaintiff.

On 18 October 2007, respondent appealed to the CA. The appellate dismissed the case for lack of jurisdiction.

On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion was denied for lack of merit in a Resolution issued by the CA on 16 September 2009.

ISSUES: 1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate; and 2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its obligation under the Suretyship Agreement.


CIVIL LAW: suretyship agreement

The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety.

Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this relief. This referral, however, can only be demanded by one who is a party to the arbitration agreement. Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the CAs order to arbitrate.

Moreover, Articles 1216 and 2047 of the Civil Code clearly provide that the creditor may proceed against the surety without having first sued the principal debtor. Even the Surety Agreement itself states that respondent becomes liable upon mere failure of the Principal to make such prompt payment. Thus, petitioner should not be ordered to make a separate claim against One Virtual (via arbitration) before proceeding against respondent.

On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist without a valid obligation. Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt that is, the right to invoke the arbitration clause in the Purchase Agreement.

We agree with petitioner.

In suretyship, the oft-repeated rule is that a suretys liability is joint and solidary with that of the principal debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal contract. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, its liability to the creditor or promise of the principal is said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the principal. He becomes liable for the debt and duty of the principal obligor, even without possessing a direct or personal interest in the obligations constituted by the latter. Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion. It may in fact be sued separately or together with the principal debtor.

After a thorough examination of the pieces of evidence presented by both parties, the RTC found that petitioner had delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its obligation, triggering respondents liability to petitioner as the formers surety. In other words, the failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the surety.

Consequently, we cannot sustain respondents claim that the Purchase Agreement, being the principal contract to which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes.

First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd., that the acceptance of a surety agreement, however, does not change in any material way the creditors relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the principal contract. The suretys role arises only upon the debtors default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor. Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that contract. An arbitration agreement being contractual in nature, it is binding only on the parties thereto, as well as their assigns and heirs.

Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only take place if at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter. Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration.

Third, sureties do not insure the solvency of the debtor, but rather the debt itself. They are contracted precisely to mitigate risks of nonperformance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the principal debtor. The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This is the reason why excussion cannot be invoked. To require the creditor to proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v. Court of Appeals, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor.

CIVIL LAW: interest; delay

Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of the latters obligation, provided that the delay is inexcusable.

Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of the latters delay in discharging its monetary obligation. Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the time it demanded the fulfilment of respondents obligation under the suretyship contract. Significantly, respondent does not contest this point, but instead argues that it is only liable for legal interest of 6% per annum from the date of petitioners last demand on 24 January 2001.

In rejecting petitioners position, the RTC stated that interests may only accrue when the delay or the refusal of a party to pay is without any justifiable cause. In this case, respondents failure to heed the demand was due to the advice of One Virtual that petitioner allegedly breached its undertakings as stated in the Purchase Agreement.49 The CA, however, made no pronouncement on this matter.

We sustain petitioner. Article 2209 of the Civil Code is clear: if an obligation consists in the payment of a sum of money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest.

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169, is synonymous with default or mora, which means delay in the fulfilment of obligations. It is the nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the surety) to be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or extrajudicially.

Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract, but because of the default and the necessity of judicial collection.

However, for delay to merit interest, it must be inexcusable in nature.

In Guanio v. Makati-Shangri-la Hotel, citing RCPI v. Verchez, we held thus:

In culpa contractual the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee that may include his expectation interest, which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, or his reliance interest, which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made; or his restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party.

Indeed, agreements can accomplish little, either for their makers or for society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make RECOMPENSE to the one who has been injured by the failure of another to observe his contractual obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence or of the attendance of fortuitous event, to excuse him from his ensuing liability.

We agree with petitioner that records are bereft of proof to show that respondents delay was indeed justified by the circumstances that is, One Virtuals advice regarding petitioners alleged breach of obligations. The lower courts Decision itself belied this contention when it said that plaintiff is not disputing that it did not complete commissioning work on one of the two systems because One Virtual at that time is already in default and has not paid GILAT. Assuming arguendo that the commissioning work was not completed, respondent has no one to blame but its principal, One Virtual; if only it had paid its obligation on time, petitioner would not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated that petitioner had delivered all equipment, including the licensed software; and that the equipment had been installed and in fact, gone into operation.

Notwithstanding these compliances, respondent still failed to pay.
As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the amount due begins to run, not from the date of the filing of the complaint, but from the date of that extra-judicial demand. Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000, we agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that time.