The Supreme Court has affirmed that parties who sign indemnity agreements related to surety bonds are bound by the terms of those agreements, even if they dispute the renewal of the underlying bond. The Court emphasized that clear contractual language authorizing renewals is enforceable, especially when signatories are educated and capable of understanding the agreement’s implications. This ruling underscores the importance of carefully reviewing and understanding the terms of contracts, particularly those involving surety and indemnity, as individuals may be held liable for obligations extending beyond their initial expectations if the contract allows for renewals or extensions.

Renewal Roulette: When Does an Indemnity Agreement Extend with a Surety Bond?

This case revolves around a surety bond issued by Oriental Assurance Corporation (respondent) in favor of FFV Travel & Tours, Inc. to guarantee payment for airline tickets purchased on credit. Paulino M. Ejercito, Jessie M. Ejercito, and Johnny D. Chang (petitioners), along with Merissa C. Somes, executed a Deed of Indemnity in favor of Oriental Assurance Corporation, agreeing to indemnify the corporation for any losses incurred due to the surety bond. The initial bond was for one year, but it was later renewed. When FFV Travel & Tours defaulted, IATA demanded payment, and Oriental Assurance paid out the bond. Oriental Assurance then sought reimbursement from the petitioners based on the Deed of Indemnity. The central issue is whether the petitioners are liable under the Deed of Indemnity for the renewed period of the surety bond, given their claim that they did not consent to the renewal.

The Regional Trial Court (RTC) initially dismissed the complaint against the petitioners, finding no written agreement showing their intention to renew the Deed of Indemnity. However, the Court of Appeals (CA) reversed this decision, ruling that the petitioners were liable because the Deed of Indemnity contained a clause authorizing the respondent to grant renewals or extensions of the original bond. The CA emphasized that the petitioners voluntarily signed the agreement and, being educated individuals, should have understood its legal effects. This brings us to the core legal question: Can parties be held liable under an indemnity agreement for renewals of a surety bond when the agreement grants the surety company the authority to renew, even if the indemnitors claim they did not specifically consent to the renewal?

The Supreme Court sided with the Court of Appeals, reinforcing the principle that a contract is the law between the parties. The Court emphasized the importance of adhering to the literal meaning of a contract’s stipulations when the terms are clear and unambiguous. In this case, the Deed of Indemnity contained explicit provisions that bound the petitioners to the renewals of the surety bond. The Court quoted key clauses from the Deed of Indemnity to illustrate this point:

INDEMNITY: – To indemnify the COMPANY for any damages, payments, advances, prejudices, loss, costs and expenses of whatever kind and nature, including counsel or attorney’s fees, which the Company may at any time, sustain or incur, as a consequence of having executed the above-mentioned Bond, its renewals, extensions, modifications or substitutions and said attorney’s fees shall not be less than fifteen (15%) per cent of the amount claimed by the Company in each action, the same to be due and payable, irrespective of whether the case is settled judicially or extrajudicially.

The Court further noted that the Deed of Indemnity explicitly empowered the respondent to grant renewals of the original bond. This empowerment was a critical factor in the Court’s decision. The inclusion of this clause demonstrated that the petitioners had agreed to be bound by any renewals or extensions of the bond.

RENEWALS, ALTERATIONS AND SUBSTITUTIONS: – The undersigned hereby empower and authorize the Company to grant or consent to the granting of, any extension, continuation, increase, modifications, change, alteration and/or renewal of the original bond herein referred to, and to execute or consent to the execution of any substitution for said bond with the same or different conditions and parties, and the undersigned hereby hold themselves jointly and severally liable to the Company for the original bond hereinabove mentioned or for any extension, continuation, increase, modification, change, alteration, renewal or substitution thereof until the full amount including principal interests, premiums, costs and other expenses due to the Company thereunder is fully paid up.

The Court rejected the petitioners’ argument that they only consented to the one-year validity of the surety bond, stating that any such claim should be directed against Somes in a separate action. The Court highlighted that the respondent was not privy to any alleged agreement between Somes and the petitioners regarding the bond’s validity. The Court also addressed the petitioners’ contention that the Deed of Indemnity was a contract of adhesion. While acknowledging that such contracts can be struck down if the weaker party is unduly imposed upon, the Court found that this was not the case here. One of the petitioners, Paulino M. Ejercito, is a lawyer, and the Court presumed that he understood the legal implications of the contract he signed. The Court noted that the petitioners could have inserted a remark in the clause granting authority to the Company to renew the original bond if they did not intend for it to be renewed.

The Supreme Court also invoked the principle that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it. The Court stated that any mistake by the petitioners regarding the legal effect of their obligation is not a valid reason for relieving them of liability. This underscores the importance of due diligence in understanding the terms of any contract before signing it. The Court’s decision emphasizes the binding nature of contracts and the importance of understanding their terms before signing. Parties cannot later claim ignorance of provisions that were clearly stated in the agreement. This case serves as a reminder that individuals and businesses must carefully review and consider the implications of contracts, particularly those involving surety and indemnity, to avoid unexpected liabilities.

FAQs

What was the key issue in this case?	The key issue was whether the petitioners were liable under a Deed of Indemnity for the renewed period of a surety bond, despite claiming they didn’t consent to the renewal. The court focused on whether the indemnity agreement granted the surety company authority to renew the bond.
What is a surety bond?	A surety bond is a contract among three parties: the principal (the party required to obtain the bond), the obligee (the party who benefits from the bond), and the surety (the insurance company that guarantees the principal’s obligations). It ensures that the principal will fulfill its obligations to the obligee.
What is a Deed of Indemnity?	A Deed of Indemnity is an agreement where one party (the indemnitor) agrees to protect another party (the indemnitee) against loss or damage. In this context, it’s an agreement to reimburse the surety company for any payments made under the surety bond.
What does it mean for a contract to be the law between the parties?	This means that the terms of a valid contract are binding on the parties who entered into it. Courts will generally enforce the contract as written, provided it is not contrary to law, morals, good customs, public order, or public policy.
What is a contract of adhesion?	A contract of adhesion is a standardized contract drafted by one party (usually the one with superior bargaining power) and offered to the other party on a “take it or leave it” basis. While not invalid per se, they are scrutinized by courts.
What did the Court say about the petitioners’ claim of ignorance?	The Court stated that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it. The Court also noted that one of the petitioners was a lawyer, implying he should have understood the contract’s implications.
What is the significance of the “renewal” clause in the Deed of Indemnity?	The renewal clause was crucial because it explicitly authorized the surety company to renew the original bond. This clause effectively bound the petitioners to the renewals, regardless of whether they gave specific consent each time.
What could the petitioners have done differently?	The petitioners could have inserted a remark in the clause granting authority to the Company to renew the original bond, if the renewal thereof was not their intention. They could have also sought legal advice before signing the agreement.

This case highlights the critical importance of carefully reviewing and understanding contracts, especially those involving surety and indemnity. The presence of clauses authorizing renewals or extensions can significantly impact liability, and parties must be aware of these provisions before signing. Consulting with legal counsel can help ensure a full understanding of contractual obligations and potential risks.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang vs. Oriental Assurance Corporation, G.R. No. 192099, July 08, 2015