Surety Bonds and Written Principal Agreements: What the Supreme Court Says

The question of when a surety can be held liable on a bond often hinges on the terms of the bond itself. In Cellpage International Corporation v. The Solid Guaranty, Inc. (G.R. No. 226731, June 17, 2020), the Supreme Court clarified that a written principal agreement is not always required for a surety to be liable. The ruling offers important guidance for creditors, sureties, and businesses that rely on bonds to secure commercial transactions.

The Facts of the Case

Cellpage International Corporation approved a credit line for Jomar Powerhouse Marketing Corporation (JPMC) for the purchase of cellcards. As a condition, JPMC secured surety bonds from The Solid Guaranty, Inc. totaling P7,000,000.00. JPMC later purchased cellcards worth P7,002,600.00 but failed to pay. Its postdated checks were dishonored for insufficient funds.

When Cellpage demanded payment from Solid Guaranty under the bonds, the surety refused. Cellpage filed a complaint for sum of money. The trial court ruled in favor of Cellpage, holding JPMC and Solid Guaranty jointly and solidarily liable. The Court of Appeals reversed, however, ruling that since no written credit line agreement was submitted to the surety, Cellpage could not demand performance under the bonds.

The Issue

The central question was whether a written principal agreement is required before a surety can be held liable on a bond, or whether the terms of the surety contract itself determine the conditions for liability.

The Supreme Court's Ruling

The Supreme Court ruled in favor of Cellpage, reversing the Court of Appeals. The Court held that a written principal agreement is not always required for a surety to be liable.

The Court explained that the liability of a surety is joint and several with the obligor, limited to the amount of the bond, and determined strictly by the terms of the contract of suretyship in relation to the principal contract. This does not mean, however, that a written principal agreement is always necessary.

Citing Article 1356 of the Civil Code, the Court noted that contracts are obligatory in whatever form they are entered into, provided all essential requisites for validity are present. An oral agreement with all essential requisites may therefore be guaranteed by a surety contract.

The Court distinguished this case from First Lepanto-Taisho Insurance Corporation v. Chevron Philippines, Inc. In that case, the surety bond expressly required that a copy of the principal agreement be attached and made an integral part of the surety contract. Here, the surety bonds issued by Solid Guaranty contained no such requirement.

The Terms of the Bond Control

The Court emphasized that whether a written principal agreement is required depends on the terms of the surety contract itself. Examining the bonds issued by Solid Guaranty, the Court found no stipulation that the surety's performance was preconditioned on submission of a written principal agreement.

The bonds merely stated that JPMC was required to post a bond to guarantee payment of the cost of products "in accordance with the terms and conditions of the agreement." The Court rejected the Court of Appeals' interpretation that this phrase required attachment of the written agreement.

If Solid Guaranty intended to impose such a condition, it should have clearly specified it in the bonds. A suretyship agreement is a contract of adhesion prepared by the surety company. Therefore, its provisions are interpreted liberally in favor of the insured and strictly against the insurer, who had the opportunity to state plainly the terms of its obligation.

The Surety's Liability Is Direct and Primary

The Court reiterated that a surety's liability is direct, primary, and absolute. The surety is directly and equally bound with the principal debtor. Here, the existence of a valid principal agreement was not in question. The principal contract was substantiated by issue slips, delivery receipts, and purchase orders, and was acknowledged by Solid Guaranty.

Upon JPMC's failure to pay, Solid Guaranty's liability under the bonds accrued. The Court held Solid Guaranty solidarily liable with JPMC up to the face amount of the bonds, P7,000,000.00, with legal interest at 12% per annum from the date of last extrajudicial demand until June 30, 2013, and 6% per annum from July 1, 2013 until full satisfaction.

Practical Takeaways

• Read the bond carefully. Whether a written principal agreement is required before a surety can be held liable depends entirely on the terms of the surety contract. If the bond does not require attachment of a written agreement, the surety cannot later insist on one.
• Surety bonds are contracts of adhesion. Since surety companies draft their bonds, any ambiguity in the terms is construed strictly against the surety and liberally in favor of the insured.
• Oral principal agreements can be guaranteed. Under Article 1356 of the Civil Code, a valid oral agreement may be secured by a surety bond. The absence of a written principal contract does not automatically defeat a surety claim.
• A surety's liability is direct and primary. The surety is equally bound with the principal debtor and cannot escape liability merely because the principal contract was not reduced to writing.
• Know the distinction from First Lepanto. That case involved a bond that expressly required attachment of the written principal agreement. Each case must be assessed based on the specific terms of the surety contract.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.