Pioneer Insurance & Surety Corporation vs. Court of Appeals

G.R. No. 76509. December 15, 1989


In 1978, Pioneer Insurance and Surety Corporation issued general warehousing bonds in favor  of the Bureau of Customs for importation of raw materials on behalf of the private respondents  Wearever Textile Mills, Inc. To secure the bonds, the respondents executed jointly and severally 

indemnity agreements. The private respondents failed to comply with their commitment by  reason whereof the Bureau of Customs demanded from the petitioner payment of the value of  the said bonds which eventually reached P9,031,000.00 in 1983. Private respondents settled their obligations to Bureau of Customs through staggered monthly installment payments. Other  than the initial payment of P500,000.00, however, respondents have not made any other  payments thereby violating the terms of the said agreement. Bureau of Customs again  demanded from the petitioner payment of its bonds. No payment has been made. 

In 1979, a fire gutted the respondent’s factory destroying materials insured with the petitioner  in the amount of P1,144,744.49. Petitioner refused to pay claiming that said proceeds must be  applied by way of partial compensation or set-off against its liability with the Bureau of  Customs arising from the warehousing bonds. The private respondents argue that since the  petitioner has not made any payment yet regarding the amount demanded by the Bureau of  Customs, there is nothing for which the petitioner should be reimbursed. 

The trial court rendered judgment in favor of the private respondents and ordered the  petitioner to pay, among others, the insurance. The Court of Appeals affirmed the trial court’s  decision, holding that legal compensation cannot take place because the requisites thereof are  not present. 


Whether or not that legal compensation or set-off under Articles 1278 and 1279 can take place considering there was no payment has been made by the petitioner 


Yes. Clearly, the petitioner can demand reimbursement from the respondents even before it has  actually paid its obligation to the Bureau of Customs. It can, in principle, be held liable under the  warehouse bonds even before actual payment to the Bureau of Customs. The liability has been  fixed. What remains is simply its liquidation. The respondents who defaulted on the agreement  to make staggered payments thereby causing the petitioner’s liability to the Bureau of Customs  cannot refuse the set-off. 

It is needless to emphasize that at the time the fire occurred, the private respondents together  with the petitioner had already incurred liability on the warehousing bonds with the Bureau of  Customs because of the respondents’ inability to comply with the provisions of their undertaking.  It is, therefore, clear that as far as the amount of P9,031,000.00 is concerned, both the petitioner  and respondents were already liable for said amount to the Bureau of Customs when the  contingency for which compensation is sought, happened. 


WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated September  23, 1986 is hereby ANNULLED and SET ASIDE. A copy of this decision is furnished the  Commissioner of Customs for appropriate action to be taken under the warehousing bonds. Costs  against the private respondents.


“Compensation shall take place when two persons, in their own right, are creditors and debtors  of each other. (Art. 1278, Civil Code). When all the requisites mentioned in Art. 1279 of the Civil  Code are present, compensation takes effect by operation of law, even without the consent or  knowledge of the debtors.’ (Art. 1290, Civil Code). Art. 1279 of the Civil Code requires among  others, that in order that legal compensation shall take place, ‘the two debts be due’ and ‘they  be liquidated and demandable.’ Compensation is not proper where the claim of the person  asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to  unliquidated, disputed claim arising from breach of contract.