5.

PIONEER INSURANCE & SURETY CORPORATION v COURT OF APPEALS
GR NO. 76509
December 15, 1989
By: Gayares
Topic: Compensation; Novation
Petitioners: Pioneer Insurance & Surety Corporation (PISC)
Respondents: Court of Appeals, Wearever Textile Mills, Inc. (WTM), and Vicente
Lim
Ponente: Gutierrez, Jr. J
RECIT-READY/SUMMARY: PISC, on behalf of WTM, issued bonds in favor of BOC.
WTM failed to comply with their commitment to pay BOC. BOC demanded
payment from PISC instead but WTM promised the former that they will be the
ones to pay instead. WTM defaulted again and a fire happened. WTM demanded
payment from the insurance policy of PISC. PISC refused since partial compensation
must take place. Court ruled that PISC can invoke compensation.
 The P500k initial payment was paid but WTM did not make any other
payments after, thus, violating the agreement.
 As a result, BOC demanded from PISC again.
 A fire eventually destroyed WTM’s factory, taking with it materials
insured in the amount of P1M. WTM demanded from PISC payment of
the proceeds of the insurance policy but the latter refused, claiming that
the proceeds must be applied by way of partial compensation or set-off
against its liability with the BOC.
 RTC: Judgment in favor of WTM. PISC must pay the insurance proceeds in
the amount of P1M plust legal interest.
 CA: Affirmed RTC. Legal compensation cannot take place because the
requisites are not present, specifically, PISC is not the creditor of WTM
and that their claim against the latter is not yet due, demandable, and
liquidated. Liability on the warehousing bonds was extinguished when the
textile goods covered were destroyed by the fire. Therefore, the law on
compensation is inapplicable.

ISSUE:
DOCTRINE:
W/N PISC can successfully invoke compensation based on the amount proceeding
Compensation is not proper where the claim of the person asserting the set-off
from the fire insurance policy and the debt claimed by BOC?
against the other is not clear nor liquidated; compensation cannot extend to
unliquidated, disputed claim arising from breach of contract.
HELD/RATIO:
FACTS:
YES – The court rules for PISC.
 PISC issued general warehousing bonds in favor of the Bureau of Customs
(BOC) for importation of raw materials in the total amount of P6.5M. The
PISC owes WTM the amount representing the proceeds of the insurance policy.
bonds were issued on behalf of the private respondents, WTM and its
WTM, however, tries to negate their own liability by questioning the claims of BOC
president, Lim.
and alleging that they have no liability because of the fortuitous event. At the same
 To secure PISC from and against any and all harm that it may incur as a
time, they admit liability when they argued that PISC was released from the same
consequence of becoming its surety, WTM executed jointly and severally
upon their agreement with BOC to make staggered payments. WTM also argued
in favor of PISC indemnity agreements for the said bonds, which
that since PISC has not made any payment regarding the amount demanded by
contained stipulations for indemnity and maturity of the contracted
BOC, there is nothing to reimburse.
obligations.
 WTM, however, failed to comply with their commitment under the
It is clear that WTM tried to avoid their liability with the BOC. Therefore, as far as
warehousing bonds due to the BOC demanding from PISC payment of the
the amount of P9M is concerned, both PISC and WTM are liable for its payment
value of the said bonds in the amount of P6,390,259.00. The amount
when the contingency for compensation was sought.
escalated to P9M eventually.
 PISC demanded from WTM. WTM replied, promising that they will settle
PISC can demand reimbursements from WTM even before it has actually paid its
their obligations with BOC.
obligation to the BOC. It can be held liable under the warehouse bonds even before
 BOC granted the request of WTM for staggered monthly installment
actual payment to the BOC. The liability has been fixed. What remains simply is
payments of their obligation on the condition that they will make an
liquidation. WTM defaulted on the agreement to make staggered payments
initial payment of P500k and amortize the balance of P400k monthly until
thereby causing PISC’s liability to the BOC.
fully paid.
Legal compensation can take place between PISC and WTM, that is, PISC can
partially set-off the insurance proceeds in the amount of P1M against its liability
under the warehousing bonds, which has been computed in the amount of P9M.

WHEREFORE, petition is granted.