G.R. No. 187116 - Asset Builders Corporation vs. Stronghold Insurance Company, Inc.

On April 28, 2006, Asset Builders Corporation (ABC) and Lucky Star Drilling & Construction Corporation (Lucky Star) entered into a contract for the construction of the ACG Commercial Complex at NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.
Lucky Star was tasked to supply labor, materials, tools, equipment, and technical supervision to drill one exploratory production well at the project site.
The contract's total price was PHP1,150,000.00 with the following key terms:

To guarantee faithful compliance, Lucky Star secured two bonds from respondent Stronghold Insurance Company, Inc.:

Surety Bond No. 141558 dated May 9, 2006, covering PHP575,000.00 (the required downpayment)
Performance Bond No. 115388 dated May 9, 2006, covering PHP345,000.00

The Surety Bond guaranteed repayment of the downpayment through deductions from periodic billings; it was callable on demand and the surety's liability did not exceed PHP575,000.00.
The Performance Bond guaranteed full and faithful contract compliance including payment to suppliers and laborers, also callable on demand, with liability capped at PHP345,000.00 plus interest, attorney’s fees, and damages.

On May 20, 2006, ABC paid Lucky Star PHP575,000.00 (less withholding tax) as the 50% advance payment.
Lucky Star began the drilling work but by July 18, 2006, only 10% of work was completed, days before the 60-calendar day deadline.
ABC sent a demand letter on July 18, 2006, to Lucky Star for immediate completion; failure to comply would result in contract cancellation and bond forfeiture.
On August 3, 2006, ABC issued a Notice of Rescission of Contract with Demand for Damages to Lucky Star, demanding refund of downpayment, liquidated damages, bond amounts, consequential and exemplary damages, attorney’s fees, and vacation of the site.
On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold under its bonds.

Neither Lucky Star nor Stronghold responded to demands, prompting ABC to file a Complaint for Rescission with Damages on November 21, 2006.
Stronghold denied liability, arguing ABC did not prove advance payment and that rescission revoked claims under the bonds.
Lucky Star failed to file a response and was declared in default on August 24, 2007.
On February 27, 2009, the Regional Trial Court (RTC), Pasig City, Branch 71, ordered Lucky Star to pay ABC PHP575,000.00 plus damages but absolved Stronghold from any liability, reasoning that rescission canceled the bonds automatically.

Bonds remained valid despite contract rescission due to continuing liability from Lucky Star’s default.
Stronghold’s liabilities under the bonds had accrued and became direct and absolute prior to rescission.
Rescission did not affect Stronghold’s liability, which was inseparable from Lucky Star’s obligations.
The RTC erred in failing to impose penalties against Stronghold under the Insurance Code for unreasonable refusal of claims.

Whether respondent Stronghold Insurance Company, Inc., as surety, can be held liable under the surety and performance bonds despite the rescission of the principal contract between ABC and Lucky Star.
Whether the rescission of the principal contract automatically cancels the surety bonds and absolves the surety from liability.
Whether the liabilities under the bonds had already accrued and became direct, primary, and absolute before the exercise of rescission by ABC.
Whether the trial court erred in not imposing penalties against Stronghold for unreasonable denial or withholding of payment under the Insurance Code.