G.R. No. 156162 - CCC Insurance Corp. vs. Kawasaki Steel Corp.

On August 16, 1988, Kawasaki Steel Corporation (Kawasaki) and F.F. MaAacop Construction Co., Inc. (FFMCCI) executed a Consortium Agreement to bid for the Pangasinan Fishing Port Network Project.
Under Article 10 of the Consortium Agreement, Kawasaki (Consortium Leader) was to secure all bonds required by the Government contract, while FFMCCI was to furnish counter-guarantees for its advance payment (15% of its work price) and performance (10% of its work price).
On October 4, 1988, the Department of Public Works and Highways (DPWH) awarded Stage I-A of the Project to the Kawasaki-FFMCCI Consortium for ₱62,000,441.00; FFMCCI’s share was ₱20,692,026.00.

Kawasaki obtained from PCIB Letter of Credit No. 38-001-183617 in favor of DPWH for ₱6,200,044.10, guaranteeing Consortium performance.
Pursuant to Article 10, FFMCCI secured from CCC Insurance Corporation (CCCIC):

Surety Bond No. B-88/11191 (₱3,103,803.90) counter-guaranteeing its advance payment share.
Performance Bond No. B-88/11193 (₱2,069,202.60) guaranteeing completion of its work portion.

FFMCCI and its President MaAacop executed Indemnity Agreements in favor of CCCIC.

In April 1989, FFMCCI ceased performance due to financial reverses. Kawasaki and FFMCCI then entered into an August 24, 1989 Agreement whereby Kawasaki assumed the unfinished work and its profits.
Kawasaki notified CCCIC of FFMCCI’s default and formally demanded payment under the Surety and Performance Bonds in September 1989; CCCIC refused. Kawasaki sued CCCIC on November 6, 1989.
CCCIC denied liability and filed counterclaims and a Third-Party Complaint against FFMCCI/MaAacop. FFMCCI and MaAacop defaulted in the third-party action.
On May 2, 1996, the RTC dismissed Kawasaki’s complaint and CCCIC’s counterclaims, ruling that:

The bonds were mere counter-guarantees whose obligation had not accrued.
Article 2079 of the Civil Code extinguished CCCIC’s obligation when the Government granted a 43-day extension without its consent.

The Court of Appeals (CA) reversed on May 30, 2002, holding CCCIC liable under the bonds and awarding interest and attorney’s fees. The CA denied CCCIC’s motion for reconsideration on November 14, 2002 but granted CCCIC’s third-party action against MaAacop.

Whether the bonds were “mere counter-guarantees” and conditional on Government’s claim under the PCIB Letter of Credit.

Whether the Government’s grant of an extension to the Consortium, without CCCIC’s consent, extinguished CCCIC’s bond obligations.

Whether the August 24, 1989 Agreement between Kawasaki and FFMCCI, without CCCIC’s consent, novated the original Consortium Agreement and released CCCIC.

Whether Kawasaki’s assumption of work, and any compensation received, negated CCCIC’s bond liability.

Whether CCCIC’s defense compelled Kawasaki to incur expenses warranting an award under Civil Code Article 2208(2).

Whether summons was validly served on FFMCCI through one of its directors under the Rules of Court.