G.R. No. 159731 - Eastern Assurance and Surety Corp. vs. Con-Field Construction and Development Corp.

Eastern Assurance and Surety Corporation (EASCO) is the petitioner in this case, while Con-Field Construction and Development Corporation (Con-Field) is the respondent.
Con-Field, a domestic corporation, was contracted by ABS-CBN Corporation to construct and install a centralized air-conditioning system at its Bacolod City building.
Con-Field entered into a sub-contracting Agreement on November 23, 1995 with Freezinhot, an entity representing itself as a duly organized Philippine corporation.

Under the Agreement, Freezinhot committed, as sub-contractor, to furnish equipment, tools, labor, supervision, and other necessary facilities in connection with the project.
Con-Field agreed to pay Freezinhot a sum of P1,730,150.00 for the project.
A provision in the Agreement required Freezinhot to secure a performance bond amounting to P346,150.00 to ensure prompt and faithful performance of its obligations.
Freezinhot secured the performance bond from EASCO in accordance with the said requirement.

After Freezinhot commenced work on the project, Con-Field’s project engineers, in a letter dated April 8, 1996, pointed out issues concerning the slow pace of work and the presence of defects in completed parts of the project.
On May 4, 1996, Freezinhot’s President, Demetrio de Guzman, communicated in writing his desire to terminate the contract due to technical reasons.
Con-Field, through Executive Vice-President Martin S. Co, responded on May 7, 1996, clarifying that:

It did not pressure Freezinhot to terminate the Agreement.
It acknowledged Freezinhot’s unilateral decision to terminate.
The termination was accepted on the basis of multiple grounds such as lack of equipment, inadequate technical capability (e.g., shop drawings), shortage in manpower and supervision, resulting equipment damage, and financial constraints.

On January 8, 1997, Con-Field filed a complaint with the Regional Trial Court (RTC) of Quezon City seeking to recover:

Freezinhot and de Guzman failed to answer, leading the RTC to declare them in default on July 11, 1997.
The RTC rendered judgment in favor of Con-Field ordering:

Payment of the principal amount (P616,961.14) with interest.
Joint and several liability of Freezinhot and EASCO to pay the performance bond amount plus interest.
Reimbursement and other incidental awards.

EASCO appealed the RTC Decision.
On March 28, 2003, the Court of Appeals (CA) partially granted EASCO’s appeal by affirming the RTC decision but deleted EASCO’s liability for attorney’s fees.
EASCO’s subsequent Motion for Reconsideration was denied by the CA in its Resolution dated August 26, 2003.

EASCO filed a Petition for Review on Certiorari with the Supreme Court under Rule 45, assailing the CA decision and its denial of the Motion for Reconsideration.
EASCO’s arguments include:

Claiming that the termination of the contract was mutual between Con-Field and Freezinhot rather than a unilateral act by Freezinhot.
Arguing that since Freezinhot did not implement the sub-contracting Agreement but instead engaged in a “labor-only” arrangement, there was no valid principal obligation.
Asserting that with the principal obligation extinguished, the performance bond (being an accessory obligation) is likewise nullified, thereby releasing EASCO from its suretyship responsibilities.
Contending that the supposed 78% completion of work as testified by Con-Field’s witness was a mere opinion and, if indicative of substantial compliance, should lead to a reduction in EASCO’s liability.

Con-Field and respondent, however, maintained that the termination was unilateral due to Freezinhot’s breach and that EASCO’s suretyship liability remains intact regardless of the termination or the “labor-only” arrangements.

Whether the termination of the sub-contracting Agreement between Con-Field and Freezinhot was mutual or unilateral.

Petitioner argues that there was a mutual termination, implying a final compromise of obligations.
Respondent maintains that the termination was unilaterally effected by Freezinhot.

Whether Freezinhot’s failure to execute the Agreement—as indicated by its “labor-only” performance—extinguished its principal obligation.

Petitioner contends that without a properly executed or fulfilled principal contract, the suretyship does not attach.
Respondent argues that the principal obligation remained despite the inferior arrangement.

Whether issues on “labor-only” sub-contracting, raised for the first time in the motion for reconsideration, are admissible for review.

The respondent asserts that such issues were not raised during the RTC or CA proceedings and should not be reconsidered on appeal.
The petitioner insists that these matters, though raised later, are essential to negating the surety’s liability.

Whether the evidence suggesting near-completion (approximately 78%) of Freezinhot’s work permits an equitable reduction of the performance bond liability.