G.R. No. 172404 - People vs. Trans-East Asia Insurance Corp. vs. Doctors of New Millennium Holdings, Inc.

Doctors of New Millennium Holdings, Inc. (respondent) is a domestic corporation of about 80 doctors.
On March 2, 1999, it entered a Construction and Development Agreement (signed agreement) with Million State Development Corporation (contractor) for building a 200-bed hospital in Cainta, Rizal.
Under the agreement, Doctors of New Millennium was to pay P10,000,000.00 as an initial payment to commence construction. Million State Development was accountable for 95% of the project cost and committed to secure P385,000,000.00 within 25 banking days from the initial payment to finance the project, including purchasing the lot for the hospital.

Before the initial payment, Million State Development submitted a surety bond of P10,000,000.00 to Doctors of New Millennium as security, issued by People’s Trans-East Asia Insurance Corporation (now People’s General Insurance Corporation, petitioner).
Doctors of New Millennium made the initial payment of P10,000,000.00.

Million State Development failed to secure the P385,000,000.00 within 25 banking days.
On April 7, 1999, the contractor cited delays due to foreign creditors in a letter to respondent.
On April 9, 1999, Doctors of New Millennium sent a demand letter for the fund remittance and cost of money.
Instead of complying, Million State Development replied on April 16, 1999, stating they expected the standby letter of credit within 15 banking days.
On June 14, 1999, respondent demanded the return of the initial payment from People’s General Insurance under the surety bond.

A subsequent demand was sent to People’s General Insurance on July 9, 1999, with a copy furnished to the Insurance Commission.
Conciliation proceedings were conducted but terminated after People’s General Insurance denied the claim, arguing its guarantee was limited to the faithful construction of the hospital building and not the funding of construction.
An administrative complaint for unfair claims settlement was filed by respondent against petitioner before the Insurance Commission.
Respondent also sent a demand letter to Million State Development for refund on October 5, 1999.
As the contractor remained inactive, respondent filed a breach of contract complaint with damages and sought preliminary attachments against both contractor and surety before the Regional Trial Court (RTC), Pasig City.

Million State Development was declared in default for non-appearance and non-response.
Testimonies revealed the surety bond was intended to secure the initial mobilization fund, whereas People’s General Insurance claimed liability was only linked to the hospital’s construction itself.
Petitioner argued the terms of the surety bond were based on a draft contract, and it was unaware of the insertion of the “Project Owner’s waiver” clause in the signed agreement, which petitioner claimed materially altered contract obligations.
The RTC ruled million State Development solely liable, discharging the insurer on grounds of implied novation due to the alteration of the contract by the insertion of the waiver clause.

The Court of Appeals reversed the RTC, holding People’s General Insurance jointly and severally liable with Million State Development for the initial payment, emphasizing the surety bond guaranteed repayment of the down payment besides the construction.
It ruled the waiver clause did not increase the surety’s risk materially and could not release it from liability.
People’s General Insurance argued the draft agreement was the principal contract for the suretyship and the insertion of the waiver clause deprived them of the ability to assess the risk properly, constituting an implied novation that extinguished their liability.
Doctors of New Millennium countered that the surety bond was based on the signed agreement, not the draft, and petitioner should have raised objections before issuing the bond.

The Court affirmed the Court of Appeals’ decision partially, holding that the surety bond’s liabilities are not extinguished by the waiver clause as it does not materially alter the principal contract’s obligations.
The Court deleted the award of attorney’s fees due to lack of sufficient basis for such award.

Whether the insertion of the “Project Owner’s waiver” clause in the principal contract constituted an implied novation that extinguished the surety’s liability under the surety bond.
Whether People’s General Insurance is jointly and severally liable with Million State Development for the initial payment guaranteed under the surety bond.
Whether attorney’s fees can be awarded against People’s General Insurance without a factual or legal basis.