G.R. No. 111107 - Paat vs. Court of Appeals

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy-Medical Rehabilitation Center, Phase II (the Project), to Ajyal Trading and Contracting Company for ID 5,416,089.046.
On 7 March 1981, spouses Eduardo and Iluminada Santos, on behalf of 3-Plex International, Inc., entered a joint venture with Ajyal: 3-Plex would execute the Project; Ajyal would earn a 4% commission.
On 8 April 1981, 3-Plex assigned its rights under the joint venture to V.P. Eusebio Construction, Inc. (VPECI), duly registered with the Philippine Overseas Construction Board (POCB).
On 2 May 1981, 3-Plex and VPECI agreed that the Project would be under their joint management.

SOB required performance and advance payment bonds: 5% and 10% of the contract price, respectively.
3-Plex and VPECI applied to the Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee) for counter-guarantees.
PhilGuarantee issued Letter of Guarantee No. 81-194-F (Performance Bond, ID 271,808.610) and No. 81-195-F (Advance Payment Bond, ID 541,608.901), secured by a Deed of Undertaking and a surety bond from First Integrated Bonding and Insurance Company, Inc.
Because SOB required a guarantee from Rafidain Bank (Iraq), a three-layer guarantee was arranged: PhilGuarantee → Al Ahli Bank of Kuwait → Rafidain Bank → SOB.

On 11 June 1981, SOB and the joint venture executed the service contract for completion in 547 days.
Construction began late August 1981 and suffered slow progress; the Performance Bond and Advance Payment Bond were extended repeatedly through December 1986 and May 1984, respectively.
By March 1986, only 51.7% of work was done; remaining work required imported electro-mechanical materials, payable in US dollars, which Iraq could not provide.

On 26 October 1986, Al Ahli Bank of Kuwait called the performance bond counter-guarantee. VPECI protested, citing delays due to SOB’s failure to pay in US dollars and negotiated extensions.
On 14 April 1987, Al Ahli Bank telexed PhilGuarantee that it had paid Rafidain Bank US $876,564 under the guarantee and demanded reimbursement plus interest and expenses.
Despite VPECI’s requests to withhold payment pending diplomatic efforts, PhilGuarantee paid US $876,564 on 21 January 1988 and US $59,129.83 on 6 May 1988 for interest and penalties.

On 19 June 1991, PhilGuarantee demanded reimbursement of P 47,872,373.98 plus interest and attorney’s fees from respondents; they did not pay.
PhilGuarantee filed Civil Case No. 91-1906 on 9 July 1991 in the RTC of Makati; the trial court dismissed the complaint, ruling the guarantee had lapsed and respondents incurred no valid default.
The Court of Appeals, on 14 June 1999, affirmed the dismissal, adding that PhilGuarantee acted with full knowledge of SOB’s contractual violations and VPECI’s defenses.
PhilGuarantee filed a petition for review on certiorari to the Supreme Court.

Whether PhilGuarantee, as guarantor, is entitled to reimbursement from respondents under the Deed of Undertaking and surety bond for amounts it paid under Letter of Guarantee No. 81-194-F.
Whether PhilGuarantee can claim subrogation to the rights of Al Ahli Bank and Rafidain Bank against respondents.
Whether it is inequitable and unjust to hold respondents liable under their Deed of Undertaking given the circumstances.