Case Summary (G.R. No. 187116)
Contractual Agreement and Obligations
On April 28, 2006, ABC and Lucky Star entered into a contract for drilling one exploratory production well as part of the commercial complex project, with a total contract price of PHP 1,150,000. The terms required a 50% downpayment upon submission of a surety bond equal to the downpayment and a performance bond equal to 30% of the contract price. Lucky Star was given 60 calendar days for completion, with a stipulated penalty of 0.2% of the contract amount per day of delay. Lucky Star furnished two bonds from Stronghold as security: a Surety Bond for PHP 575,000 and a Performance Bond for PHP 345,000.
Surety and Performance Bonds Terms
The Surety Bond guaranteed the repayment of the downpayment through deductions should Lucky Star fail to perform. This bond was callable on demand, with liability capped at PHP 575,000, effective until May 9, 2007. The Performance Bond secured the contractor’s faithful compliance with the contractual terms, with a liability limit of PHP 345,000 inclusive of damages and attorney’s fees. The Performance Bond also recognized the right of third parties supplying labor or materials to enforce claims directly.
Facts Leading to Rescission and Claims
Lucky Star received an advance payment of PHP 575,000 on May 20, 2006, and began drilling work. By July 18, 2006, shortly before the contract deadline, only 10% of the work was completed. ABC issued a demand letter for immediate completion and threatened contract cancellation and bond forfeiture. On August 3, 2006, ABC formally rescinded the contract, demanding a refund of the downpayment, liquidated damages, payment under the performance bond, consequential and exemplary damages, and attorney’s fees. ABC subsequently sent a notice of claim to Stronghold on August 16, 2006, but received no response, prompting ABC to file a complaint for rescission with damages on November 21, 2006.
Trial Court’s Ruling
The Regional Trial Court (RTC), Pasig City, absolved Stronghold of liability, ruling that the surety and performance bonds were accessory contracts dependent on the principal contract. The RTC held that rescission of the principal contract automatically canceled the bonds. The court ordered Lucky Star to pay ABC PHP 575,000 plus damages but dismissed Stronghold’s liability and its counterclaims.
Issues on Appeal
ABC petitioned for review, contesting the RTC’s finding that the bonds were automatically canceled upon rescission. ABC argued that (a) a valid principal obligation still existed despite contract rescission due to Lucky Star’s default; (b) the surety’s liability had already accrued and became direct and absolute upon principal’s breach, independent of contract rescission; and (c) rescission did not extinguish Stronghold’s bond liabilities.
Applicable Law: Suretyship under the 1987 Philippine Constitution and New Civil Code
Under the 1987 Philippine Constitution and Article 2047 of the New Civil Code, a surety binds itself solidarily with the principal obligor to guarantee the latter’s performance. The surety’s obligation, although secondary and accessory, is nonetheless direct, primary, and absolute once the principal defaults. The surety assumes responsibility for the debt or duty inherent in the principal contract, even without personal interest or benefit.
Court’s Legal Analysis on Surety’s Liability
The Supreme Court emphasized that although the surety contract depends on the existence of a valid principal obligation, it becomes enforceable upon the principal’s default. Lucky Star’s failure to complete the work within the agreed period constituted non-performance, thus activating Stronghold’s liability under the bonds. The clause “this bond is callable on demand” further confirmed the surety’s direct accountability. The Court recognized that a creditor may proceed against any or all solidary debtors (Article 1216, New Civil Code), including the surety.
Rejection of Automatic Cancellat
...continue readingCase Syllabus (G.R. No. 187116)
G.R. No. 187116, October 18, 2010
Background and Parties Involved
- Petitioner Asset Builders Corporation (ABC) entered into a contract with Lucky Star Drilling & Construction Corporation (Lucky Star) for the construction of the ACG Commercial Complex located at NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City.
- The contract entailed Lucky Star supplying labor, materials, tools, equipment, and technical supervision to drill one exploratory production well.
- Contract price was set at PHP 1,150,000.00 with a completion period of 60 calendar days and penalties of 0.2% (2/10 of 1%) of the contract price per day delay.
- ABC was to pay a 50% downpayment upon submission of surety and performance bonds and 10% retention after project acceptance.
- Lucky Star secured two bonds from respondent Stronghold Insurance Company, Inc. (Stronghold): a surety bond of PHP 575,000.00 covering the downpayment, and a performance bond of PHP 345,000.00 guaranteeing faithful performance and payment to labor and material suppliers.
Terms and Nature of Bonds Issued
- The Surety Bond, dated May 9, 2006, was callable on demand, guaranteeing repayment to ABC through deductions from periodic billings for the advance payment. Liability was limited to PHP 575,000.00 and expired on May 9, 2007.
- The Performance Bond, also dated May 9, 2006, was for PHP 345,000.00 and guaranteed faithful compliance with contract terms and satisfaction of labor/material obligations, inclusive of interest, attorney’s fees, and damages.
- Both bonds were accessory contracts dependent on the principal contract between ABC and Lucky Star.
- The bonds expressly allowed ABC to demand payment directly from Stronghold upon Lucky Star’s default, with the bonds callable on demand, signifying a primary obligation to ABC despite the bonds’ accessory nature.
Contract Execution and Breach
- On May 20, 2006, ABC paid Lucky Star PHP 575,000.00 as the 50% downpayment minus 2% withholding tax.
- Lucky Star commenced work but completed only 10% of the drilling by July 18, 2006, just days before contract deadline, constituting delay and non-performance.
- ABC issued a demand letter on July 18 urging immediate completion and threatened cancellation of contract and forfeiture of bonds upon failure to comply.
- On August 3, 2006, ABC formally rescinded the contract and demanded:
- Refund of downpayment PHP 563,500.00 plus legal interest,
- Liquidated damages of PHP 138,000.00 (2/10 of 1% per day delay),
- Payment under the performance bond of PHP 345,000.00,
- Consequential damages of PHP 150,000.00,
- Exemplary damages of PHP 150,000.00,
- Attorney’s fees of at least PHP 100,000.00,
- Vacating the project site by Lucky Star and its men.
- On August 16, 2006, ABC sent a Notice of Claim to Stronghold for bond obligation fulfillment, receiving no response.
Trial Court Proceedings and Decision
- ABC filed a Complaint for Rescission with Damages on November 21, 2006 against Lucky Star and Stronghold.
- Stronghold denied liability, disputing ABC’s alleged advance payment proof and argued that ABC’s rescission canceled any bond liability.
- Lucky Star failed