Case Summary (G.R. No. 177728)
Issuance of Bonds and Obligations
To secure FFMCCI’s portion, CCCIC issued:
• Surety Bond No. B-88/11191 (P3,103,803.90) guaranteeing repayment of FFMCCI’s advance payment from Kawasaki.
• Performance Bond No. B-88/11193 (P2,069,202.60) guaranteeing faithful completion of FFMCCI’s work.
Both bonds were effective until late October 1989, subject to written claim within ten days of expiry.
Default, Takeover Agreement, and Bond Demand
FFMCCI halted work in April 1989 for financial reasons. Pursuant to Article 8.3 of the Consortium Agreement, Kawasaki and FFMCCI executed a new agreement on August 24, 1989, recognizing Kawasaki’s completion of FFMCCI’s unfinished “Transferred Portion of Work” and awarding to Kawasaki any profits therefrom. Kawasaki then demanded payment from CCCIC under both bonds on September 14, 1989.
RTC Proceedings and Ruling
In 1989, Kawasaki sued CCCIC in the RTC to collect bond amounts plus interest. CCCIC defended, arguing:
- Bonds were mere counter-guarantees secondary to the government’s claim on the PCIB Letter of Credit and thus not yet ripe.
- Extension of project completion by the government without CCCIC’s consent extinguished its obligation under Civil Code Article 2079.
- The August 24, 1989 agreement between Kawasaki and FFMCCI novated (replaced) the Consortium Agreement, releasing CCCIC.
- Kawasaki was fully compensated for completing the work, negating loss.
- No valid service on FFMCCI for CCCIC’s third-party indemnity claim.
The RTC dismissed Kawasaki’s complaint and CCCIC’s counterclaims, ruling that the bonds had not matured and that the extension extinguished CCCIC’s liability.
Court of Appeals Decisions
The CA reversed the RTC, holding that:
• The Bonds were direct surety obligations to Kawasaki, enforceable upon FFMCCI’s default, without needing the government’s prior claim on its Letter of Credit.
• Article 2079 did not apply because the extension was granted by the government (a non-party to the bonds).
• Contractual relativity barred any effect of government action on the suretyship between CCCIC and Kawasaki.
It ordered CCCIC to pay the full bond amounts with 12% interest from September 15, 1989, plus attorney’s fees, and later held the indemnitor personally liable.
Supreme Court’s Legal Analysis on Suretyship
The Supreme Court reaffirmed that under Civil Code Article 2047, suretyship creates a direct, primary, and absolute liability to the obligee once the principal defaults. The Surety and Performance Bonds expressly guaranteed FFMCCI’s repayment and performance obligations under the Consortium Agreement, without condition that the government first enforce its Letter of Credit.
Application of Civil Code Article 2079
Article 2079 addresses extensions of debt repayment by a creditor to a debtor without a guarantor’s consent. The Court held that it does not apply to an extension granted by the Republic (a non-party to the bonds) under the Construction Contract. Hence, CCCIC’s liability to Kawasaki under its bonds remained intact.
Novation and Its Non-Applicability
Novation requires unanimous consent, extinguishment of the old obligation, and clear incompatibility between old and new terms.
• FFMCCI’s default occurred before the August 24, 1989 agreement, triggering bond liability.
• The reallocation of work scope and profit sharing under the new agreement did not alter the bonds’ terms or increase CCCIC’s obligations.
Therefore, no novation relieved CCCIC of its surety obligations.
Indemnification, Subrogation, and Claim Requirements
CCCIC’s right to indemnity from FFMCCI and subrogation to Kawasaki’s rights arise only after CCCIC has made payment to Kawasaki under the bonds (Civil Code Articles 2066–20
Case Syllabus (G.R. No. 177728)
Facts
- On August 16, 1988, Kawasaki Steel Corporation (“Kawasaki”) and F.F. Maaacop Construction Co., Inc. (“FFMCCI”) executed a Consortium Agreement to form the Kawasaki-FFMCCI Consortium for the Pangasinan Fishing Port Network Project.
- The total contract price was ₱62,000,441.00; FFMCCI’s share was ₱20,692,026.00 (33.37%).
- October 4, 1988: DPWH (Republic of the Philippines) and the Consortium signed the Stage I-A Construction Contract for the Project.
- Kawasaki, as Consortium Leader, secured from Philippine Commercial International Bank a Letter of Credit for ₱6,200,044.10 in favor of DPWH for faithful performance.
- The Republic advanced ₱9,300,066.15 (15% of contract price) to the Consortium.
Securities and Indemnity
- Pursuant to Article 10 of the Consortium Agreement, FFMCCI obtained from CCC Insurance Corporation (“CCCIC”):
- Surety Bond No. B-88/11191 in the amount of ₱3,103,803.90 (15% of FFMCCI’s share) to counter-guarantee FFMCCI’s share of the advance payment.
- Performance Bond No. B-88/11193 in the amount of ₱2,069,202.60 (10% of FFMCCI’s share) to guarantee faithful performance of its portion of work.
- FFMCCI and its president, Florante F. Maaacop, executed Indemnity Agreements in favor of CCCIC.
Events Leading to Litigation
- November 1988: Project commenced.
- April 1989: FFMCCI ceased work due to financial reverses.
- August 24, 1989: Kawasaki and FFMCCI executed a remedial agreement under Article 8.3 of the Consortium Agreement, whereby Kawasaki assumed the unfinished portion of FFMCCI’s work (“Transferred Portion”) and would accrue any resulting profit.
- September 14, 1989: Kawasaki notified CCCIC of FFMCCI’s default and formally demanded payment under the bonds.
- CCCIC refused to pay; Kawasaki filed suit on November 6, 1989, before the Regional Trial Court (RTC) Makati, Branch 66.
- August 19, 1991: CCCIC filed a third-party complaint against FFMCCI and Maaacop for indemnity. They were declared in default.
RTC Decision (May 2, 1996)
- Dismissed Kawasaki’s complaint and CCCIC’s counterclaims.
- Held the bonds to be mere “counter-guarantees” whose cause of action had not yet accrued (no government claim on the Letter of Credit).
- Ruled that a 43-day extension granted by the Republic without CCCIC’s consent extinguished