Title
FGU Insurance Corp. vs. Spouses Roxas
Case
G.R. No. 189526
Decision Date
Aug 9, 2017
A construction dispute involving breach of contract, surety bond liability, and unpaid claims, with rulings on liquidated damages, judicial compensation, and res judicata.
surety bond
liquidated damages
damages awarded

Case Summary (G.R. No. 189526)

Factual Background

The Spouses Roxas contracted with Rosendo P. Dominguez, Jr. to construct the “Vista Del Mar Executive Houses” for an estimated cost of P1,200,000.00, with Philtrust Bank financing P900,000.00 for materials and the Spouses Roxas to shoulder P300,000.00 as the contractor’s labor and supervision fee. Under the May 24, 1979 agreement the P300,000.00 labor cost was payable in three P30,000.00 cash installments and a final P210,000.00 to be paid in specified parcels of land upon completion; an interest rate of 14% per annum was stipulated for nonpayment. Dominguez secured a performance bond from FGU Insurance Corporation in the face amount of P450,000.00 conditioned on faithful performance. Disputes arose over adjustments in contract price, alleged failures by the Spouses Roxas to make the three P30,000.00 payments, alleged diversion of project funds, and the refusal of Philtrust Bank to release further sums without required invoices.

Trial Court Proceedings

Dominguez sued the Spouses Roxas and Philtrust Bank alleging breach and sought among other reliefs annulment of the completion clause, rescission of the contracts, and declaration of the surety bond unenforceable. The trial court found that the Spouses Roxas breached their obligations, that Dominguez’s noncompletion was justified by rising costs, and that Dominguez had been induced to accept the contract by deceit. The trial court cancelled the performance bond, awarded Dominguez P90,000.00 with 14% interest, P73,146.75 with legal interest, moral and exemplary damages, and attorney’s fees, and denied other claims for lack of proof.

Court of Appeals Ruling

The Court of Appeals reversed and modified the trial court in substantial respects. It held the contractual clauses and the May 24, 1979 Agreement valid. It found no proof of extraordinary inflation or compliance with Article 1724 to justify price adjustment. The Court of Appeals declared FGU Insurance Corporation’s bond in full force and effect and adjudged FGU solidarily liable with Dominguez to the Spouses Roxas and Philtrust Bank to the extent of P450,000.00. It also found unjustified stoppage and abandonment by Dominguez and adjudged Dominguez liable to the Spouses Roxas for moral, exemplary damages, and attorney’s fees, while ordering the Spouses Roxas to pay Dominguez certain sums under the May 24 agreement. The Court of Appeals remanded for reception of evidence on other claims of Philtrust Bank.

Issues Presented to the Supreme Court

The consolidated petitions raised multiple questions: whether FGU was liable for the full face amount of the bond or only for cost overruns; whether the Spouses Roxas were entitled to liquidated damages under the construction contract; whether the awards of P90,000.00 with 14% interest and P73,136.75 with legal interest in favor of Dominguez were supported by fact; whether the liabilities of the Spouses Roxas to Dominguez could be set off against any liability of FGU under Articles 1280 and 1283 of the Civil Code; whether remand for computation of Philtrust Bank’s claims was proper; and whether Philtrust Bank should be held liable for unauthorized releases of construction funds.

Parties’ Contentions on Surety Liability

FGU contended that the bond’s face amount merely set a maximum potential liability and that its exposure should be limited to actual damages or cost overruns incurred by the Spouses Roxas, or at most one-half of the face amount because Philtrust Bank was a co-obligee. The Spouses Roxas countered that the contract provided for liquidated damages of P1,000.00 per day and that the bond named “the Bank and/or owner,” permitting payment to either creditor, and that Philtrust Bank had been at fault for unauthorized releases and therefore the Spouses Roxas were entitled to the entire bond proceeds.

Supreme Court’s Analysis on the Terms of the Bond

The Court examined FGUIC Bond No. G(23) 5954 and found its condition plain: the bond secured the full and faithful performance of Dominguez and bound FGU to pay P450,000.00 if the principal failed to perform. The Court reiterated the settled rule that liability under a surety bond is determined strictly by the bond’s terms and that the surety’s obligation, where unqualified, is realized upon the principal’s default. The Court rejected FGU’s argument that it was limited to cost overruns because the bond did not contain such a limiting clause and because any ambiguity in a surety’s adhesion contract must be construed against the drafter.

Indemnity, Subrogation, and the Surety’s Rights

The Court reiterated that although a surety’s obligation is accessory, a surety who pays the creditor has the right to full indemnification from the principal and to subrogation to the creditor’s rights, relying on Escano v. Ortigas, Jr. and Civil Code provisions including Articles 2066 and 2067. Thus FGU would have the right to recover from Dominguez the amount it paid under the bond.

Solidary Creditors and Complementary Contracts

The Court construed the bond together with the Contract of Building Construction under the doctrine that complementary contracts are to be read jointly, citing Article 1374. The construction contract expressly stated that the contractor would pay the Bank and/or owners liquidated damages and required performance bonds in favor of the Bank and/or owners. The Court concluded that the contract created solidary creditors and that FGU was bound to both the Spouses Roxas and Philtrust Bank as solidary obligees rather than to two separate joint obligees entitled only to one-half each.

Liquidated Damages and Abandonment

Addressing the liquidated-damages clause of P1,000.00 per day, the Court held that the stipulation covered delay and also applied where the contractor abandoned the project. The parties validly agreed to liquidated damages to ensure performance and to indemnify the owner for delay. The Court therefore computed liquidated damages from the scheduled completion date of September 23, 1979 until Dominguez effectively abandoned the project on October 31, 1979, resulting in P38,000.00, and held that FGU could not be liable for that remedy because the surety was not a signatory to the construction contract and the bond contained no separate liquidated-damages stipulation.

Findings on Spouses’ Indebtedness to Dominguez and Set-off

The Court declined the Spouses Roxas’ invitation to reweigh evidence and deferred to the trial court’s factual findings, which were affirmed by the Court of Appeals. The trial court found that the Spouses Roxas failed to make the three P30,000.00 cash payments and that they owed Dominguez P73,136.75 for advances diverted to personal use. The Court affirmed the findings that Dominguez was entitled to P90,000.00 with 14% interest and P73,136.75 with legal interest. Applying Article 1280 of the Civil Code and related doctrines, the Court held that FGU as surety could set up compensation against amounts the creditor might owe the principal; accordingly FGU was allowed to offset its liability under the bond against Dominguez’s collectibles from the Spouses Roxas.

Philtrust Bank’s Claims and Res Judicata on Unauthorized Releases

Philtrust Bank contested the remand ordered by the Court of Appeals and maintained it had already adduced evidence of several promissory notes and releases. The Supreme Court agreed with Philtrust Bank that remand was unnecessary because it had presented sufficient evidence. The Court accepted Philtrust Bank’s proof of numerous promissory notes and computed the aggregate indebtedness with stipulated interests and penalties, arriving at P2,184,260.38 as of June 30, 1980, subject to further 19% interest thereafter. The Court also took judicial notice of a related final judgment in which Philtrust Bank had been held liable for certain unauthorized releases in Civil Case No. 4809, now final and thus precluding relitigation under res judicata; accordingly the question of Philtrust Bank’s liability for unauthorized releases in this case was no longer

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