Title
Philippine Charter Insurance Corp. vs. Central Colleges of the Philippines
Case
G.R. No. 180631-33
Decision Date
Feb 22, 2012
CCP contracted DPCC for a building project; delays led to termination. PCIC, as surety, held liable for bonds after DPCC defaulted. Counterclaim denied due to lack of evidence. SC upheld CCP's termination rights, modified bond liability.

Case Summary (G.R. No. 81381)

Contract and Bonds

On May 16, 2000, CCP contracted DPCC to build a five-storey school building in two phases, each valued at PHP 124 million, totaling PHP 248 million. To guarantee DPCC’s performance, PCIC issued three bonds: Surety Bond No. PCIC-45542 for PHP 7,031,460.74; Performance Bond No. PCIC-45541 initially for PHP 2,929,775.31, later increased to PHP 6,199,999.99; and Performance Bond No. PCIC-46172 for PHP 692,890.74. All bonds were callable on demand and set to expire on October 30, 2003.

Project Completion and Delays

Phase 1 was completed without issues, and CCP paid a downpayment of PHP 14,880,000 for Phase 2. However, Phase 2 suffered substantial delays, with only about 47% completion reported by July 2003, and 51% completion by November 2003, far behind schedule. CCP notified DPCC and PCIC of the contractor’s breach and intended to claim on the bonds, formally declaring default and requesting bond proceeds in late 2003.

Contract Termination and Claims

Due to DPCC’s failure to complete work on time, CCP terminated the contract and took over construction using a different contractor. Negotiations between CCP and DPCC failed, prompting CCP to file a complaint for arbitration with the Construction Industry Arbitration Commission (CIAC) on October 28, 2004. CCP sought joint and several liability from DPCC and PCIC for the amounts due under the surety and performance bonds, plus attorney’s fees.

CIAC Decision

On June 3, 2005, the CIAC ruled in favor of CCP, finding that: (1) CCP was justified in terminating the contract due to DPCC’s breach and delay; (2) DPCC had accomplished only 57.33% of Phase 2 as of the termination; (3) DPCC was overpaid by roughly PHP 27,779,022; (4) PCIC was liable for the bond amounts guaranteeing DPCC’s performance and for the unrecouped downpayment; (5) CCP’s claims were not time-barred; (6) PCIC could seek indemnity from DPCC; and (7) DPCC was entitled to payment for some materials and equipment left at the site, although moral and attorney’s fees claims were denied. The CIAC ordered PCIC and DPCC jointly and severally to pay CCP a net amount of PHP 9,692,087.37 plus interest.

Appeals and Court of Appeals (CA) Ruling

All parties appealed to the CA, and on June 29, 2007, the CA modified the CIAC decision. It upheld CCP’s right to terminate DPCC’s contract due to inexcusable delay but deleted the award for the cost of materials and equipment claimed by DPCC, reasoning that the costs were not sufficiently proven and that the credit belonged to DPCC, not PCIC. The CA ordered PCIC and DPCC to jointly and severally pay CCP the bond amounts totaling PHP 13,924,351.47 with applicable interest. PCIC’s motion for reconsideration was denied on November 19, 2007.

Issues on Review and PCIC’s Contentions

PCIC raised three main issues on certiorari: (1) whether the CA erred in holding it liable under the performance and surety bonds; (2) whether CCP was justified in terminating the contract; and (3) whether the CA erred in deleting DPCC’s counterclaim for materials and equipment costs and denying PCIC any benefit therefrom.

PCIC argued that it should be released from liability on Performance Bond No. PCIC-46172, since the obligation under that bond was already fulfilled, citing judicial admission by CCP’s president during the arbitration proceedings stating they no longer sought to claim this bond.

Judicial Admission and Bond PCIC-46172

The Court recognized that CCP’s president admitted before the arbitral tribunal that they were no longer pursuing claims under Performance Bond PCIC-46172 (PHP 692,890.74), effectively a judicial admission. Under Section 4, Rule 129 of the Rules of Court, judicial admissions are not subject to proof and bind the party making them, barring showing of palpable mistake. Thus, the Court limited the claim to Surety Bond PCIC-45542 and Performance Bond PCIC-45541.

Timeliness and Notice of Claim on Bonds

PCIC argued that DPCC was in default by September 4, 2003, and claims should have been filed within ten days thereafter, but CCP only notified the surety on October 29, 2003, beyond the limitation period. The Court disagreed, invoking Article 1169 of the New Civil Code, which states that delay or default commences only upon judicial or extrajudicial demand for performance.

The Court held that DPCC’s default began when CCP formally notified them of the breach and invoked the bonds on October 29, 2003. This constituted a proper extrajudicial demand. Thus, the notification complied with the bond terms requiring written claims within 10 or 15 days from expiration or default occurrence.

Nature of Suretyship and PCIC’s Liability

Citing Article 2047 of the New Civil Code and relevant jurisprudence, the Court reaffirmed the nature of suretyship as a solidary and direct liability alongside the principal obligor (DPCC) to assure performance of contractual obligations. PCIC, as surety, is bound to fulfill the obligation guaranteed by the bonds upon default of DPCC. The issuance of the bonds is an ancillary contract to the principal contract but creates binding obligations for the surety upon DPCC’s failure to perform.

Effect of Extension of Bonds and Further Claims

PCIC contended that CCP failed to file claims after the bonds were extended. The Court clarified that CCP’s October 29, 2003 notice sufficed as valid claim and notice of default. The approval of extension by PCIC on December 5, 2003 occurred after this notice and had no adverse effect on CCP’s rights or PCIC’s liability.

Legality of Contract Termination by CCP

The Court affirmed CCP’s lawful termination of the contract based on Article 16 of the contract agreement, which authorized termination on grounds including substantial failure by the contractor to fulfill obligations after written notice.

Deletion of Award for Materials, Equipment, Formworks, and Scaffoldings

Regarding th

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