G.R. No. 120988 - People vs. Dela Cruz y Nieva

Case Summary (G.R. No. 120988)

Factual Background

The parties executed a building contract dated January 27, 1999 whereby N.C. Francia Construction Corporation (FCC) agreed to construct a four‑storey commercial and parking complex known as Park N Fly for P45,522,197.72, with work to commence February 1, 1999 and to be completed under a PERT‑CPM schedule by October 15, 1999. The contract imposed liquidated damages of one‑tenth of one percent of the contract price per day of delay. Philippine Charter Insurance Corporation (PCIC) issued Performance Bond No. 31915 to secure FCC’s full and faithful performance. During performance, Petroleum Distributors & Services Corporation (PDSC) sourced materials and subcontracted portions of the work, reducing the effective contract price according to FCC to P19,809,822.12. FCC fell behind schedule; the parties executed a deed of assignment and a memorandum of agreement dated September 10, 1999 revising the work schedule and extending the performance bond until March 2, 2000. PDSC terminated the contract on December 3, 1999 and demanded liquidated damages and performance under the bond.

Contractual Terms and Performance Bond

The Building Contract expressly provided in Article 2.3 that time was of the essence and that, if the contractor failed to complete within the agreed period, the owner was entitled to liquidated damages equal to one‑tenth of one percent of the contract price per day of delay, not by way of penalty. The Performance Bond instrument pledged that PCIC, as surety, bound itself for the payment of the bond face amount to secure the contractor’s full and faithful performance and expressly limited the surety’s liability to the face value of the bond.

Procedural History

PDSC filed a complaint against FCC and its officers for damages and recovery of property; it later filed a supplemental complaint impleading PCIC for coverage under Performance Bond No. 31915. The Regional Trial Court rendered judgment on January 12, 2004 in favor of PDSC, holding FCC and PCIC jointly and severally liable and awarding P9,000,000 as damages and P50,000 attorneys’ fees. FCC and PCIC appealed. The Court of Appeals, by its July 31, 2007 Decision, affirmed the RTC with modification, holding the appellants solidarily liable to pay liquidated damages of P3,882,725.13 computed on the reduced contract price, awarding attorneys’ fees of P50,000, and limiting PCIC’s liability pursuant to the face of the performance bond. PCIC’s motion for reconsideration was denied on December 28, 2007. Only PCIC sought recourse to this Court under Rule 45.

Issues Presented

The Supreme Court identified the principal questions as: whether PCIC was liable for liquidated damages under Performance Bond No. 31915 or only for actual and compensatory damages; whether the Memorandum of Agreement dated September 10, 1999 between PDSC and FCC, entered into without PCIC’s knowledge, operated to extinguish PCIC’s obligation by novation or otherwise; and whether the sums of P2,793,000.00 (receivable from Caltex) and P662,836.50 (auction proceeds) should be deducted from the liquidated damages awarded.

Petitioner's Contentions

PCIC argued that the performance bond on its face answered only for actual and compensatory damages and did not extend to liquidated damages; that the liability of a surety cannot be expanded beyond the express terms of the bond; that the September 10, 1999 MOA and the subcontracting by PDSC altered the original obligations and thereby discharged PCIC under Article 2079 (as pleaded) and by novation; that any extension of the bond was ineffective without PCIC’s consent; that PDSC’s termination and takeover extinguished PCIC’s obligation; and that the sums recovered by PDSC from Caltex and from auction of chattels must be deducted from the award.

Respondent's Position

PDSC maintained that FCC defaulted by failing to complete the project within the stipulated period and that the Building Contract expressly provided for liquidated damages. PDSC treated the performance bond as security for FCC’s obligations and insisted that PCIC, as surety, became directly liable upon FCC’s default and PDSC’s termination of the contract.

Ruling of the Supreme Court

The Supreme Court denied the petition and affirmed the Court of Appeals’ July 31, 2007 Decision and December 28, 2007 Resolution. The Court upheld the CA’s computation of liquidated damages on the reduced contract price and its deduction of the P2,793,000.00 receivable and the P662,836.50 auction proceeds from the liquidated damages award. The Court affirmed that PCIC’s liability under the bond did not exceed the face amount of Performance Bond No. 31915.

Legal Reasoning on Liquidated Damages and Suretyship

The Court held that the Building Contract unambiguously provided for liquidated damages and that parties may stipulate such damages under Article 2226 of the Civil Code. The Court emphasized that a performance bond guaranteeing "full and faithful performance" secures the obligee against the contractor’s failure and gives the obligee the right to proceed against the surety upon default. The Court treated the surety’s obligation as accessory to the principal obligation but legally direct and enforceable against the surety upon default, citing Article 2047 and applicable jurisprudence. Consequently, PCIC could not escape liability on the ground that the bond was limited to compensatory damages where the principal contract fixed liquidated damages.

Legal Reasoning on Novation and the Memorandum of Agreement

The Court rejected PCIC’s contention that the September 10, 1999 MOA effected novation or materially altered the principal obligation so as to discharge the surety. The Court recalled that novation requires an unequivocal substitution of obligations or an incompatibility between old and new ob

Case Syllabus (G.R. No. 120988)

Parties and Procedural Posture

PHILIPPINE CHARTER INSURANCE CORPORATION filed a petition for review under Rule 45, Rules of Court from the Court of Appeals' decision in CA-G.R. CV No. 82417.
PETROLEUM DISTRIBUTORS & SERVICES CORPORATION was the appellee below and the obligee under the contested Performance Bond No. 31915.
The Court of Appeals affirmed with modification the January 12, 2004 Decision of the Regional Trial Court, Branch 111, Pasay City.
Only PHILIPPINE CHARTER INSURANCE CORPORATION sought relief before the Supreme Court, so the decision of the Court of Appeals became final and executory as to the other parties.

Key Factual Allegations

PETROLEUM DISTRIBUTORS & SERVICES CORPORATION and N.C. Francia Construction Corporation executed a Building Contract dated January 27, 1999 for the construction of the Park N Fly building for P45,522,197.72.
The parties agreed that work would start February 1, 1999 and that the project timeline under the PERT-CPM contemplated Phase 1 completion in May 1999 and overall turnover by October 1999.
PDSC subcontracted and sourced certain materials which resulted in a reduction of the contract price to P19,809,822.12, according to respondent.
FCC incurred progressive delays reflected at sixteen, thirty and ultimately sixty days, and PDSC issued warnings and later terminated the contract on December 3, 1999.
On September 10, 1999 FCC executed a deed of assignment of receivables from Caltex and a chattel mortgage as additional security and the parties executed a Memorandum of Agreement to revise the work schedule.
FCC procured Performance Bond No. 31915 from PHILIPPINE CHARTER INSURANCE CORPORATION in the face amount of P6,828,329.66 which was extended to March 2, 2000.
PDSC demanded liquidated damages totalling approximately P9,149,962.02 and later filed suit for damages and foreclosure remedies, impleading PCIC in a supplemental complaint.

Contractual Terms

The Building Contract, Article 2.2, made time and reduced construction costs the essence of the contract and fixed the completion date not later than October 15, 1999.
The Building Contract, Article 2.3, stipulated liquidated damages at one-tenth (1/10) of one percent (1%) of the contract price for every day of delay.
The Building Contract, Article 2.4, prohibited extensions of time except for Force Majeure.
Performance Bond No. 31915 guaranteed the full and faithful performance by FCC and expressly limited the surety’s liability to the face value of the bond.

Claims and Defenses

PETROLEUM DISTRIBUTORS & SERVICES CORPORATION claimed entitlement to liquidated damages for FCC’s delay and sought to hold PHILIPPINE CHARTER INSURANCE CORPORATION liable under the performance bond.
FCC contended that the contract price was reduced to P19,809,822.12, that the September 10, 1999 Memorandum of Agreement discharged its obligations, and that delays were attributable in part to PDSC.
PHILIPPINE CHARTER INSURANCE CORPORATION asserted that its bond covered only actual and compensatory damages and no