G.R. No. 180898 - Philippine Charter Insurance Corp. vs. Petroleum Distributors and Services Corp.

Case Summary (G.R. No. 180898)

Petitioner, Respondent and Procedural Posture

PCIC (surety) filed a petition for review under Rule 45 contesting the Court of Appeals’ affirmance with modification of an RTC judgment that had held FCC and PCIC jointly and severally liable for damages arising from FCC’s delay in completing the Park aN Fly project. Only PCIC appealed to the Supreme Court; the Court limited its discussion to PCIC’s liability.

Key Dates

Contract executed: January 27, 1999.
Construction commencement: February 1, 1999.
PERT-CPM milestones: Phase 1 completion May 17, 1999; Phase 2 completion October 20, 1999; overall turnover scheduled October 21, 1999 (RTC: completion not later than October 15, 1999).
MOA and security instruments: Deed of assignment and chattel mortgage dated September 10, 1999; MOA dated September 10, 1999; performance bond extended to March 2, 2000.
Termination by PDSC: December 3, 1999.
Trial court decision: January 12, 2004.
CA decision: July 31, 2007 (denial of motions for reconsideration on December 28, 2007).
Supreme Court decision: April 18, 2012. Applicable constitutional framework: 1987 Constitution.

Applicable Law and Contractual Provisions

Governing law: Civil Code principles on obligations and contracts (Articles cited in record include Arts. 1292, 1306, 2047, 2226). Contractual terms: Building Contract Article 2 provided that time, quality, and reduced cost were the essence; required completion within a fixed period; and stipulated liquidated damages of 1/10 of 1% of the contract price per day of delay, described expressly as liquidated damages and not a penalty. The Performance Bond expressly guaranteed “full and faithful performance” by FCC and limited the surety’s liability to the bond face.

Contractual Undertakings and Bond Coverage

The Building Contract imposed strict time obligations, prohibited extensions for ordinary procurement delays except for force majeure, and prescribed liquidated damages for delay. The performance bond issued by PCIC expressly secured the full and faithful performance of FCC’s obligations under the building contract and limited PCIC’s exposure to the bond face amount. The bond therefore created a direct surety obligation in favor of PDSC, contingent on FCC’s failure to perform.

Project Execution, Delays and Interim Measures

Construction began February 1, 1999. PDSC tracked progress under the PERT-CPM schedule and observed successive delays: initial 16 days behind schedule, increasing to 30 and then 60 days. PDSC issued reminders and notices to FCC to catch up. On September 10, 1999 FCC assigned receivables from Caltex and executed a chattel mortgage in favor of PDSC as additional security; on the same day FCC and PDSC executed a memorandum of agreement (MOA) revising the work schedule. The performance bond was extended to March 2, 2000.

Termination, Claims and Court Proceedings

PDSC formally terminated the contract on December 3, 1999 for failure to accomplish the project within the agreed period. It demanded payment of liquidated damages (PDSC computed P9,149,962.02) and claimed under the performance bond. After receiving no response, PDSC filed suit against FCC and its officers for damages, recovery/foreclosure of security, and later impleaded PCIC via supplemental complaint seeking payment under the bond up to its face.

Defenses of FCC and PCIC

FCC’s defenses included: (a) the contract price had effectively been reduced to P19,809,822.12 due to PDSC’s sourcing/subcontracting; (b) the September 10, 1999 MOA and related arrangements constituted waiver or extinguishment of PDSC’s claims; and (c) delay was attributable in part to PDSC. PCIC’s defenses included: (a) a performance bond answers only for actual/compensatory damages and not for liquidated damages (liability determined by the bond’s terms); (b) the bond had expired on October 15, 1999 and any extension to March 2, 2000 was not binding without PCIC’s consent; (c) the MOA extinguished or waived PDSC’s claims against PCIC; (d) any liability of PCIC should be proportionate to other sureties; and (e) certain receipts (Caltex receivable P2,793,000.00 and auction proceeds P662,836.50) should be deducted from any award.

Trial Court Ruling

The RTC found FCC guilty of delay and held FCC and PCIC jointly and severally liable, ordering payment of P9,000,000.00 as damages plus attorney’s fees and interest. FCC and PCIC appealed.

Court of Appeals Ruling and Modifications

The Court of Appeals agreed that FCC incurred delay but modified the liquidated damages computation, applying the reduced contract price of P19,809,822.12 as the base. The CA adjudged FCC, its responsible officers, and PCIC solidarily liable to pay liquidated damages of P3,882,725.13 (6% interest from January 10, 2000), attorney’s fees of P50,000.00, and costs of suit, with PCIC’s liability not to exceed the bond face of P6,828,329.66. The CA also expressly allowed deduction of the Caltex receivable and auction proceeds from the award.

Issues Presented to the Supreme Court

PCIC raised three principal issues before the Supreme Court: (1) whether the performance bond rendered PCIC liable for liquidated damages (or only for actual/compensatory damages); (2) whether the September 10, 1999 MOA between PDSC and FCC, made without PCIC’s consent, extinguished PCIC’s obligation under the bond (novation or discharge); and (3) whether the sums P2,793,000.00 (Caltex receivable) and P662,836.50 (auction proceeds) should be deducted from the liquidated damages award.

Supreme Court Analysis — Surety Liability for Liquidated Damages

The Court affirmed that the performance bond guaranteed FCC’s “full and faithful” performance and thus gave PDSC the right to proceed against PCIC following FCC’s default. The Court reiterated that suretyship is accessory to the principal obligation yet creates a direct, solidary liability of the surety to the obligee. Citing Civil Code Article 2047 and controlling jurisprudence, the Court held that PCIC’s liability arose upon FCC’s non‑performance and that the bond’s language authorized PDSC to demand payment for the principal obligation’s breach. The Court rejected PCIC’s contention that the bond only covered actual/compensatory damages, concluding the bond’s coverage of “full and faithful performance” encompassed the creditor’s contractual remedies, includ

Case Syllabus (G.R. No. 180898)

Case Caption and Source

Decision reported at 686 Phil. 154, Third Division, G.R. No. 180898, April 18, 2012; penned by Justice Mendoza, with Justices Velasco, Jr. (Chairperson), Peralta, Abad, and Perlas‑Bernabe concurring.
Petition for review under Rule 45 of the Rules of Court by petitioner Philippine Charter Insurance Corporation (PCIC) seeking reversal of the Court of Appeals’ July 31, 2007 Decision and December 28, 2007 Resolution in CA‑G.R. CV No. 82417 affirming with modification the January 12, 2004 Decision of the Regional Trial Court (RTC), Branch 111, Pasay City.

Parties and Corporate/Individual Actors

Petitioner: Philippine Charter Insurance Corporation (PCIC) — surety under Performance Bond No. 31915.
Respondent/Obligee: Petroleum Distributors & Services Corporation (PDSC).
Principal/Contractor: N.C. Francia Construction Corporation (FCC), represented by Emmanuel T. Francia (president and CEO).
Personal sureties/indemnitors: Natividad Francia, Emmanuel C. Francia, Jr., Anna Sheila C. Francia San Diego, Felipe G. Bermudez, Emmanuel T. Francia, Charlemagne C. Francia, and Ruben G. Caperia — signatories to Undertaking of Surety.
Other referenced parties: Caltex Philippines, Inc. (source of assigned receivables); auction purchasers/auction proceeds related to FCC equipment.

Contract at Issue — Building Contract (January 27, 1999)

Parties: PDSC (owner/obligee) contracted FCC (contractor) for construction of a four‑storey commercial and parking complex (Park aN Fly) at MIA Road corner Domestic Road, Pasay City.
Contract price: P45,522,197.72 (originally); later contested reduction asserted by FCC to P19,809,822.12.
Commencement and completion dates: construction to begin February 1, 1999; completion within 259 calendar days from signing or not later than October 15, 1999; PERT‑CPM allocated Phase 1 completion May 17, 1999 and Phase 2 completion October 20, 1999, turnover October 21, 1999.
Liquidated damages clause (Article 2.3): OWNER entitled to deduct from amounts due the sum of one‑tenth (1/10) of one percent (1%) of contract price for every day of delay in any stage of the project, characterized in contract as liquidated damages and not a penalty.
Work intensity requirement (Article 2.2, 2.5): construction to be conducted at least twenty hours daily with at least two shifts; contractor to schedule work to not interfere with others and to cease/resume as directed by OWNER.
Force majeure and time extension limitation (Article 2.4): contractor may not request extension for procurement delays except for Force Majeure (war, civil commotion, acts of God, other causes beyond contractor’s control without contractor’s fault).

Performance Bond (Performance Bond No. 31915)

Instrument: Performance Bond No. 31915 issued by PCIC for the benefit of PDSC as obligee to secure full and faithful performance by FCC (principal).
Face amount: PESOS SIX MILLION EIGHT HUNDRED TWENTY EIGHT THOUSAND THREE HUNDRED TWENTY NINE & 66/100 (₱6,828,329.66); stated liability of surety not to exceed face value.
Condition: Bond guarantees that principal will furnish, deliver, place and complete all necessary materials, labor, plant, tools, equipment, supervision, etc., per the attached Building Contract dated January 27, 1999; if principal performs, bond null and void; otherwise remains in full force and effect.

Factual Chronology — Performance, Delay and Security Measures

February 1, 1999: construction commenced.
PDSC sourced materials and subcontracted various phases with intent to reduce cost and speed up work; PDSC’s subcontracting resulted in alleged reduction of contract price (FCC’s contention: reduced to ₱19,809,822.12).
Phase 1 delay noticed: FCC 16 days behind schedule (PDSC letter March 25, 1999 warning of penalty under liquidated damages clause).
Delay escalated: 30 days and later 60 days delay recorded.
September 10, 1999: FCC executed deed of assignment (portion of receivables from Caltex) and chattel mortgage conveying equipment to PDSC as additional security; same date PDSC and FCC executed Memorandum of Agreement (MOA) revising work schedule.
Performance Bond extension: extended up to March 2, 2000 pursuant to the MOA and Exhibit N‑1.
December 3, 1999: PDSC terminated Building Contract pursuant to Article 12, Paragraph 12.1 for failure to accomplish project within agreed time.
PDSC demanded liquidated damages from FCC and its officers amounting to ₱9,149,962.02 and also demanded payment from PCIC pursuant to Performance Bond No. 31915.
No timely response from FCC or PCIC; PDSC filed complaint for damages, recovery of possession/foreclosure of mortgage with prayers for writs of replevin and attachment; later filed supplemental complaint impleading PCIC claiming coverage up to ₱6,828,329.66.

Pleadings and Contentions of Parties

FCC (Amended Answer): admits contract but alleges PDSC’s outsourcing/subcontracting reduced contract price to ₱19,809,822.12; claims waiver/abandonment/extinguishment of PDSC’s claims by September 10, 1999 MOA; attributes delay partly to PDSC (deletion of scopes of work and PDSC’s assumption of work); asserts agreement where PDSC would shoulder expenses, pay workers, and use equipment free of charge.
PCIC (Answer to Supplemental Complaint): as surety, claims secondary/conditional liability limited to terms of bond; contends bond answers for actual/compensatory damages, not liquidated damages; asserts bond expired October 15, 1999 and extension to March 2, 2000 was without its knowledge/consent and thus not binding; claims MOA extinguished PCIC’s liability under Article 2079 Civil Code; argues PDSC’s termination and takeover of construction and failure to file claim within ten days from expiry/default extinguished PCIC’s obligation; seeks proportional liability only if held liable and contends any liability should be apportioned among other sureties.
PDSC (Complaints and demands): insists on liquidated damages under Building Contract clause and asserts entitlement to proceed against surety PCIC after FCC’s default and termination of contract; sought recovery of liquidated damages and remedies for non‑performance.

Trial Court (RTC) Disposition — January 12, 2004

RTC held FCC guilty of delay for failure to finish and turn over project on October 15, 1999.
RTC pronounced FCC and PCIC jointly and severally liabl