Case Summary (G.R. No. 140047)
Contract Formation, Joint Venture, and Assignments
SOB awarded the Project to Ajyal Trading and Contracting Company. A joint venture agreement (7 Mar 1981) had 3‑Plex undertaking project execution with Ajyal earning a commission. Because 3‑Plex was not accredited by the Philippine Overseas Construction Board (POCB), it assigned its rights to VPECI (8 Apr 1981), and subsequently 3‑Plex and VPECI agreed to joint management (2 May 1981). The formal service contract between SOB and the joint venture (VPECI–Ajyal) was executed on 11 June 1981, with a completion term of 547 days (18 months) and a payment scheme providing 25% of project cost in Iraqi dinars and 75% in U.S. dollars.
Guarantee Structure and Issuance
SOB required a performance bond and an advance payment bond, respectively amounting to 5% and 10% of specified sums in Iraqi dinars. Philguarantee approved 3‑Plex/VPECI’s application and issued letters of guarantee addressed to Al Ahli Bank of Kuwait (as counter‑guarantee) to support Al Ahli’s counter‑guarantee to Rafidain Bank, which in turn would back the Rafidain/ SOB performance bond. Thus the security chain involved three layers: Philguarantee → Al Ahli Bank (Kuwait) → Rafidain Bank (Iraq) → SOB. The guarantees (Performance Bond Guarantee No. 81-194-F and Advance Payment Guarantee No. 81-195-F) were unconditional and irrevocable, dated from 25 May 1981 and secured by a Deed of Undertaking executed by the respondents and a surety bond issued by FIBICI.
Performance, Delays, and Extensions
Work commenced late (last week of Aug 1981) and did not meet the contractual completion date (15 Nov 1982). The guarantees and surety bond were extended repeatedly: the performance bond was extended multiple times up to 8 Dec 1986; the advance payment guarantee was extended and later cancelled after full refund by the joint venture; the surety bond was extended until 8 May 1987. By March 1986 the Project was approximately 51% complete, with remaining work largely consisting of electro‑mechanical and sanitary installations requiring imported equipment and foreign currency.
Telex Call, Diplomatic Efforts, and Petitioner’s Payments
On 26 October 1986 Al Ahli Bank issued a telex calling on the performance counter‑guarantee. VPECI protested and sought to have the call recalled, asserting that delay resulted primarily from SOB’s failure to pay the 75% portion in U.S. dollars and from Iraq’s lack of foreign exchange in the Iran‑Iraq war context, and informed Philguarantee that negotiations for a foreign loan might allow completion. Despite diplomatic exchanges, Central Bank authorization for remittance was issued (27 Aug 1987) and Philguarantee paid Al Ahli US$876,564 on 21 January 1988 (performance counter‑guarantee) and later US$59,129.83 on 6 May 1988 for interest and penalties. Philguarantee then demanded reimbursement from the respondents (letters sent 19 June 1991) and filed suit (9 July 1991) after nonpayment.
Procedural History and Lower Court Rulings
Philguarantee sued in the Regional Trial Court (Makati, Branch 58). The trial court dismissed Philguarantee’s complaint, holding that the guarantee had lapsed when first called and that Philguarantee failed to secure express consent from respondents for renewals/extensions; the court also found no valid default by the joint venture because SOB’s contractual violations rendered performance impossible and no prior demand by SOB had been shown. The trial court awarded attorney’s fees to respondents. The Court of Appeals affirmed (14 June 1999), emphasizing Philguarantee’s knowledge of project difficulties, SOB’s nonpayment in U.S. dollars, the existence of amounts retained by SOB that could be set off, and Philguarantee’s prior representations that payment would be inequitable. The Supreme Court denied the petition for review and affirmed the Court of Appeals.
Issues Presented to the Supreme Court
The Supreme Court addressed whether (1) Philguarantee, having issued Letter of Guarantee No. 81‑194‑F, was entitled to reimbursement from respondents under the deed of undertaking and surety bond; (2) Philguarantee could claim subrogation; and (3) it was equitable for Philguarantee to hold respondents liable given the surrounding circumstances.
Characterization of Philguarantee’s Liability: Guarantor, Not Surety
The Court analyzed the nature of Philguarantee’s obligation under Letter No. 81‑194‑F and distinguished guaranty from surety. Although the letter was phrased as unconditional and irrevocable and promised payment “on your first written or telex demand” in the event of VPECI’s default, the Court held Philguarantee remained a guarantor (secondary, conditional in operation) rather than a surety (primary and solidary). The Court emphasized that unconditional language in a guaranty does not convert the guarantor into a surety; suretyship arises only where the guarantor binds himself solidarily with the principal debtor or by the nature of the contract. The parties’ instruments and the nature of the undertaking indicated a guaranty.
Choice of Law, Applicable Rules on Default, and Presumption on Foreign Law
Because the project involved an Iraqi contracting party and performance in Iraq, Iraqi law bore a substantial connection to the transaction and could govern matters of time, place, manner of performance, and excuses for nonperformance. However, foreign law was not pleaded or proven; hence the processual presumption applied (foreign law presumed identical to Philippine law). The Court relied on Philippine substantive rules—particularly Article 1169 (last paragraph) of the Civil Code—stating that in reciprocal obligations neither party is in delay if the other is not ready to perform properly. The Court summarized general requisites for default: demandability and liquidation of the obligation, debtor’s delay attributable to the debtor, and the creditor’s demand for performance.
Findings on Non‑Default, Cause of Delay, and Extensions
Both trial court and Court of Appeals found that VPECI had not defaulted for causes imputable to it. The unfinished portion (48.3%) required imported equipment and foreign exchange, which Iraq did not provide in the required U.S. dollars as contractually agreed (75% in USD). Evidence showed SOB delayed and paid in Iraqi dinars, retention amounts existed, and negotiations for foreign loans (e.g., with Italian entities) had been pursued but failed due to Iraq’s foreign‑exchange difficulties and broader war conditions. SOB repeatedly allowed extensions and retained amounts subject to set‑off. The courts concluded SOB’s failures excused or prevented VPECI’s performance and that no prior demand by SOB had been shown before the bank call.
Guarantor Remedies, Excussion, Subrogation, and Waiver
Under Philippine law, a guarantor who pays for a debtor generally is entitled to indemnity from the debtor and is subrogated to the creditor’s rights (Arts. 2066–206
...continue readingCase Syllabus (G.R. No. 140047)
Title, Source, and Disposition
- Supreme Court citation: 478 Phil. 269, First Division, G.R. No. 140047, July 13, 2004.
- Case caption as extracted from the source: Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee) as petitioner; respondents include V.P. Eusebio Construction, Inc. (VPECI); 3-Plex International, Inc.; Vicente P. Eusebio; Soledad C. Eusebio; Eduardo E. Santos; Iluminada Santos; and First Integrated Bonding and Insurance Company, Inc. (FIBICI).
- Final disposition: Petition for review on certiorari denied for lack of merit; decision of the Court of Appeals in CA‑G.R. CV No. 39302 affirmed.
- No pronouncement as to costs.
- Majority opinion by Justice Davide Jr.; concurrence by Justices Panganiban, Ynares‑Santiago, Carpio, and Azcuna.
Nature of the Case and Relief Sought
- The case arises from Philguarantee’s claim for reimbursement of sums it paid under a counter‑guarantee/letter of guarantee issued to Al Ahli Bank of Kuwait in connection with a performance bond demanded in Iraq.
- Philguarantee filed a complaint for collection of money before the Regional Trial Court (RTC) of Makati City (Civil Case No. 91‑1906), seeking reimbursement from respondents under a deed of undertaking and a surety bond that had secured Philguarantee’s letters of guarantee.
- Respondents included the Philippine contractor (VPECI), its alleged joint venturer and predecessor (3‑Plex), the spouses who executed undertakings, and the domestic surety company (FIBICI).
Factual Background—Award, Joint Venture, Assignment, and Contract
- On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction, Baghdad, Iraq, awarded the construction contract for the Institute of Physical Therapy–Medical Rehabilitation Center, Phase II (the Project), to Ajyal Trading and Contracting Company for ID5,416,089/046 (approx. US$18,739,668).
- On 7 March 1981, spouses Eduardo and Iluminada Santos, on behalf of 3‑Plex International, Inc. (3‑Plex), entered into a joint venture agreement with Ajyal: 3‑Plex undertook execution of the Project; Ajyal was to receive a 4% commission.
- On 8 April 1981, 3‑Plex, not accredited with the Philippine Overseas Construction Board (POCB), assigned all rights and interests under the joint venture to V.P. Eusebio Construction, Inc. (VPECI), a POCB‑registered firm.
- On 2 May 1981, 3‑Plex and VPECI agreed that execution of the Project would be under their joint management.
- On 11 June 1981, SOB and the joint venture (VPECI and Ajyal) executed the service contract; the joint venture agreed to complete the Project within 547 days (18 months).
- Under the Contract, the joint venture would supply manpower and materials; SOB would refund 25% of project cost in Iraqi dinars and 75% in US dollars at a specified exchange rate (1 ID = US$3.37777).
Performance Requirements, Bonds, and Philguarantee’s Role
- SOB required a performance bond equal to 5% of contract price (ID271,808/610) and an advance payment bond representing 10% of the advance payment (ID541,608/901).
- Respondents 3‑Plex and VPECI applied to Philguarantee for issuance of guarantees to satisfy SOB’s bond requirements; Philguarantee was a government financial institution empowered to issue guarantees for qualified Filipino contractors.
- Philguarantee approved the application and issued letters of guarantee addressed to Rafidain Bank of Baghdad covering 100% of the performance and advance payment bonds; SOB, however, required a guarantee originating from Rafidain Bank.
- Rafidain Bank issued a performance bond to SOB conditioned on issuance of a counter‑guarantee by another foreign bank. Al Ahli Bank of Kuwait agreed to provide that counter‑guarantee but required a counter‑guarantee in its favor from Philguarantee. Thus three layers of guarantees were arranged.
Letters of Guarantee, Deed of Undertaking, and Surety Bond
- Philguarantee issued Letter of Guarantee No. 81‑194‑F (Performance Bond Guarantee) for ID271,808/610 and Letter of Guarantee No. 81‑195‑F (Advance Payment Guarantee) for ID541,608/901, both for an initial term of eighteen months from 25 May 1981.
- The letters of guarantee were secured by:
- A Deed of Undertaking executed by respondents VPECI, spouses Vicente P. and Soledad C. Eusebio, 3‑Plex, and spouses Eduardo E. and Iluminada Santos.
- A surety bond issued by First Integrated Bonding and Insurance Company, Inc. (FIBICI).
- The surety bond was amended on 23 June 1981 to increase coverage and to change the beneficiary bank from Rafidain Bank to Al Ahli Bank of Kuwait.
- The Advance Payment Guarantee was eventually cancelled on 24 May 1984 after full refund by the joint venture contractor.
Project Execution, Delays, Extensions, and Status
- Construction was to start 2 June 1981 but actually commenced in the last week of August 1981.
- Due to delays and slow progress for various setbacks and difficulties, the Project was not completed on the scheduled date of 15 November 1982.
- Upon request and foreseeing impossibility of meeting the deadline, petitioner's letters of guarantee with expiry 25 November 1982 were renewed or extended: the performance guarantee extended to 9 February 1983 and the advance payment guarantee to 9 March 1983.
- The surety bond was extended from 12 May 1982 to 12 May 1983 and later to 8 May 1987.
- The Performance Bond underwent twelve further extensions, with validity up to 8 December 1986.
- As of March 1986, the Project was 51% accomplished; the incomplete 48.3% consisted primarily of electro‑mechanical works (47%) and sanitary works (2%) which required imported equipment and materials and thus foreign exchange (US dollars).
Demand, Telex Calls, and Payments by Banks
- On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to Philguarantee demanding full payment under its performance bond counter‑guarantee; Philguarantee received a copy of the telex on 27 October 1986.
- VPECI protested and requested the Iraq Trade and Economic Development Minister to recall the telex call, asserting the call was contrary to a mutual agreement that penalties would be held in abeyance pending completion and that time extension would be open during foreign loan negotiations.
- VPECI wrote SOB protesting the call and asserting SOB’s lack of foreign exchange and noncompliance with contract term to pay 75% in US dollars as causes for noncompletion.
- On 14 April 1987, Philguarantee received a telex from Al Ahli Bank stating payments to Rafidain Bank of US$876,564 under the letter of guarantee and demanding reimbursement plus interest and expenses.
- VPECI sought diplomatic assistance and requested Central Bank intervention; on 27 August 1987, the Central Bank authorized remittance of US$876,564 to Al Ahli Bank for the account of Philguarantee (equivalent to ID271,808/610).
- Philguarantee informed VPECI on 6 November 1987 of its intention to remit US$876,564 to Al Ahli Bank and reiterated respondents’ joint and solidary obligation to reimburse.
- Philguarantee paid US$876,564 to Al Ahli Bank on 21 January 1988, and later paid US$59,129.83 on 6 May 1988 representing interest and penalty charges demanded by Al Ahli Bank.
- On 19 June 1991, Philguarantee demanded from the respondents payment of P47,872,373.98 plus accruing interest, penalties, and 10% attorney’s fees pursuant to the deed of undertaking and surety bond.
Procedural History and Lower Courts’ Decisions
- Philguarantee filed suit on 9 July 1991 in the RTC, Makati City, for collection of a sum of money against