Title
Philippine Export and Foreign Loan Guarantee Corp. vs. V.P. Eusebio Construction Inc.
Case
G.R. No. 140047
Decision Date
Jul 13, 2004
A construction joint venture in Iraq faced delays due to non-payment by the Iraqi government. Philguarantee, acting as a guarantor, paid under a performance bond but was denied reimbursement as VPECI was not in default. The Supreme Court ruled Philguarantee’s payment was undue and unenforceable.
service contract
construction firm
reimbursement

Case Summary (G.R. No. 140047)

Factual Background

The State Organization of Buildings, Ministry of Housing and Construction, Baghdad, Iraq (SOB) awarded the construction of the Institute of Physical Therapy-Medical Rehabilitation Center, Phase II, to Ajyal Trading and Contracting Company on 8 November 1980 for ID5,416,089/046. On 7 March 1981, 3-Plex International, Inc., represented by spouses Eduardo and Iluminada Santos, entered a joint venture with Ajyal whereby 3-Plex undertook execution of the project and Ajyal would receive a four percent commission. On 8 April 1981, 3-Plex assigned its rights under the joint venture to V.P. Eusebio Construction, Inc. (VPECI), a POCB-registered contractor, with the parties later agreeing on 2 May 1981 that execution would be under joint management.

Contracting and Guarantees

The SOB required a performance bond equal to five percent of the contract price and an advance payment bond representing ten percent of the advance payment. Because 3-Plex was not accredited with the Philippine Overseas Construction Board, the joint venture applied to petitioner Philguarantee for issuance of guarantees. Philguarantee issued Letters of Guarantee No. 81-194-F (Performance Bond Guarantee) and No. 81-195-F (Advance Payment Guarantee) in favor of Al Ahli Bank of Kuwait, each covering 100% of the respective bonds and both effective for an initial term from 25 May 1981. These letters were secured by a Deed of Undertaking executed by VPECI, the Eusebio spouses, 3-Plex, and the Santos spouses, and by a Surety Bond issued by FIBICI. The arrangement reflected a three-layer guarantee structure required by the Iraqi banks.

Project Performance and Extensions

The service contract between SOB and the joint venture was executed on 11 June 1981 with an 18-month completion period. Construction began late in August 1981 and encountered delays and setbacks. Philguarantee’s guarantees were extended multiple times: the advance payment guarantee was renewed until its cancellation on 24 May 1984 after full refund; the performance bond was extended repeatedly until 8 December 1986; and the surety bond was extended to 8 May 1987. By March 1986, the Project was found to be approximately fifty-one percent completed; the remaining work consisted largely of electro-mechanical and sanitary installations requiring imported equipment and thus foreign exchange.

Telex Calls, Payments, and Remittances

On 26 October 1986 Al Ahli Bank of Kuwait sent a telex calling on its counter-guarantee. VPECI protested and sought diplomatic intervention, asserting that delays stemmed from SOB’s failure to pay seventy-five percent of billings in US dollars and from Iraq’s lack of foreign exchange. On 14 April 1987 Al Ahli advised it had paid Rafidain Bank US$876,564 under its guarantee and demanded reimbursement from Philguarantee. The Central Bank authorized remittance of US$876,564 on 27 August 1987. Philguarantee remitted US$876,564 on 21 January 1988 and later paid US$59,129.83 on 6 May 1988 for interest and penalties. After unsuccessful demands, Philguarantee sent letters on 19 June 1991 seeking P47,872,373.98 plus accruing interest, penalties, and ten percent attorneys’ fees, and filed suit on 9 July 1991.

Trial Court Proceedings

The Regional Trial Court of Makati, after trial, dismissed Philguarantee’s complaint and found for the respondents. The trial court concluded the guarantee had lapsed at the time of the call and that valid renewal or extension required the express consent of Philguarantee, which had not been secured. The court also found that VPECI did not incur delay attributable to it, because SOB’s breaches made performance impossible, and that SOB had not made a prior demand on the contractor before calling the guarantee. The RTC dismissed counterclaims and cross-claims and ordered Philguarantee to pay attorneys’ fees of P100,000 to specified respondents, with costs.

Court of Appeals Ruling

The Court of Appeals affirmed on 14 June 1999. It reasoned that Philguarantee knew the project status and problems between 1982 and 1985 and that the successive renewals and extensions were prompted by delays not solely attributable to the contractors. The CA observed that Philguarantee was aware of SOB’s failure to pay seventy-five percent in US dollars and that the project owner still retained amounts collectible by VPECI which could be set off against the guarantee. The CA characterized Philguarantee’s later insistence on honoring the foreign banks’ call as a reversal inconsistent with its prior representations and knowledge of the contractors’ predicament.

Issues Presented to the Supreme Court

The petitioner sought review under Rule 45, Rules of Court, advancing three principal contentions: that respondents are liable under the Deed of Undertaking and Surety Bond for reimbursement of payments made under Letter of Guarantee No. 81-194-F; that Philguarantee cannot be denied subrogation; and that it would be iniquitous and unjust to hold the petitioner liable without reimbursement. The core legal question framed by the Court was whether Philguarantee was entitled to reimbursement from the respondents for amounts it paid under its letter of guarantee to Al Ahli Bank.

Parties’ Contentions

Philguarantee argued that its Letter of Guarantee No. 81-194-F was absolute, unconditional, and irrevocable and that its liability analogous to that of a surety had accrued upon VPECI’s failure to complete the Project. It maintained that it was therefore entitled to enforce the deed of undertaking and surety bond against the respondents. The respondents countered that the call on the guarantee was unjustified because the delay in completion was caused primarily by SOB’s breach and the lack of foreign exchange in Iraq, that no proper demand was made on the principal obligor prior to the call, that Philguarantee waived its rights to excussion and other remedies, and that payment by the guarantor without proper cause precluded recovery.

Legal Analysis and Applicable Law

The Court undertook a legal distinction between guaranty and surety under Article 2047, Civil Code and relevant doctrine. It held that although Letter of Guarantee No. 81-194-F was unconditional and irrevocable, that characterization did not convert Philguarantee into a surety. The Court explained that a guarantor’s obligation is subsidiary and conditional upon default by the principal obligor, whereas a surety is an original obligor bound with the principal by the same instrument. The Court further addressed the conflict-of-laws question as to the law governing the contract, noting that the place of performance and one contracting party were in Iraq and that Iraqi law bore a substantial relation to the transaction, but observing that Iraqi law was not pleaded or proven. Consequently, the processual presumption applied that foreign law is the same as Philippine law for purposes of adjudication.

Findings on Default and Excussion

Applying Article 1169, Civil Code and related doctrine, the Court accepted the factual findings of the lower courts that VPECI did not default for reasons imputable to it. The Court emphasized requisites for default — that the obligation be demandable and liquidated, that the debtor delays, and that the creditor requires performance — and found these requisites unmet because SOB had not performed its own obligation to pay seventy-five percent in US dollars, payments were delayed, and no effective demand was made by SOB on VPECI prior to the bank call. The Court noted that a guarantor is ordinarily entitled to the benefit of excussion and other remedies, and that Philguarantee had waived such rights by making payment despite knowledge of VPECI’s outstanding receivables from SOB and the availability of set-off.

Subrogation and Reimbursement

The Court acknowledged the general rule that a guarantor who pays is subrogated to the creditor’s rights and is entitled to indemnity from the principal. It clarified, however, that a person who pays without the knowledge or against the will of the debtor may recover only to the extent that payment benefited the debtor, and that defenses available to the debtor against the creditor are likewise available against a paying guarantor. The Court found on the record that Philguarantee’s payment did not benefit VPECI, since the contractor had viable defenses

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