Case Summary (G.R. No. 140047)
Petitioner’s Undertaking and Guarantees
• Philguarantee issued an unconditional, irrevocable performance bond counter-guarantee (Letter of Guarantee No. 81-194-F for ID271,808.610) and advance payment guarantee (No. 81-195-F for ID541,608.901) in favor of Al Ahli Bank of Kuwait, conditioned on VPECI’s default.
• Guarantees were secured by a Deed of Undertaking executed by respondents and a surety bond by FIBICI.
Contractual Engagement and Performance Difficulties
• November 1980: SOB awarded construction of the Institute of Physical Therapy–Medical Rehabilitation Center, Phase II, in Baghdad to Ajyal Trading & Contracting.
• March–April 1981: Ajyal entered a joint venture with 3-Plex; rights were assigned to VPECI; joint management agreed.
• SOB required 5% performance bond and 10% advance payment bond, ultimately secured through layered guarantees involving Rafidain Bank and Al Ahli Bank.
• Construction commenced late August 1981, with an 18-month completion target. Delays arose from war conditions and SOB’s failure to pay 75% of progress billings in U.S. dollars, impeding importation of equipment.
Payment Calls and Diplomatic Efforts
• October 1986: Al Ahli Bank called the performance bond counter-guarantee. VPECI protested, citing contractual breaches by SOB and pending negotiations for foreign financing.
• November 1986 to March 1987: VPECI sought diplomatic intervention; Central Bank ultimately authorized remittance.
• January 1988: Philguarantee paid US$876,564 principal and May 1988 an additional US$59,129.83 interest and penalties.
Procedural History
• July 1991: Philguarantee sued respondents for reimbursement (Civil Case No. 91-1906, RTC Makati).
• RTC dismissed, finding guarantees had lapsed without express respondent consent for extension, that VPECI was not in default, and that no valid demand preceded the guarantee call; awarded attorney’s fees against Philguarantee.
• June 1999: CA affirmed on grounds that (1) Philguarantee knew of project delays and SOB’s breaches; (2) extensions implied waiver of default; (3) set-off rights existed; (4) it was inequitable to enforce reimbursement.
• July 2004: Supreme Court denied petition for review.
Applicable Law
• 1987 Philippine Constitution governs government financial institutions and diplomatic relief.
• Civil Code provisions on guaranty and surety (Art. 2047; distinction between primary suretyship and secondary guaranty).
• Article 1169 on reciprocal obligations and default (mora).
• Article 1280 on set-off; Article 2058 on defenses of debtor against creditor and guarantor.
• Conflict-of-laws principle: lex loci solutionis presumed identical to Philippine law absent proof of foreign law.
Issues
- Whether Philguarantee’s liability was that of a surety or a guarantor.
- Whether VPECI defaulted in its contractual obligations, justifying guarantee enforcement.
- Whether, upon payment, Philguarantee could recover from respondents under the deed of undertaking and surety bond or by subrogation.
Court’s Analysis
• Nature of Liability: Philguarantee was a guarantor—not a surety—because its undertaking was a separate, conditional obligation triggered only by VPECI’s default; the instrument did not bind it solidarily as a surety.
• Default by Principal Obligor: Both RTC and CA found no default by VPECI. SOB’s failure to pay 75% in U.S. dollars and war-related currency constraints were causes beyond VPECI’s control. Extensions of performance deadlines by SOB implied waiver of any delay. No demand for compl
Case Syllabus (G.R. No. 140047)
Facts of the Case
- On 8 November 1980, the Iraqi State Organization of Buildings (SOB) awarded Ajyal Trading and Contracting Company a US$18.74 million contract to build the Institute of Physical Therapy–Medical Rehabilitation Center, Phase II, in Baghdad.
- On 7 March 1981, spouses Eduardo and Iluminada Santos, on behalf of 3-Plex International, Inc., entered into a joint venture with Ajyal; 3-Plex would execute the project, Ajyal receiving a 4 % commission.
- On 8 April 1981, 3-Plex assigned its rights under the joint venture to V.P. Eusebio Construction, Inc. (VPECI), a POCB-registered firm; on 2 May, 3-Plex and VPECI agreed on joint management of the project.
- SOB required a 5 % performance bond (ID 271,808.610) and a 10 % advance payment bond (ID 541,608.901). 3-Plex and VPECI applied to Philguarantee, which issued unconditional and irrevocable Letters of Guarantee Nos. 81-194-F (performance) and 81-195-F (advance payment), effective 25 May 1981 for 18 months, secured by a deed of undertaking and a surety bond from First Integrated Bonding and Insurance Co., Inc.
- The service contract was executed on 11 June 1981 with an 18-month completion period; payment was structured 25 % in Iraqi dinars and 75 % in US dollars. Construction began late August 1981 but was only 51 % complete by March 1986. The balance comprised electro-mechanical and sanitary works requiring imports and foreign exchange.
- Letters of guarantee and the surety bond were extended repeatedly: the performance bond until December 1986, the advance payment bond until May 1984 (then cancelled upon refund), and the surety bond until May 1987.
Triggering Events and Call on Guarantee
- On 26 October 1986, Al Ahli Bank of Kuwait telexed Philguarantee demanding payment under its counter-guarantee. VPECI protested, citing an agreement with SOB to hold penalties in abeyance and citing SOB’s failure to pay 75 % in US dollars.
- On 14 April 1987, Al Ahli Bank confirmed it had paid Rafidain Bank US$876,564 under the guarantee and demanded reimbursement plus interest and expenses.
- The BSP authorized remittance of US$876,564 on 27 August 1987. Philguarante