Title
Trade and Investment Development Corporation of the Philippines vs. Asia Paces Corporation
Case
G.R. No. 187403
Decision Date
Feb 12, 2014
TIDCORP sought payment from bonding companies after ASPAC defaulted on loans. SC ruled bonding companies liable, as payment extensions to TIDCORP did not extinguish their obligations under Surety Bonds.
surety
guaranty
suretyship

Case Summary (G.R. No. 187403)

Factual Background

In January 1981, Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered into a sub-contract with the Electrical Projects Company of Libya for construction and erection of transmission lines in Libya. To finance working capital, ASPAC obtained foreign loans from Banque Indosuez and PCI Capital. To secure those loans, TIDCORP issued irrevocable and unconditional Letters of Guarantee guaranteeing full payment of ASPAC’s loan obligations in case of default by ASPAC.

Letters of Guarantee and Surety Bonds

As a precondition to issuance of the Letters of Guarantee, ASPAC, PICO, and Nicolas C. Balderrama executed several Deeds of Undertaking binding themselves jointly and severally to reimburse TIDCORP for damages or liabilities it might incur under the Letters. Separately, ASPAC entered into Surety Bonds with the bonding companies Paramount, Phoenix, Mega Pacific, and Fortune, each obligating those sureties solidarily to TIDCORP for liabilities arising under the Letters of Guarantee, subject to the bonds’ coverage amounts and expiration dates.

Default, Demands and Restructuring

ASPAC defaulted on its loan obligations, prompting Banque Indosuez and PCI Capital to send demands to TIDCORP in March 1984 and February 1985 respectively. TIDCORP in turn sent demand letters to the bonding companies in May 1985, prior to the final expiration dates of the Surety Bonds. In response to a moratorium request by the Philippine Minister of Finance, TIDCORP and its creditor banks executed a Restructuring Agreement on April 16, 1986 which extended scheduled payments under the Letters of Guarantee, with Section 4.01 providing semi-annual installments beginning December 31, 1989 through December 31, 1994. The bonding companies were not parties to the Restructuring Agreement and did not consent to the extensions. TIDCORP fully settled its obligations to the banks on dates between 1991 and 1992.

Trial Court Proceedings

TIDCORP filed a collection suit against (a) ASPAC, PICO, and Balderrama on the Deeds of Undertaking, and (b) the bonding companies on the Surety Bonds. The Regional Trial Court of Makati, Branch 132, in a Decision dated April 29, 2005, held ASPAC, PICO, and Balderrama jointly and severally liable to TIDCORP in the sum of P277,891,359.66 under the Deeds of Undertaking. The RTC absolved the bonding companies on the ground that the moratorium request and the consequent payment extensions granted by the banks to TIDCORP without the bonding companies’ consent extinguished their obligations under the Surety Bonds pursuant to Article 2079 of the Civil Code.

Court of Appeals Ruling

On appeal, the Court of Appeals in a Decision dated April 30, 2008 affirmed the RTC’s application of Article 2079 of the Civil Code, concluding that the payment extensions under the Restructuring Agreement were extensions granted to the debtor without the consent of the guarantor or surety and thus extinguished the sureties’ obligations. The CA relied on prior pronouncements, including Security Bank and Trust Co., Inc. v. Cuenca, to hold that Article 2079 applies equally to guaranty and suretyship. The CA also rejected Balderrama’s contention that his liability depended on payment to ASPAC by the main contractor. The CA modified the RTC decision only to award TIDCORP attorneys’ fees of P2,000,000.00 against ASPAC, PICO, and Balderrama under the Deed of Undertaking. Motions for reconsideration were denied.

Issues Presented to the Supreme Court

The dispositive issue presented was whether the Court of Appeals erred in holding that the bonding companies’ liabilities under the Surety Bonds were extinguished by payment extensions granted by Banque Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement, given that those extensions occurred without the bonding companies’ consent.

Supreme Court’s Disposition

The Supreme Court granted the petition. The Court ruled that the CA’s application of Article 2079 of the Civil Code to extinguish the sureties’ obligations was erroneous because the extensions were granted by the creditor banks to TIDCORP, not by TIDCORP to ASPAC, the principal debtor secured by the Surety Bonds. The Court modified the CA Decision and Resolution by ordering Philippine Phoenix Surety and Insurance, Inc., Mega Pacific Insurance Corporation, and Fortune Life and General Insurance Company to fulfill their respective obligations to TIDCORP under the Surety Bonds, discounting obligations covered by Paramount’s Compromise Agreement with TIDCORP. The Court left intact the CA’s dispositions concerning Balderrama and the award of attorneys’ fees because no appeal was taken from those parts.

Legal Basis and Reasoning: Nature of Suretyship and Guaranty

The Court reiterated the legal distinction and the interrelation between surety and principal debtor. It emphasized that a surety becomes a solidary debtor pursuant to Article 2047 of the Civil Code, and that a creditor may proceed against any one of the solidary debtors under Article 1216 of the Civil Code. The Court observed authorities distinguishing suretyship from guaranty, notably Palmares v. CA, which describes a surety as an insurer of payment and a guarantor as an insurer of solvency.

Legal Basis and Reasoning: Scope of Article 2079

The Court addressed prior decisions which applied Article 2079 of the Civil Code to suretyships, citing Cochingyan, Jr. v. R&B Surety & Insurance Co., Inc. and Security Bank and Trust Co., Inc. v. Cuenca, which rationalized that an unconsented extension deprives the surety of the opportunity to pay and be subrogated to the creditor’s remedies during the original maturity. Nevertheless, the Court held that Article 2079 presupposes an extension granted by the creditor to the principal debtor secured by the guaranty or suretyship. In the present case, no such extension was granted by TIDCORP to ASPAC; the extensions concerned TIDCORP’s own indebtedness to the banks under the Letters of Guarantee.

Contractual Relativity and Separate Transactions

The Court applied the civil law principle of the relativity of contracts to emphasize that the Letters of Guarantee and the Surety Bonds constituted distinct contractual transactions binding only their respective parties. The Letters of Guarantee secured ASPAC’s loans to the banks with TIDCORP as guarantor to the banks. The Surety Bonds secured ASPAC’s indebtedness to TIDCORP under the Deeds of Undertaking with the bonding companies as sureties to TIDCORP. Because the Restructuring Agreement altered the schedule of TIDCORP’s payment obligations to the banks and did not modify ASPAC’s obligations to TIDCORP, the extensions did not deprive the sureties of their right to pay TIDCORP and to seek subrogati

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