National Power Corporation v. Court of Appeals and Philippine American General Insurance Co., Inc.
REITERATIONFacts
The Antecedents: The National Power Corporation (NPC) entered into a contract with Far Eastern Electric, Inc. (FFEI) for the erection of transmission lines. FFEI agreed to complete the work within 120 days, with liquidated damages of P200.00 per calendar day for delay. Philippine American General Insurance Co., Inc. (Philamgen) issued a surety bond for P30,672.00 for FFEI's faithful performance. The bond stipulated that its liability would expire one year after final completion and acceptance, and it would be cancelled 30 days after expiration unless notified of an existing obligation. Procedural History: FFEI started construction but, due to equipment unavailability, requested NPC's assistance. The work was abandoned on June 26, 1963. On July 19, 1963, FFEI and Philamgen informed NPC of the abandonment due to financial difficulties. NPC completed the work on September 30, 1963. NPC notified Philamgen on January 30, 1967, of FFEI's outstanding obligation of P75,019.85 and demanded payment under the bond. Philamgen contended its liability expired on September 20, 1964, as no notice of obligation was given within 30 days of expiration. NPC filed a collection case. The trial court ruled in favor of NPC, holding both FFEI and Philamgen liable up to the bond amount. The Court of Appeals reversed this, dismissing the complaint against Philamgen. The Petition: NPC filed a petition for review on certiorari, seeking to set aside the Court of Appeals' decision and resolution, arguing that the Court of Appeals erred in holding that notice of obligation within 30 days of bond expiration was required despite NPC taking over the work, and that the notice given was insufficient.
Issue(s)
Whether the Court of Appeals erred in holding that petitioner should have given notice to private respondent Philamgen of any existing obligation within 30 days from the expiration of the bond to hold said surety liable, despite petitioner's taking over of the work abandoned by the contractor before its completion. Whether petitioner's letter dated July 19, 1963, to private respondent was a sufficient compliance with the condition of the bond, assuming notice was still required. Whether the Court of Appeals erred in absolving private respondent Philamgen from its liability under the bond.
Ruling
The petition is impressed with merit. The decision of the Court of Appeals is set aside, and the decision of the Court of First Instance of Manila is reinstated.
Ratio Decidendi
On the requirement of notice within 30 days from bond expiration: The Supreme Court held that the 30-day notice requirement stipulated in the surety bond applies to situations where the contractor completes the work. In this case, the contractor, FFEI, abandoned the work before completion. The Court emphasized that the surety bond must be read in its entirety and together with the construction contract. The contract expressly provided for the continuing liability of the contractor and its bondsmen for expenses in completing the work in excess of the contract price and the bond amount if the corporation takes over the work. Therefore, the abandonment of the work by FFEI gave rise to a continuing liability of the bond, as provided for in the contract, which was deemed incorporated into the surety bond. To rule that private respondent was not properly notified under these circumstances would be a gross error. On the sufficiency of the notice provided: The Court found that Philamgen was duly informed of FFEI's failure to comply with its undertaking as early as May 30, 1963, with a notice signed by Philamgen's Assistant Vice President. Furthermore, on July 19, 1963, when FFEI informed NPC of its abandonment, NPC forthwith informed Philamgen on the same date. Philamgen's subsequent request for information on the percentage of work completed prior to abandonment and the reasons for relinquishment further bolstered the fact that Philamgen had timely notice. The Court reiterated that the 30-day notice adverted to in the surety bond applies to the completion of the work by the contractor, which did not occur here. Thus, the notice given was sufficient compliance given the circumstances of abandonment and NPC's takeover. On the absolution of Philamgen from liability: The Court concluded that Philamgen could not be absolved from liability. It found that the breach of contract, specifically the abandonment of the unfinished work by FFEI, occurred within the effective period of both the contract and the surety bond. This abandonment triggered the continuing liability of the bond as stipulated in the contract, which was incorporated into the bond. The Court also applied the principle that contracts of insurance are construed liberally in favor of the insured and strictly against the insurer, meaning any ambiguity should be interpreted in favor of the beneficiary. Given the timely notices and the express provisions of the contract and bond regarding abandonment, Philamgen remained liable for the costs incurred by NPC in completing the work and for any damages suffered.
Main Doctrine
A surety bond for faithful performance of a construction contract, which incorporates the contract's provisions, remains answerable for the cost of completion and damages even after its stated expiration if the contractor abandons the work within the bond's effective period, provided the surety is duly notified of the abandonment and the principal's continuing liability.