Philippine Export and Foreign Loan Guarantee Corporation v. V.P. Eusebio Construction, Inc.
REITERATIONFacts
The Antecedents: Petitioner Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee) issued counter-guarantees to Al Ahli Bank of Kuwait to secure performance and advance payment bonds for respondent V.P. Eusebio Construction, Inc. (VPECI) for a construction project in Iraq. The project was awarded by the Iraqi State Organization of Buildings (SOB) to a joint venture involving VPECI. The guarantees were secured by a Deed of Undertaking from VPECI and its officers, and a surety bond from First Integrated Bonding and Insurance Company, Inc. (FIBICI). The project faced delays and difficulties, primarily due to SOB's failure to pay 75% of the contract price in US Dollars, as required by the contract, and the non-convertibility of Iraqi Dinars. Despite these issues and VPECI's protests and efforts to secure foreign loans, Al Ahli Bank called on the performance bond counter-guarantee. Philguarantee paid Al Ahli Bank the sum of US$876,564 plus interest and penalties. Procedural History: Philguarantee filed a collection case against the respondents. The Regional Trial Court (RTC) dismissed the complaint, holding that Philguarantee had no valid cause of action as the guarantee had lapsed and there was no valid renewal. The RTC also found that VPECI did not incur delay and that SOB's violations rendered performance impossible. The Court of Appeals (CA) affirmed the RTC's decision, agreeing that Philguarantee was aware of the project's status, the contractors' problems, and SOB's contractual violations. The CA found that the delay was not solely attributable to the contractors and that SOB had not complied with its contractual commitments. The CA also noted that VPECI had collectibles from SOB that could be set off against the guarantee amount. The Petition: Philguarantee filed a petition for review on certiorari, arguing that the CA erred in ruling that respondents are not liable under the Deed of Undertaking and that Philguarantee cannot claim subrogation, asserting that it is inequitable to hold respondents liable.
Issue(s)
Whether Philguarantee, as a guarantor, is entitled to reimbursement from the respondents for the payment made under the counter-guarantee, considering the benefit of excussion and compensation, and whether Philguarantee can claim subrogation. Whether the respondent contractor, VPECI, defaulted in its obligations under the service contract, considering the application of foreign law and processual presumption.
Ruling
The petition is denied for lack of merit. The decision of the Court of Appeals affirming the trial court's ruling is affirmed. Philguarantee is not entitled to reimbursement from the respondents for the payment made under the counter-guarantee.
Ratio Decidendi
On the entitlement to reimbursement and subrogation, and the benefit of excussion and compensation: The Court held that Philguarantee is a guarantor, not a surety, as its obligation is secondary and conditional upon the principal debtor's default. Applying Article 1236, second paragraph, of the Civil Code, a person who makes payment without the knowledge or against the will of the debtor can only recover insofar as the payment has been beneficial to the debtor. In this case, the payment made by Philguarantee did not benefit VPECI because VPECI had valid defenses against SOB, which could also be set up against the paying guarantor. The Court emphasized that Philguarantee should have waited for the natural course of the guaranty, which requires the debtor to default and the creditor to demand performance first. By paying against VPECI's will, Philguarantee exposed itself to the defenses VPECI had against SOB. The Court reiterated that a guarantor is entitled to the benefit of excussion (exhausting the debtor's property) and compensation (setting off what the creditor owes the debtor). Philguarantee was aware of VPECI's outstanding receivables from SOB, which could have been set off against the guarantee amount. The Court noted that Philguarantee's own internal documents indicated that the amount retained by SOB was more than sufficient to cover the counter-guarantee. By paying without setting up compensation, Philguarantee waived these rights and remedies, making its payment not beneficial to VPECI. On whether respondent contractor defaulted, and the application of foreign law and processual presumption: The Court affirmed the findings of the lower courts that VPECI did not default in its obligations. The delay and non-completion of the project were primarily caused by SOB's violations of the contract, specifically its failure to pay 75% of the contract price in US Dollars. Under Article 1169, last paragraph, of the Civil Code, in reciprocal obligations, neither party incurs delay if the other does not comply with what is incumbent upon him. The Court noted that SOB's failure to provide foreign currency made it impossible for VPECI to procure necessary materials and equipment from abroad, which were essential for project completion. Furthermore, Philguarantee itself had previously acknowledged the obstacle posed by the lack of foreign exchange in Iraq. The Court acknowledged that the issue of default might be governed by Iraqi law due to the substantial connection of the transaction to Iraq. However, since Iraqi law was not properly pleaded or proved, the presumption of identity or similarity (processual presumption) applied, meaning Iraqi law is presumed to be the same as Philippine law. Under Philippine law, specifically Article 1169 of the Civil Code, VPECI could not be considered in default because SOB failed to perform its reciprocal obligation of paying in US Dollars. The Court also pointed out that even if there were delay attributable to VPECI, the effects of such delay ceased upon the implied renunciation by SOB through granting extensions, and no demand was made by SOB against VPECI.
Main Doctrine
A guarantor who pays without the knowledge or against the will of the debtor can only recover insofar as the payment has been beneficial to the debtor. Furthermore, the same defenses available to the debtor against the creditor can be set up against the paying guarantor.