Asset Builders Corp. v. Stronghold Insurance Co.
REITERATIONFacts
The Antecedents: Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling & Construction Corporation (Lucky Star) for the construction of an ACG Commercial Complex. Lucky Star was to supply labor, materials, tools, and equipment for drilling an exploratory production well for a total contract price of ₱1,150,000.00. The agreement stipulated a 50% downpayment upon submission of a surety bond and a performance bond, a 60-day completion date, and penalties for delay. To guarantee compliance, Lucky Star obtained a Surety Bond for ₱575,000.00 and a Performance Bond for ₱345,000.00 from Stronghold Insurance Company, Inc. (Stronghold). ABC paid Lucky Star the ₱575,000.00 downpayment. By July 18, 2006, Lucky Star had only accomplished 10% of the work, with the completion date approaching. ABC sent a demand letter for completion and, subsequently, a Notice of Rescission of Contract with Demand for Damages, demanding refund of the downpayment, liquidated damages, and payment under the performance bond. ABC then sent a Notice of Claim to Stronghold. When no reply was received from either Lucky Star or Stronghold, ABC filed a Complaint for Rescission with Damages. Procedural History: Stronghold denied liability, arguing that ABC had not proven the advance payment and that the rescission of the contract with Lucky Star revoked the claims against the bonds. Lucky Star was declared in default. The Regional Trial Court (RTC) ordered Lucky Star to pay ABC but absolved Stronghold, ruling that the rescission of the principal contract automatically cancelled the surety and performance bonds. The Petition: ABC filed a petition for review on certiorari, assailing the RTC's decision absolving Stronghold, arguing that the rescission did not extinguish Stronghold's liability, which had already accrued upon Lucky Star's default.
Issue(s)
Whether the rescission of the principal contract automatically cancels the surety and performance bonds. Whether the surety company can be held liable under its bonds despite the rescission of the principal contract.
Ruling
The Supreme Court ruled in the affirmative, holding that the surety company is liable under its bonds. The Court modified the RTC decision, declaring Stronghold Insurance jointly and severally liable with Lucky Star for the payment of ₱575,000.00 and ₱345,000.00.
Ratio Decidendi
On the issue of whether the rescission of the principal contract automatically cancels the surety and performance bonds: The Court held that the rescission of the principal contract does not automatically extinguish the liability of the surety. The surety's liability arises from the contract of suretyship, which is an accessory contract. According to Article 2047 of the New Civil Code, a surety is bound solidarily with the principal debtor. This solidary undertaking makes the surety's liability direct, primary, and absolute, even though the principal contract is secondary. The Court emphasized that the surety's liability attaches upon the principal's default, not upon the rescission of the principal contract. Therefore, the RTC erred in ruling that the rescission automatically cancelled the bonds. On the issue of whether the surety company can be held liable under its bonds despite the rescission of the principal contract: The Court ruled that Stronghold, as the surety, became solidarily bound with Lucky Star when Lucky Star failed to complete the drilling work within the agreed timeframe and failed to return the advanced downpayment. The clause "this bond is callable on demand" further indicated Stronghold's primary and direct responsibility. Article 1216 of the New Civil Code allows the creditor to proceed against any one of the solidary debtors. The Court clarified that the rescission was a necessary step by ABC to prevent further losses due to Lucky Star's non-performance. The liability of the surety, having arisen upon the principal's default, was not extinguished by the rescission. Consequently, Stronghold should be answerable to ABC on account of Lucky Star's non-performance, as guaranteed by the performance bond.
Main Doctrine
The rescission of a principal contract due to the contractor's default does not automatically extinguish the liability of the surety under its surety and performance bonds, as the surety's liability arises upon the principal's default and becomes direct, primary, and absolute.