Hospicio de San Jose v. Fidelity & Surety Co.
REITERATIONFacts
1. The Antecedents: The Hospicio de San Jose contracted Romulo Machetti to construct a building. Machetti guaranteed the faithful fulfillment of this contract with a bond from The Fidelity and Surety Company of the Philippine Islands for P12,800. Machetti later entered into an additional contract for further construction, to which the surety company was not a party. Machetti failed to complete both constructions according to plans and specifications, acted in bad faith, and incurred significant delays. The Hospicio de San Jose subsequently hired another contractor to rectify the faulty work and complete the constructions. 2. Procedural History: The Hospicio de San Jose filed a claim against the insolvent estate of Romulo Machetti, which was allowed by the Court of First Instance and affirmed by the Supreme Court. However, the distribution of Machetti's estate yielded only a partial payment, leaving a substantial balance unpaid. The Hospicio de San Jose then filed the present action against The Fidelity and Surety Company of the Philippine Islands to recover the bond amount. The Court of First Instance ruled in favor of the plaintiff, ordering the surety company to pay P12,800. The surety company appealed this decision. 3. The Petition: The Fidelity and Surety Company of the Philippine Islands appealed the lower court's decision, assigning several errors. The core of the appeal centered on whether the surety was discharged from its obligation due to an extension of time granted to the contractor without the surety's consent, and whether the contractor's premature full payment by the Hospicio de San Jose relieved the surety of liability. The appellant also questioned if the plaintiff's action had prescribed. The Supreme Court considered the surety's obligation was limited to the plans and specifications, not the completion timeline, and that the surety had not properly pleaded the defense of premature payment. Furthermore, the Court found the action had not prescribed due to a prior cross-complaint filed within the statutory period.
Issue(s)
Whether the 25-day extension granted to the contractor without the surety's consent extinguished the surety's liability. Whether the premature payment of the total construction price to the contractor without the surety's knowledge relieved the surety of liability. Whether the plaintiff's action to recover the bond amount from the defendant had prescribed.
Ruling
The Supreme Court affirmed the judgment of the lower court, ordering the defendant to pay the plaintiff the amount of P12,800, with legal interest. The Court held that the surety's liability was not extinguished by the extension of time, nor by the premature payment, and that the action had not prescribed.
Ratio Decidendi
On the issue of the 25-day extension: The Court ruled that the extension of 25 days granted by the plaintiff to Romulo Machetti for the completion of the work, without the consent of the defendant surety company, did not extinguish the latter's liability. This was because the surety's obligation, as stated in the contract, was to guarantee the exact and faithful fulfillment of the obligations contracted by Machetti according to the plans and specifications. The original contract did not specify a completion period, and the surety did not bind itself to answer for the exact fulfillment of a specific completion date. Since suretyship is an accessory contract and the surety cannot be bound for more than the principal debtor, the surety's obligation did not extend to guaranteeing the completion within the extended period. Therefore, the extension did not alter the terms of the surety's undertaking in a way that would release it from its guaranty. On the issue of premature payment: The Court held that the defendant surety company could not set up the defense of premature payment made by the plaintiff to the contractor as a ground for discharge from its obligation. This was because the defendant failed to allege this premature payment as a special defense in its answer to the complaint. The general rule in suretyship cases is that defenses such as discharge due to the obligee's actions must be specially pleaded. Since this defense was not raised in the pleadings, it could not be introduced for the first time on appeal. The Court also noted the plaintiff's objection to the materiality and relevancy of this fact in the agreed statement of facts, further reinforcing the procedural bar. On the issue of prescription: The Court found that the plaintiff's action against the defendant had not prescribed. While the principal obligor's failure to fulfill the obligation occurred on February 16, 1917, the plaintiff had previously filed a cross-complaint against the defendant on February 7, 1920, in a prior case (Machetti vs. Hospicio de San Jose and Fidelity and Surety Company). This filing was within the ten-year prescriptive period provided by Section 43 of the Code of Civil Procedure for actions arising from written contracts. Although that cross-complaint was dismissed as premature by the Supreme Court, the Court explicitly reserved the plaintiff's right to bring a new action after exhausting remedies against the principal obligor. The current action, filed on December 23, 1927, was initiated after Machetti's insolvency proceedings were concluded and the unpaid balance was established, thus falling within the preserved right of action and not having prescribed.
Main Doctrine
An extension of time granted to a principal debtor without the consent of the surety does not extinguish the surety's liability if the surety did not guarantee the specific completion date, but rather the faithful performance of the work according to plans and specifications. Furthermore, a surety cannot set up the defense of premature payment by the obligee to the principal debtor for the first time on appeal if it was not specially pleaded in the answer.