FGU Insurance Corporation v. Spouses Roxas
REITERATIONFacts
The Antecedents: On May 22, 1979, Spouses Floro and Eufemia Roxas (Spouses Roxas) entered into a Contract of Building Construction with Rosendo P. Dominguez, Jr. (Dominguez) and Philippine Trust Company (Philtrust Bank) for the completion of 'Vista Del Mar Executive Houses' in Cabcaben, Mariveles, Bataan, estimated at P1,200,000.00; Philtrust Bank financed materials up to P900,000.00 upon Dominguez's request and Spouses Roxas' conformity with submitted invoices, while Spouses Roxas shouldered P300,000.00 labor costs, but Dominguez bound himself to complete within 150 working days from April 25, 1979 regardless; non-compliance triggered P1,000.00 daily liquidated damages to Bank and/or Owners; on May 24, 1979, Spouses Roxas and Dominguez agreed on payment terms for P300,000.00 (three P30,000.00 cash installments then P210,000.00 in specific Bataan properties) with 14% interest on delay; same day, Dominguez secured P450,000.00 FGU Surety Bond (FIC No. G(23)5954) binding FGU solidarily to pay Floro Roxas and Philtrust Bank upon non-performance. Dominguez requested contract price upward adjustment on September 20, 1979 due to rising costs (denied); demanded P90,000.00 unpaid installments plus interest on October 22, 1979, warning work stoppage by October 31 absent payment; on November 9, 1979, demanded P73,136.75 borrowed from project funds for personal use (e.g., P53,000.00 personal loan to Eufemia); Philtrust withheld P24,000.00 balance for lack of accounting; Dominguez abandoned project October 31, 1979 after partial work amid disputes over payments, releases, and rising costs. Procedural History: Dominguez filed Civil Case No. 130783 (March 28, 1980, CFI Manila Br. 40) vs. Spouses Roxas and Philtrust for payments, annulment of contracts/bond, etc.; Philtrust answered with counterclaim for liquidated damages, impleaded FGU; Spouses Roxas counterclaimed for reimbursement P422,000.00 unauthorized releases, damages; FGU argued partial liability. RTC (Sept. 4, 1990) ruled for Dominguez: voided clauses/contracts, cancelled bond, awarded P90,000.00+14% interest, P73,136.75+legal interest, P50,000.00 moral/exemplary/attorney's fees each, dismissed other claims; CA (May 26, 2009) modified: upheld contracts/bond, FGU solidarily liable P450,000.00 to Spouses Roxas, Spouses pay Dominguez P90,000.00+14%, P73,136.75+legal interest, awarded Spouses damages/attorney's fees vs. Dominguez, remanded Philtrust claims; MRs denied (Sept. 14, 2009); FGU/Spouses petitioned (G.R. Nos. 189526/189656, consolidated). The Petition: FGU: bond max liability P450,000.00 only for actual damages/cost overrun (unproven), not greater than principal's, half to Spouses (joint obligees); Spouses: full P450,000.00+liquidated damages to them alone (Philtrust at fault), no basis for their payments to Dominguez, Philtrust liable for unauthorized releases/unrealized rentals; Philtrust: include as obligee, liquidated damages vs. Dominguez, enforce Spouses' P13M+ loans/mortgages.
Issue(s)
Whether FGU is liable for full P450,000.00 bond or only actual damages/cost overrun, and to whom (Spouses alone or shared with Philtrust). Whether Spouses entitled to liquidated damages vs. Dominguez. Factual basis for Spouses' payments to Dominguez (P90,000.00+14%, P73,136.75). Whether FGU may set off Spouses' debts to Dominguez vs. bond liability (Arts. 1280, 1283). Remand propriety for Philtrust claims vs. Spouses; Philtrust liability for unauthorized releases.
Ruling
Petitions PARTIALLY GRANTED; CA Decision AFFIRMED WITH MODIFICATION: (1) Dominguez/FGU solidarily pay Spouses/Philtrust P450,000.00 + legal interest; (2) Dominguez pay Spouses/Philtrust P38,000.00 liquidated damages (38 days), damages/attorney's fees + interest; (3) Spouses pay Dominguez P90,000.00+14% from Oct. 31, 1979, P73,136.75+legal interest from Nov. 16, 1979 (FGU offsets); Spouses liable to Philtrust for its share; (4) Spouses pay Philtrust P876,000.00+19% from June 30, 1980, P2,184,260.38+19% penalty from same date, P243,320.00 attorney's fees; foreclose mortgages if default; remand RTC for execution.
Ratio Decidendi
On FGU's Liability under Surety Bond (Issue 1): Suretyship (Ins. Code Sec. 175) creates solidary, primary, absolute liability with principal (Civ. Code Arts. 2047, 1216), payable upon default without proving actual damages if bond terms so provide; here, FGU Bond No. G(23)5954 explicitly binds to pay P450,000.00 to Floro Roxas/Philtrust if Dominguez fails Contract undertakings—literal terms control as adhesion contract strictly construed against insurer (Luzon Surety v. Quebrar), no limitation to cost overrun specified, so full face value due on abandonment; 'complementary-contracts' doctrine (Art. 1374) incorporates construction contract naming Bank/Owners solidarily ('and/or'), rejecting joint obligees halving claim; creditor may sue surety alone (Gilat v. UCPB Gen. Ins.); FGU entitled to full indemnity/subrogation vs. principal (Arts. 2066-2067, Escaño v. Ortigas). On Liquidated Damages (Issue 2): Valid per Art. 2226 as penalty ensuring performance (PEZA v. Pilhino), applies to any breach including abandonment (not delay-only), accruing P1,000.00/day from Sept. 23, 1979 (150 days from Apr. 25) to Oct. 31, 1979 (P38,000.00) vs. Dominguez; FGU not liable therefor absent bond stipulation. On Spouses' Payments to Dominguez (Issue 3): Factual findings (non-payment P90,000.00 installments, different properties offered, P73,136.75 diverted loan) binding as trial court/CA-consistent, substantial evidence (Agreement, checks, Eufemia admissions)—no review of facts (Am. Home Ins. v. F.F. Cruz). On Compensation/Set-Off (Issue 4): Surety invokes Art. 1280 (guarantor/surety sets up creditor's debt to principal), extinguishing FGU liability vs. Spouses' P90,000.00+14%, P73,136.75+interests to Dominguez; Spouses liable to Philtrust for its solidary share (Art. 1215). On Philtrust Claims/Remand, Unauthorized Releases (Issue 5): No remand needed—Spouses admitted P1,557,200.00 loans + P876,000.00 construction (promissory notes, TSN admissions), 19% interest/penalty valid (Art. 1159), computed to P2,184,260.38 + P876,000.00 as of June 30, 1980 + interests/fees; no proof prepaid interest; unauthorized releases liability settled via res judicata (G.R. No. 171897, RTC Bataan final award P100,000.00+ damages to Spouses).
Main Doctrine
The liability of a surety under a performance bond is determined strictly in accordance with the actual terms of the bond issued, guaranteeing payment of the face amount upon the principal's failure to perform contractual obligations without the necessity of proving the measure of actual damages sustained by the obligee, as the bond is a contract of adhesion interpreted liberally in favor of the obligee and strictly against the insurer. Although the surety's obligation is secondary to the principal's, it is solidary, primary, and absolute, allowing the creditor to proceed against the surety independently under Articles 1216 and 2047 of the Civil Code. A surety may set up compensation under Article 1280 against amounts owed by the creditor to the principal debtor, extinguishing mutual credits to the extent allowed by law. Liquidated damages clauses in construction contracts apply not only to delays but also to breaches involving abandonment, serving as penalties to ensure performance as per Article 2226. Surety bonds incorporate principal contracts via the 'complementary-contracts-construed-together' doctrine under Article 1374, treating obligees as solidary if so stipulated therein.