Surety/suretyship agreement; liabilities of surety - G.R. No. 180898

G.R. No. 180898

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A contract of suretyship is an agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of another party, called the obligee.[40] Although the contract of a surety is secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.[41] This was explained in the case of Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,[42] where it was written:

 The surety’s obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the principal.

Corollary, when PDSC communicated to FCC that it was terminating the contract, PCIC’s liability, as surety, arose. The claim of PDSC against PCIC occurred from the failure of FCC to perform its obligation under the building contract. As mandated by Article 2047 of the Civil Code, to wit:

Article 2047. By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case, the contract is called a suretyship.

Thus, suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor for the purpose of fulfilling an obligation.[43] A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.[44] Therefore,  as surety, PCIC becomes liable for the debt or duty of FCC although it possesses no direct or personal interest over the obligations of the latter, nor does it receive any benefit therefrom.[45]

The Court also found untenable the contention of PCIC that the principal contract was novated when PDSC and FCC executed the September 10, 1999 MOA, without informing the surety, which, in effect, extinguished its obligation.

A surety agreement has two types of relationship: (1) the principal relationship between the obligee and the obligor; and (2) the accessory surety relationship between the principal and the surety. The obligee accepts the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship with the principal obligor. Neither does it make the surety an active party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor.[46]

Furthermore, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with each other.[47] Novation of a contract is never presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[48]

Undoubtedly, a surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form.[49] In this case, however, no new contract was concluded and perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the revision of the work schedule originally agreed upon was the subject thereof. The parties saw the need to adjust the work schedule because of the various subcontracting made by PDSC. In fact, it was specifically stated in the MOA that “all other terms and conditions of the Building Contract of 27 January 1999 not inconsistent herewith shall remain in full force and effect.”[50] There was no new contract/agreement which could be considered to have substituted the Building Contract. As correctly ruled by the CA, thus:

At first blush, it would seem that the parties agreed on a revised timetable for the construction of Park ‘N Fly. But then, nowhere in the voluminous records of this case could We find the Annex “A” mentioned in the above-quoted agreement which could have shed light to the question of whether a new period was indeed fixed by the parties. The testimony of appellant Emmanuel Francia, Sr., President and Chief Executive Officer of appellant N.C, Francia, candidly disclosed what truly happened to Annex “A”, as he admitted that no new PERT/CPM was actually attached to the Memorandum of Agreement.

Accordingly, We find no compelling reason to declare that novation ensued under the prevailing circumstances. The execution of the Building Contract dated27 January 1999 does not constitute a novation of the Memorandum of Agreement dated 10 September 1999. There lies no incompatibility between the two contracts as their principal object and conditions remained the same. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchtone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.[51]

    

It must likewise be emphasized that pursuant to the September 10, 1999 MOA, PCIC extended the coverage of the performance bond until March 2, 2000.[52]

Finally, as pointed out by PCIC, the receivable in the amount of ₱2,793,000.00 acquired by PDSC from Caltex and the proceeds from the auction sale in the sum of ₱662,836.50 should be deducted from the award of ₱3,882,725.13. There is no quibble on this point. The ruling of the CA on the matter is very clear. It reads:

With these points firmly in mind, We proceed to the next question raised by appellants – whether the value of the securities given as well as the proceeds of the sale of chattels should be deducted from the claim of liquidated damages.

We answer in the affirmative.

There is no quibble that appellant N.C Francia assigned a portion of its receivables from Caltex Philippines, Inc. in the amount of ₱2,793,000.00 pursuant to the Deed of Assignment dated 10 September 1999. Upon transfer of said receivables, appellee Petroleum Distributors automatically stepped into the shoes of its transferor. It is in keeping with the demands of justice and equity that the amount of these receivables be deducted from the claim for liquidated damages.

So too, vehicles and equipment owned by appellant N.C. Francia were sold at public auction at ₱1,070,000.00. After deducting storage fees, the amount of₱662,836.50 was deposited before the court a quo. The latter amount accrues in favor of appellee Petroleum Distributors as partial payment of its claim for liquidated damages.

   

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