G.R. No. L-28245. May 22, 1982.
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, petitioner, vs. THE COURT OF APPEALS and DAVE HARVEY, INC., respondents.

FACTS

On February 21, 1958, private respondent Dave Harvey, Inc. entered into a Painting Contract with Caltex (Phil.), Inc. to paint a storage tank. The contract contained two key warranty provisions. Clause 12 obligated the contractor to furnish a surety bond, which would be liable for any defect arising from materials or workmanship discovered within ninety (90) days from the completion and acceptance of the work. Petitioner Philippine American General Insurance Company issued this P1,500.00 bond. Separately, the “Specifications for Tank Painting” (Annex “A” of the contract) contained a clause stating that any defects in workmanship discovered within a period of one year would be corrected by the contractor without additional charge.
Dave Harvey completed the painting job in March 1958, and a representative of the site owner certified it as satisfactory. However, on September 16, 1958, Caltex notified Dave Harvey of alleged defects, which was more than 90 days after acceptance but within the one-year period. Caltex subsequently demanded payment from the surety, petitioner Philamgen, which paid the bond amount. Philamgen then sued Dave Harvey for reimbursement based on an indemnity agreement.

ISSUE

Whether the surety bond issued by petitioner was liable for defects discovered beyond the 90-day period stipulated in the main contract, thereby entitling petitioner to reimbursement from the principal debtor.

RULING

No. The Supreme Court affirmed the dismissal of the complaint, holding that the surety’s liability was extinguished after the 90-day period. The Court harmonized the seemingly conflicting 90-day and one-year warranty clauses. It ruled that the 90-day period in Clause 12 specifically governed the liability of the surety bond for defects arising from either “defective materials or workmanship.” In contrast, the one-year warranty in Annex “A” applied only to “defects in workmanship” and created a direct, personal obligation on the contractor, Dave Harvey, to make corrections without involving the bond.
Since Caltex discovered and reported the alleged defects only in September 1958, which was clearly beyond the 90-day period from the March 1958 acceptance, the condition for enforcing the surety bond was not met. Consequently, petitioner Philamgen had no legal obligation to pay Caltex under the bond. A surety’s liability is strictly limited to the terms of its contract. Having voluntarily paid despite the lapse of the bond’s effective period, petitioner assumed a liability not imposed by the surety agreement. Therefore, its payment was not a discharge of a valid surety obligation, and it cannot seek reimbursement from the principal debtor under the indemnity agreement. The right to recover under the indemnity agreement presupposes a valid and demandable payment by the surety.