GR 159731; (April, 2008) (Digest)
G.R. No. 159731; April 22, 2008
Eastern Assurance and Surety Corporation vs. Con-Field Construction and Development Corporation
FACTS
Con-Field Construction entered into a subcontract with Freezinhot for the installation of an air-conditioning system. The agreement required Freezinhot to furnish a performance bond, which it secured from Eastern Assurance and Surety Corporation (EASCO). Subsequently, Freezinhot’s president, Demetrio de Guzman, sent a letter to Con-Field unilaterally terminating the contract due to “technical reasons.” Con-Field responded, accepting the termination and citing Freezinhot’s lack of equipment, technical capability, manpower, and financial support as the bases, while clarifying it did not initiate the termination.
Con-Field thereafter completed the project itself and incurred additional costs. It filed a complaint against Freezinhot and EASCO to recover these costs and to claim the amount of the performance bond. The Regional Trial Court ruled in favor of Con-Field, holding EASCO solidarily liable on the bond. The Court of Appeals affirmed the RTC decision but deleted the award of attorney’s fees against EASCO.
ISSUE
Whether the surety, EASCO, is liable on the performance bond following the termination of the subcontract between Con-Field and Freezinhot.
RULING
Yes, EASCO is liable. The Supreme Court affirmed the CA decision. The legal logic centers on the nature of a suretyship and the cause of the principal obligation’s termination. EASCO argued that the exchange of letters constituted a mutual agreement to rescind the subcontract, thereby extinguishing the principal obligation and, consequently, its accessory surety obligation under Articles 2052 and 2076 of the Civil Code.
The Court rejected this. The termination was not a mutual rescission but a unilateral act by Freezinhot, which Con-Field merely accepted. Acceptance of a rescission offered by the other party is not equivalent to mutual agreement. The termination was due to Freezinhot’s default—its inability to perform—which is precisely the risk covered by the performance bond. Since the principal obligation was extinguished by breach, not by mutual consent, the surety’s accessory liability for that breach remained effective.
Furthermore, EASCO failed to provide evidence supporting its claim that the project was nearly complete when taken over, which could have warranted a reduction in liability. The bond amount was less than the actual damages incurred by Con-Field. The surety’s right to reimbursement from Freezinhot under their Indemnity Agreement was also preserved by the lower court’s judgment. Therefore, EASCO was correctly held liable for the full bond amount.