GR 172404; (August, 2014) (Digest)
G.R. No. 172404, August 13, 2014.
PEOPLE’S TRANS-EAST ASIA INSURANCE CORPORATION, a.k.a. PEOPLE’S GENERAL INSURANCE CORPORATION, Petitioner, vs. DOCTORS OF NEW MILLENNIUM HOLDINGS, INC., Respondent.
FACTS
Doctors of New Millennium Holdings, Inc. (respondent) entered into a Construction and Development Agreement with Million State Development Corporation (contractor) for a hospital project. As a condition for its initial payment of ₱10,000,000.00, the contractor submitted a surety bond issued by People’s Trans-East Asia Insurance Corporation, now People’s General Insurance Corporation (petitioner). The contractor failed to secure the required project funding within the stipulated period. Respondent demanded payment from the petitioner under the surety bond. Petitioner denied liability, arguing its bond only guaranteed the construction of the hospital, not the funding, and that the principal contract had been altered without its consent by the insertion of the clause “or the Project Owner’s waiver” in the conditions for disbursement. The Regional Trial Court dismissed the complaint against the petitioner, finding the insertion constituted a material alteration (novation) that discharged the surety. The Court of Appeals reversed, holding the petitioner jointly and severally liable with the contractor.
ISSUE
Whether the petitioner, as surety, is discharged from its obligation under the surety bond due to a material alteration of the principal contract between the respondent and the contractor.
RULING
No. The Supreme Court affirmed the decision of the Court of Appeals. The liability of the surety was not extinguished. The insertion of the phrase “or the Project Owner’s waiver” did not substantially increase the risk or alter the principal obligation guaranteed by the bond. The surety bond explicitly guaranteed the repayment of the downpayment, and its terms made the attached construction agreement an integral part of the bond. The alteration was not material as it did not change the core obligation of the contractor to repay the initial payment upon default. The surety is jointly and severally liable with the principal obligor. The Court modified the award of interest to be at the rate of six percent (6%) per annum from the date of judicial demand until finality of judgment, and twelve percent (12%) per annum thereafter until full payment. Attorney’s fees were also awarded.