GR 180898; (April, 2012) (Digest)
G.R. No. 180898 ; April 18, 2012
PHILIPPINE CHARTER INSURANCE CORPORATION, Petitioner, vs. PETROLEUM DISTRIBUTORS & SERVICE CORPORATION, Respondent.
FACTS
Respondent PDSC entered into a building contract with N.C. Francia Construction Corporation (FCC) for the construction of a commercial complex. To secure FCC’s performance, petitioner PCIC issued a performance bond. Delays in construction occurred, prompting the parties to execute a Memorandum of Agreement (MOA) on September 10, 1999, which revised the work schedule. Consequently, the performance bond was extended until March 2, 2000. Despite this, FCC failed to complete the project, leading PDSC to terminate the contract on December 3, 1999. PDSC then demanded payment from FCC and, subsequently, sought recourse against PCIC under the performance bond.
PCIC denied liability, arguing that its obligation under the bond was extinguished. It contended that the extension of the bond was made without its knowledge and consent. It further asserted that PDSC’s act of terminating the contract and taking over the construction discharged the surety. The Regional Trial Court ruled in favor of PDSC, holding PCIC liable under the bond. The Court of Appeals affirmed this decision with modification.
ISSUE
Whether petitioner PCIC, as surety, is liable to respondent PDSC under the performance bond despite the execution of the MOA and the subsequent termination of the building contract.
RULING
Yes, PCIC is liable. The Supreme Court affirmed the CA’s decision. The legal logic is anchored on the nature of a contract of suretyship and the principle that a surety’s obligation is accessory to the principal obligation. The execution of the MOA, which merely revised the work schedule, did not constitute a novation that would extinguish the original contract and the accessory surety agreement. Novation requires a clear intent to extinguish the old obligation, which was absent. The MOA was a continuation and modification to accommodate delays, not a replacement of the principal contract.
Furthermore, the extension of the performance bond was valid and binding on PCIC. The extension was a necessary consequence of the MOA’s revised completion date, to which the bond was accessory. PCIC, as surety, was deemed to have consented to this modification as it was within the scope of the original undertaking to secure faithful performance. The termination of the building contract by PDSC due to FCC’s default did not release the surety; instead, it triggered the surety’s liability under the bond precisely for such failure to perform. The taking over of the project by PDSC was a legitimate remedy under the contract and law to mitigate damages, not an act that would discharge the surety. Therefore, PCIC remained solidarily liable with FCC up to the bond’s limit.