G.R. No. 205007 , September 16, 2019
THE MERCANTILE INSURANCE CO., INC., PETITIONER, VS. DMCI-LAING CONSTRUCTION, INC., RESPONDENT.

FACTS

Rockwell Land Corporation (Rockwell) entered into a contract with DMCI-Laing Construction, Inc. (DLCI) as the general contractor for a construction project. As part of the agreement, Altech Fabrication Industries, Inc. (Altech) was appointed as the nominated subcontractor for the supply and installation of glazed aluminum and curtain walling. A Sub-Contract was executed between DLCI and Altech. Pursuant to this, Altech secured a Performance Bond from The Mercantile Insurance Co., Inc. (Mercantile) in the amount of PhP90,448,941.60, initially in favor of both Rockwell and DLCI, but later corrected to name DLCI as the sole obligee. The bond’s effectivity was extended to March 5, 2000.
Due to Altech’s poor progress and substandard work, DLCI sent several communications highlighting delays. DLCI was constrained to undertake completion and rectification of Altech’s work. On September 3, 1999, DLCI made a demand on the Performance Bond (the “First Call”), which was reiterated in subsequent letters. The demand letters did not specify an exact amount claimed. On February 21, 2000, DLCI terminated its Sub-Contract with Altech due to default, including failure to proceed with due diligence and Altech’s financial difficulties. After failed negotiations, DLCI reiterated its demand on the bond in November 2000. Mercantile denied the claim on February 26, 2001, citing the bond’s expiration on March 5, 2000.
DLCI filed a complaint against Altech and Mercantile before the Construction Industry Arbitration Commission (CIAC) on May 29, 2003, seeking to recover Php31,618,494.81 for costs incurred to complete the subcontracted works. The CIAC dismissed the complaint, ruling that DLCI filed the complaint beyond a “reasonable time” as required by the Sub-Contract, thereby violating its terms and applying laches. The CIAC also held that Mercantile was released from its obligation under Article 2080 of the Civil Code because DLCI’s delay deprived Mercantile of its right of subrogation against Altech. Furthermore, the CIAC found DLCI’s First Call invalid for not specifying an amount and deemed the termination of the Sub-Contract unjustified, noting Altech had achieved 95% accomplishment. The Court of Appeals reversed the CIAC decision, prompting Mercantile’s petition for review.

ISSUE

Whether the Court of Appeals erred in reversing the CIAC decision and holding Mercantile liable on the Performance Bond despite DLCI’s delay in filing its claim and the alleged invalidity of the demand and termination.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals decision, holding Mercantile liable on the Performance Bond.
The Court ruled that DLCI’s demand on the bond was valid. The Performance Bond itself stipulated that the surety shall immediately indemnify the obligee upon demand, “notwithstanding any dispute to the effect that the principal has fulfilled its contractual obligation.” The demand letters, while not specifying an exact amount, were sufficient to put Mercantile on notice of DLCI’s claim. The exact quantification of damages is not a prerequisite for a valid demand under a surety agreement.
The Court held that DLCI’s filing of the CIAC complaint was within a reasonable time. The Sub-Contract required arbitration demand to be made “within a reasonable time after the dispute has arisen and attempts to settle amicably have failed.” The dispute crystallized upon the termination of the Sub-Contract on February 21, 2000. DLCI and Altech engaged in negotiations until they fell through. DLCI’s final demand was in November 2000, and Mercantile denied the claim in February 2001. DLCI filed the CIAC case in May 2003. Under the circumstances, including the time for negotiations and the preparation of a detailed claim, the delay was not unreasonable and did not constitute laches. Laches requires a finding of negligence or omission to assert a right, which was not present here.
The Court further ruled that Mercantile was not released from its obligation under Article 2080 of the Civil Code. This article applies to guarantors, not sureties. A surety’s obligation is primary and solidary with the principal debtor. The right of subrogation accrues only after the surety pays the creditor. Since Mercantile had not paid, its right of subrogation had not yet arisen, and thus could not have been prejudiced by any delay. The principle of release due to the creditor’s act that deprives the surety of recourse against the debtor was inapplicable.
The Court found the termination of the Sub-Contract by DLCI was justified due to Altech’s failure to perform according to the agreed terms, including consistent delays and failure to meet quality standards, coupled with its admitted financial difficulties and surrender of major assets to creditors, which constituted events of default under the contract.
On the amount of liability, the Court modified the CA decision. It held that DLCI was entitled to recover the actual costs it incurred to complete Altech’s work, which amounted to Php31,618,494.81 as proven before the CIAC. The Court awarded legal interest on this amount at 6% per annum from the date of judicial demand (filing of the CIAC complaint on May 29, 2003) until finality of judgment, and then 6% per annum on the total sum until full payment. Attorney’s fees were also awarded to DLCI, as provided for in the Performance Bond, fixed at 10% of the principal claim.