G.R. No. L-19277 January 30, 1967
Mindanao Motors Corporation, plaintiff-appellee, vs. Bessire Housing Corporation and Capital Insurance & Surety Co., Inc., defendants. Capital Insurance & Surety Co., Inc., defendant-appellant.

FACTS

Bessire Housing Corporation (defendant) had a contract with the Republic of the Philippines to construct pre-fabricated barrio school buildings. In compliance with Act 3688, Bessire and Capital Insurance & Surety Co., Inc. (appellant) executed a surety bond in favor of the Government and any entity supplying the principal with labor or materials. Mindanao Motors Corporation (appellee) supplied Bessire with hauling services, gasoline, and vehicle repairs from November 8, 1950, to February 11, 1951. On September 5, 1951, the parties executed an agreement where Bessire admitted an indebtedness of P7,201.93 (later corrected to P7,375.39) and promised to pay the balance of P5,000.00 (correctly P5,274.00) by November 15, 1951, with interest and attorney’s fees. Bessire made a partial payment on March 12, 1952. After demands for the balance of P4,274.00 were unmet, appellee sued both defendants. The trial court ordered them to pay jointly and severally. Appellant surety company appealed, contending the complaint failed to state a cause of action due to non-compliance with Act 3688.

ISSUE

Whether the lower court erred in denying appellant’s motion to dismiss the complaint for failure to state a cause of action, specifically due to appellee’s non-compliance with the jurisdictional requirements of Act 3688 for filing suit on the surety bond.

RULING

Yes, the lower court erred. The complaint was properly dismissible against the appellant surety company. Act 3688 establishes specific conditions for a supplier to initiate suit on a contractor’s bond: (1) no suit by the Government within six months from contract completion and final settlement, or a government waiver; (2) the supplier’s suit must be commenced within one year from the performance and final settlement of the contract; (3) only one action may be brought, allowing other creditors to intervene within one year; and (4) personal notice to known creditors and notice by publication in a newspaper of general circulation in the place where the contract was performed must be given. The law requires the principal government contract to be completed and finally settled before any supplier’s action to ensure all creditors have an equal chance to file claims and share pro rata in the bond. The complaint failed to allege when the contract was settled. Furthermore, there was no showing that the mandatory requirement of notice by publication was complied with; such notice is jurisdictional. Therefore, the complaint failed to state a cause of action against the surety. The judgment was reversed and the complaint dismissed as against appellant.