G.R. No. L-43706 November 14, 1986
NATIONAL POWER CORPORATION, petitioner, vs. COURT OF APPEALS and PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

FACTS

The National Power Corporation (NPC) contracted with Far Eastern Electric, Inc. (FEEI) for the construction of transmission lines. FEEI’s performance was secured by a surety bond from Philippine American General Insurance Co., Inc. (Philamgen). The bond stipulated that Philamgen’s liability would expire one year from final completion and acceptance of the work, and the bond would be cancelled 30 days after expiration unless the surety was notified of any existing obligation. FEEI commenced work but subsequently abandoned the project due to financial difficulties. Both FEEI and Philamgen formally notified NPC of the abandonment in a joint letter dated July 19, 1963. On the same date, NPC wrote to Philamgen, formally holding it and FEEI liable for the cost to complete the work. NPC eventually completed the project itself.
After completing the work, NPC later demanded payment from Philamgen based on the surety bond. Philamgen refused, contending its liability had expired because NPC failed to notify it of any existing obligation within 30 days after the bond’s expiration date. NPC filed a collection suit. The trial court ruled in favor of NPC, holding Philamgen solidarily liable. The Court of Appeals reversed, dismissing the complaint against Philamgen on the ground that the 30-day notice condition was not complied with, prompting NPC’s petition to the Supreme Court.

ISSUE

Whether Philamgen, as surety, is liable under its performance bond despite NPC’s alleged failure to give a notice of existing obligation within 30 days after the bond’s expiration.

RULING

The Supreme Court reversed the Court of Appeals and reinstated the trial court’s decision, holding Philamgen liable. The legal logic centers on the proper construction of the surety bond in relation to the principal construction contract. The Court ruled that the 30-day notice condition in the bond applied to a situation where the contractor had completed the work, which never happened. Here, the contractor abandoned the project, a fundamental breach occurring during the bond’s effective period. The bond and the construction contract must be read together as one agreement. Critical provisions of the contract, incorporated into the bond, expressly stated that the surety’s liability would continue if NPC took over an abandoned work.
Furthermore, Philamgen had actual and timely knowledge of the default and abandonment through direct communications from NPC and even through its own joint letter with FEEI notifying NPC of the abandonment. This actual notice rendered strict compliance with the formal 30-day post-expiration notice unnecessary. Applying the rule that insurance contracts (including surety bonds) are construed liberally in favor of the insured and strictly against the insurer, any ambiguity in the bond’s notice provision must be interpreted against Philamgen. The surety cannot evade liability when its principal’s breach and NPC’s takeover occurred within the bond’s coverage period and with the surety’s full knowledge.