G.R. No. L-8312; March 29, 1915
UY TAM and UY YET, plaintiffs-appellants, vs. THOMAS LEONARD, ET AL., defendants-appellees.

FACTS:
Plaintiffs-appellants Uy Tam and Uy Yet supplied materials to contractors R.C. Hosty and W.W. Brown for a public works contract with the City of Manila for furnishing crushed rock. The contractors executed a performance bond in favor of the City of Manila, with individual defendants as sureties. The bond’s condition included a stipulation that the contractors would “promptly make all payments to all persons supplying them labor or materials in the prosecution of the work provided for in said contract.” The plaintiffs, having notified the defendants of their acceptance of this condition, filed an action against the sureties to recover payment for the materials supplied. The City of Manila was joined as a nominal defendant. The Court of First Instance of Manila sustained the defendants’ demurrer on the ground that the complaint failed to state a cause of action and dismissed the case.

ISSUE:
Whether the plaintiffs, as material suppliers who are not parties to the bond, have a right of action to enforce the stipulation in the performance bond executed in favor of the City of Manila, which requires the contractors to pay persons supplying labor or materials.

RULING:
NO. The Supreme Court affirmed the judgment of the lower court, holding that the plaintiffs could not maintain an action on the bond.

The Court applied Article 1257 of the Civil Code, which provides that contracts generally produce effects only between the parties and their heirs. The second paragraph of the article allows a third person to demand fulfillment of a stipulation in their favor, provided they have communicated their acceptance before its revocation. The Court analyzed the nature of the stipulation pour autrui (in favor of a third party).

The Court held that for a third party to benefit under such a stipulation, it must be clearly intended for their benefit. In this case, the bond was executed solely between the contractors/sureties and the City of Manila as the obligee. The clause regarding payment to materialmen and laborers was inserted primarily for the protection and benefit of the City of Manila, to shield it from any liens or claims that might arise from the contractor’s non-payment. It was not intended to create a direct obligation from the sureties to the material suppliers. The bond did not name materialmen as obligees, and its primary purpose was to secure the City’s interests under the contract.

The Court distinguished cases where bonds were expressly made payable to materialmen, which would grant them a direct right of action. It rejected a forced construction of the bond’s language to imply such an intent. The Court found support in civil law principles and analogous jurisprudence, including a Louisiana case (Salem Brick and Lumber Co. vs. Le Sassier), which held that a similar bond clause did not create a stipulation in favor of third-party materialmen.

Therefore, the demurrer was properly sustained as the complaint, based on a bond that did not confer privity of contract upon the plaintiffs, failed to state a cause of action.

Arellano, C.J., Torres, Carson, Araullo, and Moreland, JJ., concurred.
Johnson, J., dissented.