PHILIPPINE

CHARTER INSURANCE CORPORATION v.

Philippine Charter Insurance Corporation Central Colleges of the PH, Dynamic Planners
and Construction Corporation
Doctrine:
• The surety undertakes to be bound solidarily with the principal obligor.
• Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses
no direct or personal interest over the obligations nor does it receive any benefit
therefrom.
• Although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; he is directly and equally bound with the principal.
Facts:
1. CCP, an educational institution, contracted the service of Dynamic Planners and
Construction Corporation (DPCC) to be its general contractor for the construction of
its 5-storey school building. As embodied in their Contract Agreement, the entire
building would be done in two phases with each phase valued at P124M.
2. To guarantee the fulfillment of the obligation, DPCC posted three (3) bonds, all issued
by the Philippine Charter Insurance Corporation (PCIC), namely: (1) Surety Bond No.
PCIC-45542; (2) Performance Bond No. PCIC-45541; and (3) Performance Bond No.
PCIC-46172. All these bonds were callable on demand and set to expire on October
30, 2003.
3. The Phase 1 of the project was completed without issue. Thereafter, CCP paid DPCC
P14,880,000.00 or 12% of the agreed price of P124,000,000.00 with a check dated
March 14, 2002 as down payment for the Phase 2 of the project. However, the Phase
2 of the project encountered numerous delays. When CCP audited DPCC on July 25,
2003, only 47% of the work to be done was actually finished.
4. In a letter dated October 29, 2003 addressed to DPCC and PCIC, CCP informed them of
the breach in the contract and its plan to claim on the construction bonds. Thereafter,
CCP noti ed DPCC and PCIC that only 51% of the project was completed, which was
way behind the construction schedule, prompting it to declare the occurrence of
default against DPCC. It formally requested PCIC to remit the proceeds of the bonds.
5. DPCC wrote PCIC confirming the finding that Phase 2 was only 51% finished and
requesting for the extension of its performance and surety bonds because the
supposed revision of the plans would require more days.
6. CCP notified PCIC that because of DPCC's inability to complete the project on time, it
 decided to terminate its contract with the latter and to continue the construction on
its own but subsequently approved its request for the extension of the bonds
7. CCP sent a letter to PCIC of its final demand for the payment of P13,924,351.47 as
indicated in the bonds but PCIC denied CCP's claims against the three bonds.
8. CCP filed a complaint with request for arbitration before the Construction Industry
Arbitration Commission (CIAC) against DPCC and PCIC and prayed that CIAC hold DPCC
and PCIC, jointly and severally liable, against Under Surety Bond No. 45542 and
Performance Bond Nos. PCIC-45541.
CIAC: Surety is liable to Claimant under the Performance and Surety Bonds it issued in favor
of Claimant. The liability of Surety is to indemnify Claimant for the un-recouped down
payment under the Surety Bond and for not more than the amount under the Performance
Bonds. If Surety is obliged to pay these amounts to Claimant, it is entitled, on its cross-claim,
to indemnity from Dynamic. Claimant's claims under the Surety and Performance Bonds are
not time-barred. Surety is not barred by estoppel from denying liability under the Surety and
Performance Bonds.

CA: DPCC was already in delay for managing to complete only 51% of the construction work
necessary to finish the Phase 2 of the project. Due to DPCC's inexcusable delay, CCP was
legally within its rights to terminate the contract with it.

Issue/s: Ruling:
WON the CA grossly erred in sustaining the CIAC award finding PCIC liable 1. NO.
to CCP under the performance bonds and the surety bond?

Ratio:
PCIC is liable to CCP under the surety and performance bonds.
CCP's cause of action accrued from the time that DPCC became in culpable delay as
contemplated in the surety and performance bonds. The surety bond and performance bond
each specified specifically how the claims should be made against it.

Upon notice of default of obligor DPCC, PCIC's liability, as surety, already attached. A surety
under Article 2047 of the New Civil Code solidarily binds itself with the principal debtor to
assure the fulfillment of the obligation:

Art. 2047.By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a
suretyship. [Emphasis supplied]

The surety undertakes to be bound solidarily with the principal obligor. That undertaking
makes a surety agreement an ancillary contract as it presupposes the existence of a principal
contract. Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses no
direct or personal interest over the obligations nor does it receive any benefit therefrom. Let
it be stressed that notwithstanding the fact that the surety contract is secondary to the
principal obligation, the surety assumes liability as a regular party to the undertaking.

The surety's obligation is not an original and direct one for the performance of his own act,
but merely accessory or collateral to the obligation contracted by the principal. Nevertheless,
although the contract of a surety is in essence secondary only to a valid principal
obligation, his liability to the creditor or promisee of the principal is said to be direct,
primary and absolute; in other words, he is directly and equally bound with the principal.

Suretyship, in essence, contains two types of relationship:

1. the principal relationship between the obligee and the obligor

In this arrangement, the obligee accepts the surety's solidary undertaking to pay if the
obligor does not pay. However, such acceptance does not change in any material way the
obligee's relationship with the principal obligor. Neither does it make the surety an active
party to the principal obligee-obligor relationship. Thus, the acceptance does not give the
surety the right to intervene in the principal contract. The surety's role arises only upon the
obligor's default, at which time, it can be directly held liable by the obligee for payment as a
solidary obligor.

Having acted as a surety, PCIC is duty bound to perform what it has guaranteed on its surety
and performance bonds, all of which are callable on demand, occasioned by its principal's
default.