FGU Insurance Corporation vs. Spouses Roxas

The liability of a surety under a performance bond is strictly limited to the amount stipulated in the bond and is determined in accordance with the bond's specific terms; the surety is solidarily liable with the principal for the full face amount upon default, but may invoke compensation (set-off) against amounts owed by the creditor to the principal debtor pursuant to Article 1280 of the Civil Code.

The dispute arose from a Contract of Building Construction dated May 22, 1979 for the construction of "Vista Del Mar Executive Houses" in Mariveles, Bataan. Spouses Roxas, as owners, engaged Dominguez as contractor to complete the project for P300,000.00 in labor costs, while Philtrust Bank agreed to finance materials up to P900,000.00. To guarantee performance, Dominguez secured FGU Surety Bond No. G(23) 5954 for P450,000.00, binding FGU and Dominguez jointly and severally to pay the obligees in case of non-performance. When Dominguez abandoned the project due to payment disputes, litigation ensued regarding the extent of the surety's liability, the validity of liquidated damages clauses, and the rights of the parties to set off mutual obligations.

• On May 22, 1979, Spouses Roxas entered into a Contract of Building Construction with Dominguez and Philtrust Bank for the construction of a housing project in Bataan, with an estimated cost of P1,200,000.00, where Philtrust Bank would finance materials up to P900,000.00 and Dominguez would provide labor for P300,000.00.
• The contract stipulated that Dominguez would complete the project within 150 working days from April 25, 1979, "whether or not the [Spouses Roxas] could provide/supply the funds to finance the labor costs," and provided for liquidated damages of P1,000.00 per day for non-compliance.
• On May 24, 1979, Spouses Roxas and Dominguez executed a separate Agreement specifying payment terms for the P300,000.00 labor cost, including three cash payments of P30,000.00 each and a final payment in real properties upon completion, with 14% interest per annum on unpaid amounts.
• Also on May 24, 1979, Dominguez secured Performance Bond No. G(23) 5954 (Surety Bond) from FGU Insurance Corporation for P450,000.00, binding FGU and Dominguez jointly and severally to pay Floro Roxas and Philtrust Bank in case of Dominguez's non-performance.
• Dominguez requested an upward adjustment of the contract price on September 20, 1979 due to rising costs, which Spouses Roxas rejected; Dominguez then demanded payment of the three P30,000.00 installments plus interest, warning he would stop work by October 31, 1979 if unpaid.
• On November 9, 1979, Dominguez demanded payment of P73,136.75 from Spouses Roxas representing personal loans and advances diverted from the project funds.
• Dominguez abandoned the project on October 31, 1979, having failed to complete the construction within the stipulated period, prompting Philtrust Bank to send demand letters to FGU to pay P450,000.00 under the Surety Bond.
• The RTC found that Spouses Roxas breached their payment obligations to Dominguez and that the "Whereas Clause" requiring completion regardless of funding was void, while the Court of Appeals reversed these findings, holding the contracts valid and Dominguez liable for breach due to abandonment.

• FGU Insurance Corporation argued that the P450,000.00 face amount of the Surety Bond merely indicated its maximum potential liability, and that it should only be liable for the actual damages or cost overrun incurred by Spouses Roxas to complete the project, which they failed to prove.
• FGU contended that under Article 2054 of the Civil Code, its liability cannot exceed that of the principal (Dominguez), and since the Court of Appeals did not adjudge Dominguez liable for actual damages, FGU should not be liable either.
• FGU maintained that Philtrust Bank and Floro Roxas were named as joint (not solidary) creditors in the Surety Bond, limiting FGU's liability to Spouses Roxas to only one-half (1/2) of the face amount, or P225,000.00.
• FGU asserted that the liquidated damages clause in the Construction Contract applied only to delay in completion, not to abandonment of the project, and therefore Article 1167 (specific performance at cost) should apply instead.
• Spouses Roxas argued that the Court of Appeals erred in finding factual basis for ordering them to pay Dominguez P90,000.00 and P73,136.75 with interest, claiming these amounts were not sufficiently proven.
• Spouses Roxas contended that Philtrust Bank's unauthorized release of construction funds to Dominguez caused the non-completion, and that their claim for unrealized rentals should be offset against their liability to Philtrust Bank.

• Spouses Roxas (as respondents in G.R. No. 189526) countered that under the Construction Contract, Dominguez's liability for non-completion included liquidated damages of P1,000.00 per day until compliance, rendering the P450,000.00 bond amount potentially inadequate given the project remained uncompleted.
• They argued that the Contract of Building Construction referred to "the Bank and/or owner," indicating that Philtrust Bank and Spouses Roxas were solidary creditors, and since Philtrust Bank was at fault in releasing funds without conformity, Spouses Roxas alone should be entitled to the entire bond proceeds.
• Philtrust Bank (as respondent in G.R. No. 189656) argued that remand to the trial court was unnecessary because it had already presented sufficient evidence to prove the Spouses Roxas' loan obligations and mortgage indebtedness totaling P3,053,739.50 plus interest and attorney's fees.
• Philtrust Bank maintained that the release of construction funds was made with the conformity of Spouses Roxas as evidenced by promissory notes and testimony of its loan clerk, and that the Spouses Roxas' claim for unrealized rentals was speculative and unproven.

• Procedural Issues:
  • Whether the Court of Appeals erred in remanding the case to the trial court for reception of evidence and computation of Philtrust Bank's claims against Spouses Roxas when Philtrust Bank had already presented evidence of the loan obligations.
• Substantive Issues:
  • Whether FGU Insurance Corporation is liable for the full amount of P450,000.00 under the Surety Bond or only for the actual cost overrun/cost to complete the project.
  • Whether FGU is solidarily liable with Dominguez to both Spouses Roxas and Philtrust Bank, or only jointly liable for one-half of the bond amount to Spouses Roxas.
  • Whether Dominguez (and consequently FGU) is liable for liquidated damages under the Construction Contract for abandoning the project.
  • Whether the liabilities of Spouses Roxas to Dominguez may be set off against FGU's liability under the Surety Bond pursuant to Articles 1280 and 1283 of the Civil Code.
  • Whether Philtrust Bank is liable for unauthorized release of construction funds and whether this liability affects the rights of the parties.

• Procedural:
  • The Supreme Court agreed with Philtrust Bank that remand was improper and unnecessary because Philtrust Bank had already presented sufficient documentary and testimonial evidence to prove the Spouses Roxas' loan obligations through promissory notes and admissions made during trial.
  • The Court held that the principle of res judicata bars relitigation of Philtrust Bank's liability for unauthorized release of funds, as this issue was already settled in a final judgment in Civil Case No. 4809 (Regional Trial Court of Bataan) and affirmed in G.R. No. 171897.
• Substantive:
  • The Court affirmed that FGU is solidarily liable with Dominguez to pay the full face amount of P450,000.00 under the Surety Bond, rejecting FGU's argument that liability should be limited to actual damages or cost overrun. The liability of a surety is determined strictly by the terms of the bond, and since the bond guaranteed payment of P450,000.00 upon non-performance without limiting liability to actual damages, FGU is bound by the literal stipulation.
  • The Court held that suretyship agreements are contracts of adhesion interpreted strictly against the surety (drafter) and liberally in favor of the obligee; thus, FGU's failure to include specific language limiting liability to cost overrun must be construed against it.
  • The Court ruled that Spouses Roxas and Philtrust Bank are solidary creditors (not joint creditors) based on the Construction Contract's reference to "Bank and/or Owners" and the complementary-contracts-construed-together doctrine, making FGU liable to pay either or both creditors up to the full bond amount.
  • The Court held that Dominguez is liable for liquidated damages of P1,000.00 per day from the scheduled completion date (September 23, 1979) until the date of abandonment (October 31, 1979), totaling P38,000.00, but FGU is not liable for these liquidated damages as the Surety Bond did not guarantee such damages and FGU was not a party to the Construction Contract.
  • The Court allowed FGU to set up compensation under Article 1280 of the Civil Code, permitting FGU to offset its P450,000.00 liability against the amounts owed by Spouses Roxas to Dominguez (P90,000.00 with 14% interest and P73,136.75 with legal interest), as the surety may set up compensation regarding what the creditor owes the principal debtor.
  • The Court ordered Spouses Roxas to pay Philtrust Bank P876,000.00 (construction loan) with 19% interest, and P2,184,260.38 (previous loans) with 19% penalty interest and attorney's fees of P243,320.00.

• Suretyship Distinguished from Guaranty — While both involve promises to answer for another's debt, a guarantor insures the solvency of the debtor (paying if principal is unable), while a surety insures the debt itself (paying if principal does not pay). The Court held that provisions governing guaranty (such as compensation under Article 1280) apply to sureties by analogy or extension.
• Solidary Liability of Surety — Under Article 2047 of the Civil Code, a surety binds himself solidarily with the principal debtor. The surety's liability is direct, primary, and absolute, allowing the creditor to proceed against the surety separately or simultaneously with the principal.
• Strict Construction of Surety Bonds — As contracts of adhesion prepared by the surety, performance bonds are construed strictly against the surety and liberally in favor of the obligee. Any ambiguity or omission limiting liability is resolved against the drafter.
• Complementary-Contracts-Construed-Together Doctrine — The surety bond and the principal contract (Construction Contract) must be interpreted together to determine the true intention of the parties, consistent with Article 1374 of the Civil Code.
• Right of Surety to Compensation — Article 1280 of the Civil Code, though literally applying to guarantors, extends to sureties, allowing the surety to set off amounts owed by the creditor to the principal debtor against the surety's liability under the bond.
• Indemnification and Subrogation — Articles 2066 and 2067 of the Civil Code, granting guarantors rights to full reimbursement and subrogation to the creditor's rights, apply to sureties to prevent unjust enrichment and ensure the surety can recover from the principal.

• "The liability of a surety is determined strictly in accordance with the actual terms of the performance bond it issued. It may, however, set up compensation against the amount owed by the creditor to the principal."
• "A suretyship agreement is a contract of adhesion ordinarily prepared by the surety or insurance company. Therefore, its provisions are interpreted liberally in favor of the insured and strictly against the Insurer who, as the drafter of the bond, had the opportunity to state plainly the terms of its obligation."
• "The specific condition in the FGU Surety Bond did not clearly state the limitation of FGU's liability... Hence, FGU was bound to pay the stipulated indemnity upon proof of Dominguez's default without the necessity of proof on the measure of damages caused by the breach."
• "While Article 1280 specifically pertains to a guarantor, the provision nonetheless applies to a surety... Hence, FGU could offset its liability under the Surety Bond against Dominguez's collectibles from the Spouses Roxas."

• Escaño v. Ortigas, Jr. — Cited for the principle that sureties, like guarantors, have rights to indemnification (Article 2066) and subrogation (Article 2067) under the Civil Code, and that these provisions apply to sureties despite Article 2047's reference to solidary obligations.
• Prudential Guarantee and Assurance, Inc. v. Equinox Land Corp. — Cited for the definition of suretyship as a solidary binding of the surety with the principal debtor, making the surety's liability direct, primary, and absolute.
• Luzon Surety Co., Inc. v. Quebrar — Cited for the rule that suretyship agreements are contracts of adhesion construed strictly against the surety.
• Prudential Guarantee and Assurance, Inc. v. Anscor Land, Inc. — Cited for the complementary-contracts-construed-together doctrine requiring the surety bond and principal contract to be interpreted jointly.
• Philippine Economic Zone Authority v. Pilhino Sales Corp. — Cited for the definition of liquidated damages as penalties meant to impress upon defaulting obligors the graver consequences of their culpability.
• Nacar v. Gallery Frames — Cited for the application of 12% legal interest from the date of judicial demand until June 30, 2013, and 6% legal interest from July 1, 2013 until fully paid.

• Article 1280, Civil Code — Allows the guarantor (and by extension, the surety) to set up compensation as regards what the creditor may owe the principal debtor; applied to allow FGU to offset its liability against Spouses Roxas' debts to Dominguez.
• Article 2047, Civil Code — Defines suretyship as a contract where a person binds himself solidarily with the principal debtor; basis for the direct and primary liability of the surety.
• Articles 2066 and 2067, Civil Code — Grant the guarantor/surety the right to indemnification by the principal debtor and subrogation to the creditor's rights against the debtor.
• Article 2226, Civil Code — Defines liquidated damages as those agreed upon by the parties to be paid in case of breach; basis for the award of P38,000.00 against Dominguez.
• Section 175, Presidential Decree No. 612 (Insurance Code) — Defines a contract of suretyship as an agreement where a surety guarantees the performance by the principal of an obligation in favor of an obligee.
• Article 1374, Civil Code — Mandates that various stipulations of a contract be interpreted together; applied to construe the surety bond and construction contract jointly.