FGU Insurance Corporation vs. Spouses Roxas

A surety's liability is determined strictly in accordance with the actual terms of the performance bond, and it is liable for the full face amount upon the principal's default unless specific limiting words are present; however, the surety may set up compensation against what the creditor owes the principal debtor.

Spouses Roxas engaged Dominguez to construct a housing project financed by Philtrust Bank. To guarantee the project's completion, Dominguez secured a performance bond from FGU. Disputes arose when Dominguez demanded an upward adjustment for rising costs and payment for labor, while the Spouses Roxas failed to pay the agreed installments and diverted construction funds for personal use. Dominguez eventually abandoned the project, leading to multiple suits over the contract, the surety bond, and the parties' respective liabilities.

• Original Filing: Court of First Instance of Manila (Branch 40), Civil Case No. 130783
• Lower Court Decision: September 4, 1990 — RTC ruled for Dominguez, voided the contract's "Whereas Clause," cancelled the FGU Surety Bond, and ordered Spouses Roxas to pay Dominguez.
• Appeal: CA-G.R. CV No. 30340
• CA Decision: May 26, 2009 — CA modified the RTC Decision. It upheld the validity of the contracts and the Surety Bond, declared FGU solidarily liable for the P450,000.00 bond, and ordered Dominguez to pay Spouses Roxas damages for bad faith abandonment.
• SC Action: Separate Petitions for Review filed by FGU (G.R. No. 189526) and Spouses Roxas (G.R. No. 189656). Consolidated by the SC on March 17, 2010.

• The Construction Contract: On May 22, 1979, Spouses Roxas, Dominguez, and Philtrust Bank signed a Contract of Building Construction for "Vista Del Mar Executive Houses." Philtrust Bank financed P900,000.00 for materials; Dominguez shouldered P300,000.00 for labor. Dominguez bound himself to finish the project within 150 working days "whether or not the [Spouses Roxas] could provide/supply the funds to finance the labor costs." Liquidated damages of P1,000.00/day were stipulated for non-compliance.
• The Payment Agreement: On May 24, 1979, the parties agreed on the P300,000.00 labor payment scheme: three P30,000.00 cash installments and a final P210,000.00 payment via real properties upon completion. A 14% annual interest was stipulated for non-payment.
• The Surety Bond: Also on May 24, 1979, Dominguez secured FIC Bond No. G(23) 5954 from FGU for P450,000.00. FGU and Dominguez bound themselves jointly and severally to "Floro Roxas and Philippine Trust Company" if Dominguez failed to perform.
• The Dispute and Abandonment: Dominguez requested an upward contract price adjustment due to rising costs, which Spouses Roxas rejected. Spouses Roxas failed to pay the three P30,000.00 installments and offered different properties than those stipulated. They also borrowed P73,136.75 from project funds for personal use. Philtrust Bank refused to release the remaining P24,000.00 balance because Dominguez failed to submit invoices. On October 31, 1979, Dominguez effectively abandoned the project.
• The Lawsuit: Dominguez sued for collection and annulment of contracts. Philtrust Bank counterclaimed for liquidated damages and impleaded FGU. Spouses Roxas counterclaimed for reimbursement of unauthorized fund releases and unrealized rentals.

• FGU Insurance Corporation:
  • Its liability should only be for actual damages/cost overruns incurred by Spouses Roxas to finish the project, not the full P450,000.00 face amount.
  • Under Article 2054 of the Civil Code, its liability cannot exceed that of the principal.
  • Spouses Roxas can only claim one-half (1/2) of the face amount because Philtrust Bank is a joint creditor under the bond.
  • The liquidated damages clause applies only to delay, not abandonment; thus, Article 1167 (cost of execution) should apply.
• Spouses Roxas:
  • Dominguez's liability includes liquidated damages, making the P450,000.00 bond grossly inadequate.
  • They alone should receive the entire Surety Bond proceeds because Philtrust Bank was at fault for unauthorized releases.
  • There is no factual basis for the CA's award of P90,000.00 and P73,136.75 plus interests to Dominguez.

• Philippine Trust Company:
  • Remand to the trial court is unnecessary because it has already presented sufficient evidence (promissory notes, admissions from Eufemia Roxas) proving Spouses Roxas' loan obligations.
  • The release of construction funds was with the conformity of Spouses Roxas.
  • Seeks payment of loan obligations, interest, penalties, attorney's fees, and foreclosure of mortgages.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether FGU is liable for the full P450,000.00 face amount of the Surety Bond or merely the cost overrun/actual damages.
  • Whether Spouses Roxas are entitled to liquidated damages despite the project's abandonment rather than mere delay.
  • Whether there is factual basis for Spouses Roxas' debts to Dominguez (P90,000.00 and P73,136.75).
  • Whether FGU may set up compensation against the amounts Spouses Roxas owe Dominguez.
  • Whether the CA erred in remanding Philtrust Bank's claims against Spouses Roxas.
  • Whether Philtrust Bank is liable for the unauthorized release of construction funds.

• Procedural: N/A
• Substantive:
  • FGU is liable for the full P450,000.00. The terms of the Surety Bond were clear and did not limit liability to cost overruns. The literal meaning of the stipulation controls. As a contract of adhesion prepared by the surety, any ambiguity must be construed against the insurer. If FGU intended to limit liability to cost overruns, it should have inserted specific words to that effect.
  • Spouses Roxas are entitled to liquidated damages. The stipulation for liquidated damages covers delay in completion; a fortiori, it applies to non-completion/abandonment. To rule otherwise would diminish the coercive force of the penal clause. Dominguez is liable for P1,000.00/day from the scheduled completion (Sept 23, 1979) until abandonment (Oct 31, 1979). FGU is not liable for these liquidated damages as it is not a party to the Construction Contract, and the bond does not cover damages on top of its face amount.
  • The factual findings of the RTC, as affirmed by the CA, regarding Spouses Roxas' debts to Dominguez are binding. Eufemia Roxas admitted the unpaid installments and the P73,136.75 loan.
  • FGU may set up compensation. Under Article 1280 of the Civil Code, a guarantor/surety may offset what the creditor owes the principal debtor. FGU can offset Spouses Roxas' debts to Dominguez against FGU's liability under the bond.
  • Remand was improper. The evidence already on record (Eufemia's admissions, promissory notes) was sufficient to compute Philtrust Bank's claims. Spouses Roxas are liable for their loan obligations plus stipulated interest and penalties.
  • Philtrust Bank's liability for unauthorized releases is barred by res judicata, having been settled in a prior final decision (G.R. No. 171897).

• Complementary-contracts-construed-together doctrine — Stipulations, terms, and conditions of both the principal and accessory contracts must be construed together to arrive at the true intention of the parties. Applied: The Surety Bond incorporated the Construction Contract; reading them together shows that "Floro Roxas and Philippine Trust Company" are solidary (not joint) creditors under the bond, as the Construction Contract uses "Bank and/or Owners."
• Compensation by a Surety (Art. 1280, Civil Code) — A guarantor may set up compensation as regards what the creditor may owe the principal debtor. This right extends to sureties. Applied: FGU may offset the amounts Spouses Roxas owe Dominguez against FGU's P450,000.00 liability.
• Strict interpretation of Surety Bonds against the Surety — A surety's liability is determined strictly in accordance with the actual terms of the bond. As a contract of adhesion prepared by the surety, its provisions are interpreted liberally in favor of the insured and strictly against the insurer. Applied: FGU is liable for the full face value because it failed to include specific words limiting its liability to cost overruns.

• Article 2047, Civil Code — Defines suretyship as binding oneself solidarily with the principal debtor. Applied to classify FGU's undertaking and affirm the solidary nature of its liability.
• Article 1216, Civil Code — Allows the creditor to proceed against any solidary debtor. Applied to justify proceeding against FGU separately or together with Dominguez.
• Article 1374, Civil Code — Stipulations of a contract shall be interpreted together. Applied as the statutory basis for the complementary-contracts-construed-together doctrine.
• Article 1280, Civil Code — Guarantor may set up compensation regarding creditor's debt to principal. Applied to allow FGU to offset Spouses Roxas' debts to Dominguez against the bond.
• Article 2226, Civil Code — Defines liquidated damages. Applied to affirm the stipulated P1,000.00/day damages for breach of the construction contract.
• Section 175, Presidential Decree No. 612 (Insurance Code) — Defines a contract of suretyship. Applied to characterize the performance bond.