Stronghold Insurance Company, Inc. vs. Republic-Asahi Glass Corporation

A surety's solidary liability under a performance bond is not extinguished by the death of the principal obligor, because monetary obligations are transmissible to the deceased's estate and the creditor may proceed against any solidary debtor separately or simultaneously.

Republic-Asahi Glass Corporation contracted with Jose D. Santos, Jr., proprietor of JDS Construction, for the construction of roadways and a drainage system at its compound in Pasig City. To guarantee faithful performance, JDS posted a performance bond of ₱795,000, executed jointly and severally with SICI as surety. The contractual framework included provisions for rescission by the obligee for unsatisfactory progress and for recovery of damages from the contractor and its sureties. The dispute arose after JDS failed to complete the project and Santos died, prompting SICI to argue that the death extinguished all liability under the bond.

On May 24, 1989, Republic-Asahi Glass Corporation entered into a contract with Jose D. Santos, Jr., proprietor of JDS Construction, for the construction of roadways and a drainage system at Republic-Asahi's compound in Barrio Pinagbuhatan, Pasig City. The contract price was ₱5,300,000 inclusive of value added tax, with a completion period of 240 days beginning May 8, 1989. To guarantee faithful performance, JDS posted a performance bond of ₱795,000, executed jointly and severally with SICI as surety under Performance Bond No. SICI-25849/g(13)9769. The bond expressly bound JDS and SICI, as well as their heirs, executors, administrators, successors, and assigns, jointly and severally, to Republic-Asahi.

Republic-Asahi paid JDS ₱795,000 as downpayment on May 23, 1989, and subsequently paid two progress billings totaling ₱274,621.01, which accounted for only 7.301% of the contracted work. Republic-Asahi's engineers repeatedly called JDS's attention to the alarmingly slow pace of construction, fearing the project would not be finished within the stipulated period, but these reminders went unheeded.

On November 24, 1989, Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII thereof, citing dissatisfaction with the progress of work, and notified JDS of the rescission. Article XV of the contract provided that rescission would not be construed as a waiver of Republic-Asahi's right to recover damages from JDS and its sureties. Republic-Asahi hired another contractor to finish the project, incurring an additional expense of ₱3,256,874. On January 6, 1990, and again on March 22, 1991, Republic-Asahi sent demand letters to SICI claiming payment under the bond for not less than ₱795,000; both went unheeded.

Republic-Asahi then filed a complaint against JDS and SICI, seeking ₱3,256,874 from JDS as additional expenses, and from JDS and SICI jointly and severally, ₱750,000 as damages under the performance bond, ₱100,000 as exemplary damages, and at least ₱100,000 as attorney's fees. Summons were served on SICI, but Santos had died in 1990 and JDS Construction was no longer at its registered address. SICI filed its answer on July 10, 1991, arguing that Republic-Asahi's money claims had been extinguished by Santos's death, that no valid liquidation had occurred with SICI's participation, and that SICI had been released from liability due to lack of notice of the rescission and alleged deviations from the contract terms.

The lower court dismissed the complaint on August 16, 1991, on the ground that the claim against JDS did not survive Santos's death. After Republic-Asahi's motion for reconsideration, the lower court reinstated the case against SICI on October 15, 1991, but later reversed itself on January 28, 1993, dismissing the case against SICI as well. The Court of Appeals reversed that dismissal, holding that SICI's obligation under the surety agreement was not extinguished by Santos's death and that performance of the contract became impossible due to JDS's own failure, not Republic-Asahi's rescission.

• Death as Defense: Petitioner argued that the death of Santos, the bond principal, extinguished his liability under the surety bond, and consequently SICI was automatically released from any liability under the bond.
• Lack of Liquidation: Petitioner maintained that there was no valid liquidation of work accomplishments with the participation of SICI and Santos, rendering ascertainment of their respective liabilities under the performance bond impossible, especially after Santos's death.
• Denial of Due Process: Petitioner contended that it was not notified of the unilateral rescission of the contract nor of Republic-Asahi's process of determining the cost of completing the unfinished project, thereby depriving SICI of its right to protect its interests as surety.
• Contractual Deviation: Petitioner alleged that Republic-Asahi deviated from the terms and conditions of the contract without SICI's written consent, thus releasing the surety from all liability.
• Public Policy: Petitioner argued that the procedure in Article XV of the contract was against public policy for denying SICI procedural due process.

• Effect of Death on Surety's Liability: Whether petitioner's liability under the performance bond was automatically extinguished by the death of Santos, the principal obligor.

• Effect of Death on Surety's Liability: No. The death of the principal debtor does not extinguish a transmissible monetary obligation, which passes to the estate, and the solidary creditor may proceed directly against the surety under Article 1216 of the Civil Code.

• Effect of Death on Surety's Liability: As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs unless the transmission is prevented by law, the stipulations of the parties, or the nature of the obligation. Only obligations that are purely personal or identified with the persons themselves are extinguished by death. Section 5 of Rule 86 of the Rules of Court expressly allows the prosecution of money claims arising from contract against the estate of a deceased debtor, confirming that such claims are not extinguished—what is lost is only the action filed before a court not acting as a probate court. Santos's monetary liabilities under his contracts with Republic-Asahi were not intransmissible by nature, stipulation, or law; they merely passed to his estate. SICI's liability was contractual, arising from a performance bond that expressly bound SICI and its principal jointly and severally, including their heirs, executors, and assigns. Under Article 2047 of the Civil Code, a surety who binds itself solidarily with the principal debtor is governed by the rules on solidary obligations. Article 1216 allows the creditor to proceed against any one of the solidary debtors or all of them simultaneously. The death of the principal debtor does not convert, decrease, or nullify the substantive right of the solidary creditor. Accordingly, Republic-Asahi may sue SICI alone despite Santos's death.

• Non-extinguishment of obligations by death — As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs except when transmission is prevented by law, stipulation, or the nature of the obligation. Only purely personal obligations are extinguished by death. The Court applied this doctrine to hold that Santos's monetary liabilities under the construction contract were transmissible to his estate and were not extinguished by his death.
• Solidary liability of a surety — A surety who binds itself solidarily with the principal debtor is governed by the rules on solidary obligations under Articles 1207 to 1222 of the Civil Code. The surety's liability is direct, primary, and absolute, and the creditor may proceed against the surety alone or together with the principal. The Court relied on this doctrine to hold that Republic-Asahi could sue SICI independently of Santos's death, since the bond expressly created a joint and several obligation.
• Nature of suretyship under Article 2047 — When a person binds itself solidarily with the principal debtor, the contract is called a suretyship. Although the surety's obligation is accessory or collateral to the principal obligation, the surety's liability to the creditor is direct, primary, and absolute—the surety is directly and equally bound with the principal.

• "As a general rule, the death of either the creditor or the debtor does not extinguish the obligation." — This passage states the controlling rule on the non-extinguishment of obligations by death, which is the ratio decidendi of the case.
• "The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter's liability under the performance bond." — This passage articulates the application of solidary liability principles to the surety context, confirming that the creditor's right to proceed against any solidary debtor survives the principal's death.
• "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." — This quotation from Garcia vs. Court of Appeals, as adopted by the Court, defines the canonical formulation of a surety's liability under Philippine law.

• Garcia vs. Court of Appeals, 191 SCRA 493 (1990) — Cited as controlling authority for the principle that a surety's liability, though accessory in essence, is direct, primary, and absolute. The Court adopted its formulation to explain the nature of suretyship under Article 2047.
• Limjoco vs. Intestate of Fragante, 80 Phil. 776 (1948) — Cited in support of the proposition that monetary obligations of a deceased debtor are not extinguished by death but are transmissible to the estate.
• Suiliong & Co. vs. Chio-Taysan, 12 Phil. 13 (1908) — Cited as early authority for the transmissibility of obligations upon the debtor's death.
• Pavia vs. De La Rosa, 8 Phil. 70 (1907) — Cited alongside the above cases for the same proposition regarding transmissibility of obligations.

• Article 2047, Civil Code — Defines suretyship as arising when a person binds himself solidarily with the principal debtor, making the provisions on solidary obligations applicable. Applied to establish that SICI's liability was solidary with Santos.
• Article 1216, Civil Code — Provides that the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. Applied to hold that Republic-Asahi could sue SICI alone despite the death of the principal.
• Article 1311, Civil Code — States that contracts take effect between the parties, their assigns, and heirs, except when rights and obligations are not transmissible by nature, stipulation, or law. Applied to confirm that Santos's obligations were transmissible to his estate.
• Section 5, Rule 86, Rules of Court — Allows the prosecution of money claims arising from contract against the estate of a deceased debtor. Applied to demonstrate that such claims are not extinguished by death but may be pursued in the proper proceedings.

Consuelo Ynares-Santiago, Ma. Alicia Austria-Martinez, Romeo J. Callejo, Sr., and Minita V. Chico-Nazario.