Stronghold Insurance Company, Inc. vs. Spouses Stroem

A surety under a performance bond is not bound by an arbitration clause in the underlying construction contract, and the CIAC has no jurisdiction over claims against such surety, where the surety is not a party to the construction contract and the bond merely references rather than incorporates the contract's terms. Active participation in trial court proceedings estops a party from raising lack of jurisdiction even where jurisdiction is constitutionally or statutorily defined, provided the objection was not raised seasonably.

Spouses Rune and Lea Stroem engaged Asis-Leif & Company, Inc. (Asis-Leif) to construct a two-storey residence with a swimming pool and landscaping on their property in Antipolo, Rizal. Pursuant to the Owners-Contractor Agreement, Asis-Leif secured Performance Bond No. LP/G(13)83056 from Stronghold Insurance Company, Inc. in the amount of ₱4,500,000.00, binding Stronghold and Asis-Leif jointly and severally to pay the spouses in the event of non-completion. Asis-Leif failed to complete the project despite demands. The spouses rescinded the contract and engaged an independent appraiser, who found completion percentages of 47.53% for the residential building, 65.62% for the garage, and 13.32% for ancillary works.

• Nature of the Contracts: The Owners-Contractor Agreement was executed solely between Spouses Stroem and Asis-Leif. Article 8.1 thereof provided that disputes "between the parties hereto" shall be settled by arbitration under Republic Act No. 876 and Executive Order No. 1008. Article 7 required Asis-Leif to furnish a performance bond guaranteeing satisfactory and faithful performance of all contract provisions.
• The Performance Bond: Performance Bond No. LP/G(13)83056 was issued by Stronghold in favor of the Spouses Stroem, with Asis-Leif as principal. The bond obligated Stronghold and Asis-Leif jointly and severally to pay ₱4,500,000.00 should the construction project remain uncompleted. The bond referenced the Owners-Contractor Agreement regarding Asis-Leif's construction duties but did not contain an arbitration clause.
• Breach and Rescission: Asis-Leif failed to finish the project despite repeated demands. The Spouses Stroem rescinded the agreement and commissioned Asian Appraisal Company, Inc. to evaluate completion percentages. Ms. Cynthia Asis-Leif subsequently absconded and could not be served summons.
• Trial Court Proceedings: Only Stronghold was served and participated in the trial. It filed motions and presented evidence. On July 13, 2010, the RTC ruled in favor of the Spouses Stroem, finding Stronghold liable for the full penal sum of the bond.
• Appellate Proceedings: Both parties appealed. The Court of Appeals affirmed the liability finding but increased the award of attorney's fees from ₱35,000.00 to ₱50,000.00. Stronghold received notice of the CA Decision on December 5, 2012. Spouses Stroem filed a Motion for Partial Reconsideration on December 11, 2012. Stronghold filed its Petition for Review on January 21, 2013, without disclosing the pendency of said motion in its Certification Against Forum Shopping, despite having received notice of the motion on January 9, 2013.

• CIAC Jurisdiction: Stronghold maintained that the trial court lacked jurisdiction because the dispute arose from a construction contract containing an arbitration clause. Citing Republic Act No. 876, it argued that courts are limited to determining the existence of an arbitration agreement and must refer the parties to arbitration if such agreement exists.
• Incorporation by Reference: Stronghold argued that the performance bond was inextricably linked to the Owners-Contractor Agreement, and the stipulations in the agreement were "part and parcel of the conditions in the bond." It contended that Asis-Leif remained a party to the surety agreement, thereby binding Stronghold to the arbitration clause.
• Limited Liability: Stronghold asserted that its liability under the performance bond was limited only to additional costs for completion of the project, not the full penal sum.
• Forum Shopping Defense: Stronghold denied committing forum shopping, claiming it merely exercised its remedy against the CA Decision and that the Certification Against Forum Shopping required disclosure only of "other actions" involving the same issues in different tribunals, not pending motions in the same case.

• Forum Shopping: Spouses Stroem countered that Stronghold deliberately committed forum shopping by filing the Petition for Review while the Motion for Partial Reconsideration of the CA Decision remained pending, thereby violating Rule 42, Section 2 in relation to Rule 45, Section 4 of the Rules of Court.
• Separate Contracts: Respondents argued that the Owners-Contractor Agreement and the Performance Bond were separate and distinct contracts with different parties. The arbitration clause bound only the parties to the construction contract (Asis-Leif and the Spouses), not Stronghold, which was not a signatory.
• Full Surety Liability: Respondents maintained that Stronghold was liable as surety for the full amount of the bond. The terms of the bond evidenced a solidary obligation, and notice to Stronghold was not required for liability to attach.

• Forum Shopping: Whether Stronghold committed forum shopping by failing to disclose the pendency of respondents' Motion for Partial Reconsideration in its Certification Against Forum Shopping.
• CIAC Jurisdiction: Whether the Construction Industry Arbitration Commission has exclusive and original jurisdiction over a dispute involving a performance bond issued to guarantee a construction contract.
• Arbitration Clause Binding Effect: Whether a surety under a performance bond is bound by the arbitration clause in the underlying construction contract where the surety is not a party to said contract.
• Extent of Liability: Whether Stronghold's liability is limited to additional completion costs or extends to the full penal sum of the performance bond.

• Forum Shopping: Forum shopping was established. The elements were present: identity of parties, identity of rights asserted and reliefs prayed for founded on the same facts, and the potential for res judicata. Stronghold's Certification stated it had not commenced any other action and undertook to inform the Court of any pending action within five days, yet it failed to disclose the pending Motion for Partial Reconsideration despite receiving notice thereof. The vexation caused to courts and litigants by simultaneous remedies warranted dismissal.
• CIAC Jurisdiction over Non-Signatories: The CIAC lacked jurisdiction over Stronghold. Under Section 4 of Executive Order No. 1008 and Section 35 of Republic Act No. 9285, CIAC jurisdiction requires either an arbitration clause in a construction contract or an agreement by the parties to submit to arbitration. Stronghold was not a party to the Owners-Contractor Agreement; the contract was signed only by the Spouses Stroem and Asis-Leif. Pursuant to Article 1311 of the Civil Code, contracts take effect only between the parties.
• Distinction from Prudential Guarantee: The Court distinguished Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc., where the performance bond was expressly incorporated into the construction contract as a "Contract Document." Here, Article 7 of the Owners-Contractor Agreement merely required Asis-Leif to provide a bond; the bond itself was not incorporated into the contract. The "complementary-contracts-construed-together" doctrine did not apply because the bond was silent on arbitration and was not integrated into the construction contract's terms.
• Estoppel by Active Participation: Even assuming CIAC jurisdiction existed, Stronghold was estopped from raising the objection after actively participating in the trial court proceedings without seasonably asserting the jurisdictional defect. Jurisdiction may be conferred by Constitution or statute, but a party who invokes the regular courts' jurisdiction and litigates fully therein cannot belatedly challenge jurisdiction to defeat an adverse judgment.
• Extent of Surety Liability: Stronghold was solidarily liable for the full ₱4,500,000.00 penal sum of the performance bond. A performance bond is designed to afford the project owner security that the contractor will faithfully comply with contract requirements. The surety's obligation, while accessory to the principal debt, is direct, primary, and absolute to the obligee. The bond terms did not limit liability to additional completion costs.

• Forum Shopping Test — Forum shopping exists when: (a) there is identity of parties or parties representing the same interests in both actions; (b) there is identity of rights asserted and reliefs prayed for, founded on the same facts; and (c) the identity is such that any judgment rendered in one case, regardless of which party is successful, amounts to res judicata in the other. The certification requirement in Rule 42, Section 2 and Rule 45, Section 4 mandates disclosure of any pending action or proceeding and an undertaking to inform the court of any similar action filed within five days.
• CIAC Jurisdiction Requirements — The Construction Industry Arbitration Commission has original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction, provided the parties agree to submit to voluntary arbitration. Jurisdiction vests either through an arbitration clause in the construction contract or through a subsequent agreement to arbitrate.
• Relativity of Contracts and Third-Party Sureties — Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns, and heirs. A surety under a performance bond who is not a signatory to the underlying construction contract is not bound by the contract's arbitration clause unless the bond expressly incorporates the contract or the surety otherwise consents to arbitration.
• Complementary-Contracts-Construed-Together Doctrine — Under Article 1374 of the Civil Code, various stipulations of a contract must be interpreted together. However, this doctrine binds a surety to an arbitration clause in the principal contract only where the performance bond is expressly incorporated into the construction contract or clearly references arbitration. Mere reference to the construction contract in the bond, without integration of the arbitration clause, does not bind the surety to arbitrate.
• Estoppel to Question Jurisdiction — A party who actively participates in judicial proceedings without seasonably raising jurisdictional objections, and who invokes the court's processes and presents evidence, is estopped from belatedly questioning jurisdiction to avoid an adverse judgment, even where jurisdiction is defined by statute or Constitution.
• Nature of Performance Bond Liability — A performance bond is an accessory contract that guarantees the principal contractor's performance. While the surety's obligation is secondary to the principal debtor's, the surety is directly and solidarily bound to the obligee (project owner) for the full penal sum upon the principal's default, unless the bond terms expressly limit liability.

• "There is forum shopping when: as a result of an adverse opinion in one forum, a party seeks a favorable opinion (other than by appeal or certiorari) in another... This court has enumerated the elements of forum-shopping: '(a) identity of parties, or at least such parties as represent the same interests in both actions; (b) identity of rights asserted and reliefs prayed for, the reliefs being founded on the same facts; and (c) the identity with respect to the two preceding particulars in the two cases is such that any judgment rendered in the pending cases, regardless of which party is successful, amount to res judicata in the other case.'"
• "Ultimately, what is truly important to consider in determining whether forum-shopping exists or not is the vexation caused the courts and parties-litigant by a party who asks different courts and/or administrative agencies to rule on the same or related causes and/or to grant the same or substantially the same reliefs, in the process creating the possibility of conflicting decisions being rendered by the different fora upon the same issue."
• "A guarantee or a surety contract under Article 2047 of the Civil Code of the Philippines is an accessory contract because it is dependent for its existence upon the principal obligation guaranteed by it... Although not the construction contract itself, the performance bond is deemed as an associate of the main construction contract that it cannot be separated or severed from its principal."
• "It is basic that '[c]ontracts take effect only between the parties, their assigns and heirs[.]' Not being a party to the construction agreement, petitioner cannot invoke the arbitration clause."
• "However, where a surety in a construction contract actively participates in a collection suit, it is estopped from raising jurisdiction later... we cannot allow petitioner to invoke arbitration at this late stage of the proceedings since to do so would go against the law's goal of prompt resolution of cases in the construction industry."

• Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc., G.R. No. 177240, September 8, 2010, 630 SCRA 368 — Distinguished. In that case, the performance bond was expressly incorporated into the construction contract as a "Contract Document," thereby binding the surety to the arbitration clause. The present case lacked such express incorporation.
• Heunghwa Industry Co., Ltd. v. DJ Builders Corporation, 593 Phil. 632 (2008) — Cited for the rule that CIAC jurisdiction vests through either an arbitration clause in the construction contract or a subsequent agreement to submit to arbitration.
• First Philippine International Bank v. Court of Appeals, 322 Phil. 280 (1996) — Cited for the definition of forum shopping and the "vexation" test for determining its existence.
• LICOMCEN, Incorporated v. Foundation Specialists, Inc., G.R. No. 167022, April 4, 2011, 647 SCRA 83 — Cited for the state policy encouraging arbitration to promote prompt resolution of construction disputes.

• Section 4, Executive Order No. 1008 (Construction Industry Arbitration Law) — Defines the CIAC's original and exclusive jurisdiction over disputes arising from or connected with construction contracts, provided the parties agree to submit to voluntary arbitration.
• Section 35, Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Confirms CIAC's original and exclusive jurisdiction over construction disputes involving parties bound by an arbitration agreement, including project owners, contractors, subcontractors, and bondsmen or insurers.
• Article 1311, Civil Code of the Philippines — Establishes the principle of relativity of contracts: "Contracts take effect only between the parties, their assigns and heirs..."
• Article 1374, Civil Code of the Philippines — Provides that various stipulations of a contract shall be interpreted together, attributing to doubtful ones the sense resulting from all taken jointly.
• Article 2047, Civil Code of the Philippines — Defines a guaranty or suretyship as a contract whereby a party guarantees the performance by another of an obligation in favor of a third party.
• Rule 42, Section 2 and Rule 45, Section 4, Rules of Court — Mandate the submission of a Certification Against Forum Shopping requiring disclosure of any pending action or proceeding and an undertaking to inform the court of any similar action within five days.

• Antonio T. Carpio (Chairperson)
• Presbitero J. Velasco, Jr.
• Mariano C. Del Castillo
• Jose Catral Mendoza