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FIRST DIVISION

CCC INSURANCE CORPORATION, G.R. No. 156162

Petitioner,
Present:

SERENO, CJ.,
Chairperson,
- versus - LEONARDO-DE CASTRO,
BERSAMIN,
PEREZ, and
PERLAS-BERNABE, JJ.
KAWASAKI STEEL
CORPORATION, F.F. MANACOP
CONSTRUCTION CO., INC., and Promulgated:
FLORANTE F. MANACOP,
Respondents.
)(- - - - - - - -- - - - - - - - - - -- - - - - - - - - -

LEONARDO-DE CASTRO, J.:

Assailed in this Petition for Review on Certiorari are: (1) the

Decision 1 dated May 30, 2002 of the Court of Appeals in CA-G.R. CV No.
54066, which reversed and set aside the Decision2 dated May 2, 1996 of the
Regional Trial Court (RTC), Makati City, Branch 66, and held petitioner
CCC Insurance Corporation (CCCIC) liable under its Surety and
Performance Bonds to respondent Kawasaki Steel Corporation (Kawasaki);
and (2) the Resolution3 dated November 14, 2002 of the appellate court in
the same case which denied the Motion for Reconsideration of CCCIC.

The antecedents of this case are as follows:

On August 16, 1988, Kawasaki, represented by its Manager,

Y oshimitsu Hosoya, and F .F. Mafiacop Construction Company, Inc.
(FFMCCI), represented by its President, Florante F. Mafiacop (Mafiacop ),
e""ecuted a Consortium Agreement for Pangasinan Fishing Port Network

Rollo, pp. 37-49; penned by Associate Justice Perlita J. Tria Tirona with Associate Justices
Buenaventura J. Guerrero and Rodrigo V. Cosico, concurring.
2
CA rollo, pp. 71-79; penned by Judge Eriberto U. Rosario, Jr.
Rollo, pp. 51-54.

~
DECISION 2 G.R. No. 156162

Project (Consortium Agreement).4 Kawasaki and FFMCCI formed a

consortium (Kawasaki-FFMCCI Consortium) for the purpose of contracting
with the Philippine Government for the construction of a fishing port
network in Pangasinan (Project). According to their Consortium Agreement,
Kawasaki and FFMCCI undertook to perform and accomplish their
respective and specific portions of work in the intended contract with the
Philippine Government.5

The Project was awarded to the Kawasaki-FFMCCI Consortium for

the contract price of P62,000,441.00, 33.37% of which or P20,692,026.00
was the price of work of FFMCCI. On October 4, 1988, the Republic of the
Philippines (Republic), through the Department of Public Works and
Highways (DPWH), represented by former Secretary Romulo M. del
Rosario, as owner, and the Kawasaki-FFMCCI Consortium, represented by
Shigeru Kohda, as contractor, entered into a Contract Agreement entitled
Stage I-A Construction of Pangasinan Fishing Port Network (Construction
Contract).6

In accordance with Article 10 of the Consortium Agreement,7

“Consortium Leader” Kawasaki, on behalf of the Consortium, secured from
the Philippine Commercial International Bank (PCIB) Letter of Credit No.
38-001-1836178 in the amount of P6,200,044.10 in favor of DPWH,
available from September 9, 1988 to November 19, 1990. Said Letter of
Credit guaranteed the faithful performance by Kawasaki-FFMCCI
Consortium of its obligation under the Construction Contract.

The Republic made an advance payment for the Project to the

Kawasaki-FFMCCI Consortium in the amount of P9,300,066.15,
representing 15% of the contract price of P62,000,441.00.

For the release of its share in the advance payment made by the
Republic, and also pursuant to Article 10 of the Consortium Agreement,
FFMCCI secured from CCCIC the following bonds in favor of Kawasaki:
(a) Surety Bond No. B-88/111919 in the amount of P3,103,803.90

4
Id. at 64-87.
5
Article 5, Consortium Agreement.
6
Rollo, pp. 95-98.
7
ARTICLE 10 – BONDS
10.1 The CONSORTIUM LEADER shall arrange, at their own cost, all necessary bonds or
guarantees as required under the CONTRACT on behalf of the CONSORTIUM.
MAÑACOP shall, at its own cost, furnish the CONSORTIUM LEADER with a suitable
counter guarantees of its advance payment under the CONTRACT and the performance of
its PORTION OF WORK in the amount of fifteen (15%) percent (in the case of the
repayment guarantee for the advance) and ten (10%) percent (in the case of the performance
guarantee) of the price of its PORTION OF THE WORK.
10.2 If the EMPLOYER exercises its right on the bonds or guarantees furnished by the
CONSORTIUM LEADER, the PARTIES shall decide the respective responsibilities
according to the provisions of this AGREEMENT and the necessary reimbursement or
compensation shall be made also according to the provisions of this AGREEMENT. (Rollo,
p. 79.)
8
Records (Vol. I), p. 130.
9
Rollo, pp. 99-100.
DECISION 3 G.R. No. 156162

(equivalent to 15% of the price of work of FFMCCI), effective from October

26, 1988 to October 26, 1989, to counter-guarantee the amount of advance
payment FFMCCI would receive from Kawasaki; and (b) Performance Bond
B-88/1119310 in the amount of P2,069,202.60 (equivalent to 10% of the
price of work of FFMCCI), effective from October 27, 1988 to October 27,
1989, to guarantee completion by FFMCCI of its scope of work in the
Project. In turn, FFMCCI and Mañacop executed two Indemnity
Agreements11 promising to compensate CCCIC for any damages the
insurance company might incur from issuing the Surety and Performance
Bonds.
In two letters dated October 27, 1998,12 FFMCCI submitted the Surety
and Performance Bonds to Kawasaki and requested Kawasaki to release the
advance payment in the amount of P3,103,803.90. FFMCCI eventually
received the amount of advance payment it requested on a staggered basis.13
The Project commenced in November 1988.14 Sometime in April
1989, FFMCCI ceased performing its work in the Project after suffering
financial problems and/or business reverses. After discussions, Kawasaki
and FFMCCI then executed a new Agreement15 on August 24, 1989 wherein
Kawasaki recognized the “Completed Portion of Work” of FFMCCI as of
April 25, 1989, and agreed to take over the unfinished portion of work of
FFMCCI, referred to as “Transferred Portion of Work.” Kawasaki and
FFMCCI further agreed that “[a]ny profit or benefit arising from the
performance by [Kawasaki] of the Transferred Portion of Work shall accrue
to [Kawasaki].”
In a letter dated September 14, 1989,16 Kawasaki informed CCCIC
about the cessation of operations of FFMCCI, and the failure of FFMCCI to
perform its obligations in the Project and repay the advance payment made
by Kawasaki. Consequently, Kawasaki formally demanded that CCCIC, as
surety, pay Kawasaki the amounts covered by the Surety and Performance
Bonds. Because CCCIC did not act upon its demand, Kawasaki filed on
November 6, 1989 before the RTC a Complaint17 against CCCIC to collect
on Surety Bond No. B-88/11191 and Performance Bond No. B-88/11193.

In its Answer with Counterclaims,18 CCCIC denied any liability on its

Surety and Performance Bonds on the following grounds: (a) the rights of
Kawasaki under the Surety and Performance Bonds had not yet accrued
since the said Bonds were mere counter-guarantees, for which CCCIC could
only be held liable upon the filing of a claim by the Republic against the
Kawasaki-FFMCCI Consortium; (b) Kawasaki and FFMCCI, without the
10
Id. at 101-102.
11
Records (Vol. I), pp. 220-223.
12
Id. at 46-47.
13
Records (Vol. IV), pp. 59-60.
14
TSN, March 18, 1993, p. 32.
15
Records (Vol. I), pp. 165-167.
16
Id. at 50.
17
Id. at 1-9.
18
Id. at 157-164.
DECISION 4 G.R. No. 156162

consent of CCCIC, executed a new Agreement dated August 24, 1989

novating the terms of the Consortium Agreement, which prevented CCCIC
from being subrogated to the right of Kawasaki against FFMCCI; (c)
Kawasaki, in completing the Transferred Portion of Work was
correspondingly compensated, which negated any allegation of loss on the
part of Kawasaki; and (d) the obligation of CCCIC was extinguished when
the Republic granted the Kawasaki-FFMCCI Consortium an extension of
time to complete the Project, without the consent of CCCIC.

CCCIC subsequently filed on August 19, 1991 before the RTC a

Third-Party Complaint19 against FFMCCI and its President Mañacop based
on the two Indemnity Agreements which FFMCCI and Mañacop executed in
favor of CCCIC. The RTC issued summonses but FFMCCI and Mañacop
failed to file any responsive pleading to the Third-Party Complaint of
CCCIC. Upon motion of CCCIC, the RTC issued an Order20 dated
December 2, 1991 declaring FFMCCI and Mañacop in default.

After trial, the RTC rendered a Decision on May 2, 1996 dismissing

the Complaint of Kawasaki and the counterclaim of CCCIC. The RTC
agreed with CCCIC that the Surety and Performance Bonds issued by the
insurance company were mere counter-guarantees and the cause of action of
Kawasaki based on said Bonds had not yet accrued. Since the Republic did
not exercise its right to claim against the PCIB Letter of Credit No. 38-001-
183617, nor compelled Kawasaki to perform the unfinished work of
FFMCCI, Kawasaki could not claim indemnification from CCCIC.
Moreover, the RTC, citing Article 2079 of the Civil Code, ruled that the
obligations of CCCIC under the Surety and Performance Bonds were
extinguished when the Republic granted the Kawasaki-FFMCCI Consortium
a 43-day extension to finish the Project, absent the consent of CCCIC. The
RTC found no deliberate intent on the part of Kawasaki to cause prejudice to
CCCIC, so it did not grant the counterclaims for moral and exemplary
damages and attorney’s fees of CCCIC against Kawasaki.

Kawasaki appealed before the Court of Appeals assigning the

following errors on the part of the RTC:

I. THE COURT A QUO GROSSLY ERRED IN HOLDING

THAT [CCCIC] CAN BE HELD LIABLE TO [Kawasaki] UNDER THE
SUBJECT BONDS ONLY “IF THE GOVERNMENT EXERCISES ITS
RIGHTS AGAINST THE GUARANTEE-BONDS ISSUED TO IT BY
[Kawasaki]” ON THE THEORY ADVANCED BY [CCCIC], WHICH
THE COURT A QUO FULLY EMBRACED AND ADOPTED, THAT
THE BONDS ARE MERE “COUNTER-GUARANTEES.”

II. THE COURT A QUO GROSSLY ERRED IN HOLDING

THAT THE EXTENSION GRANTED BY THE GOVERNMENT TO
THE CONSORTIUM FOR THE CONSTRUCTION OF THE

19
Id. at 207-210.
20
Id. at 271.
DECISION 5 G.R. No. 156162

PANGASINAN FISHING PORT NETWORK PROJECT

EXTINGUISHED THE LIABILITY OF [CCCIC].

III. THE COURT A QUO GROSSLY ERRED IN HOLDING

THAT ARTICLE 2079 OF THE CIVIL CODE OF THE PHILIPPINES
APPLIES TO THE CASE AT BAR. IN A LONG LINE OF DECISIONS,
THE SUPREME COURT HAS HELD THAT THE RULE OF
“STRICTISSIMI JURIS” DOES NOT APPLY TO SURETY
COMPANIES SUCH AS [CCCIC] HEREIN.

IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER

26 AND 27, 1989 RESPECTIVELY WHILE THE ORIGINAL PERIOD
OF THE CONTRACT WITH THE GOVERNMENT, THE
PERFORMANCE OF WHICH BY [CCCIC] ARE PRECISELY
GUARANTEED BY THESE BONDS, IS UNTIL DECEMBER 30, 1989.
ON THE OTHER HAND, THE DEFAULT BY [FFMCCI] WHICH THE
BONDS GUARANTEED AGAINST OCCURRED ON [OR] ABOUT
AUGUST 24, 1989. THEREFORE, IRRESPECTIVE OF WHETHER
THERE WAS AN EXTENSION OR NOT AT THE END OF THE
ORIGINAL CONTRACT PERIOD AND IRRESPECTIVE OF
WHETHER THIS EXTENSION IS KNOWN OR UNKNOWN TO
[CCCIC], THE LIABILITY THAT IT BOUND ITSELF UNTO UNDER
THE BONDS IS VERY CLEARLY AND UNEQUIVOCALLY FIXED
UNTIL OCTOBER 26 AND 27, 1989 RESPECTIVELY. THEREFORE,
ARTICLE 2079 WILL NOT APPLY. HENCE, THE COURT A QUO
GROSSLY ERRED IN HOLDING OTHERWISE.21

The Court of Appeals, in its Decision dated May 30, 2002, reversed
the appealed RTC Decision, reasoning as follows:

From the language of the aforesaid bonds, it is clear that, in the

case of the surety bond, the same was posted, jointly and severally, by
[FFMCCI] and CCCIC “to fully and faithfully guarantee the repayment of
the downpayment made by the principal ([FFMCCI]) to the obligee
(KAWASAKI) in connection with the construction of the Pangasinan
Fishing Port Network Project at Pangasinan” subject only to the condition
that “the liability of the [herein] surety shall in no case exceed the amount
of Pesos: THREE MILLION ONE HUNDRED THREE THOUSAND
EIGHT HUNDRED THREE & 90/100 (P3,103,803.90) Philippine
currency; and in the case of the performance bond, the same was posted,
jointly and severally by [FFMCCI] and CCCIC “to guarantee the full and
faithful performance of the principal ([FFMCCI]) of its obligation in
connection with the project for the construction of the Pangasinan Fishing
Port Network located at Pangasinan in accordance with the plans and
specifications of the contract” subject only to the condition that “the
liability of the [herein] surety shall in no case exceed the amount of Pesos:
TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO &
60/100 (P2,069,202.60) Philippine currency.”

The right of KAWASAKI as the obligee/creditor of the said bonds

was not made subject to any other condition expressly so provided in the
Consortium Agreement, which was the reason for the bonds posted by
[FFMCCI] and CCCIC, or in the subject bonds themselves.

21
CA rollo, pp. 42-44.
DECISION 6 G.R. No. 156162

It is not provided, neither in the Consortium Agreement nor in the

subject bonds themselves that before KAWASAKI may proceed against
the bonds posted by [FFMCCI] and CCCIC, the Philippine government as
employer must first exercise its rights against the bond issued in its favor
by the consortium.

Hence, this Court finds that the court a quo did err in ruling that
“[u]nder the Consortium Agreement, the bonds are counter-guarantees
which only guarantee the plaintiff KAWASAKI for reimbursement to the
extent of the value of the bonds in case the employer (government)
successfully exercised its rights under the bonds issued to it by plaintiff
KAWASAKI;” and that “[c]onsidering that the government did not
exercise its rights against the bond issued to it by the Consortium Leader,
it follows that the Consortium Leader cannot collect from the counter-
guarantees furnished by [FFMCCI].”

Time and again, the Supreme Court has stressed the rule that a
contract is the law between the parties, and courts have no choice but to
enforce such contract so long as they are not contrary to law, morals, good
customs or public policy.

With respect to the second, third and fourth issues raised, suffice it
to say that this Court finds Article 2079 of the Civil Code of the
Philippines not applicable.

[Kawasaki] claims that since the issue in this case is the liability of
CCCIC to KAWASAKI, the extension of forty-three (43) days within
which to complete the Pangasinan Fishing Port Network Project granted
by the Philippine government, who is not a party to the two (2) bonds
posted by [FFMCCI] and CCCIC, to the consortium, does not absolve
CCCIC’s liabilities to KAWASAKI under the subject bonds.

We agree.

As stated earlier, the parties insofar as the surety bond and

performance bond are concerned are: KAWASAKI, as obligee,
[FFMCCI], as principal; and CCCIC, as surety.

Considering therefore that the extension of time within which to

complete the construction of the Pangasinan Fishing Port Network Project
was granted by the Philippine government, who is not the creditor of the
bonds, this Court finds that Article 2079 of the Civil Code of the
Philippines does not apply and the extension of time granted by the
Philippine government, contrary to the ruling of the trial court, does not
absolve the surety of its liabilities to KAWASAKI under the subject
bonds.

The principle of relativity of contracts provides that contracts can

only bind the parties who entered into it.

Finally, this Court finds the award of attorney’s fees in favor of the
appellant warranted under the circumstance, pursuant to paragraph (2) of
Article 2208 of the Civil Code of the Philippines.22

22
Rollo, pp. 46-48.
DECISION 7 G.R. No. 156162

In the end, the Court of Appeals decreed:

WHEREFORE, the instant appeal is hereby GRANTED.

Accordingly, the assailed decision of the Regional Trial Court of Makati
City, Branch 66, is hereby REVERSED and SET ASIDE.

CCC Insurance Corporation is hereby ordered to pay KAWASAKI

the following:

1. The amount of P3,103,803.90 representing its liability to

Kawasaki Steel Corporation under Surety Bond No. B-88/11191,
plus legal interest at the rate of 12% per annum computed from 15
September 1989, until fully paid;

2. The amount of P2,069,202.80 representing its liability to

Kawasaki Steel Corporation under Performance Bond No. B-
88/11193, plus legal interest at the rate of 12% per annum
computed from 15 September 1989, until fully paid; and

3. 15% of the total amount due as and for attorney’s fees.23

In its Resolution dated November 14, 2002, the Court of Appeals

denied the Motion for Reconsideration of CCCIC. However, in the same
Resolution, the appellate court partially granted the Third-Party Complaint
of CCCIC by holding Mañacop liable under the Indemnity Agreements he
executed in favor of the insurance company, while declaring the RTC was
without jurisdiction over FFMCCI due to invalid service of summons. The
Court of Appeals ultimately resolved:

WHEREFORE, judgment is hereby rendered in favor of third-

party plaintiff CCC Insurance Corporation and against third-party
defendant Florante F. Mañacop, ordering the latter to indemnify the
former the total amount paid by the former to Kawasaki Steel Corporation
representing CCC Insurance Corporation’s liabilities under Surety Bond
No. B-88/11191 and Performance Bond No. B-88/11193 and to pay CCC
Insurance Corporation 25% of the total amount due, as and for attorney’s
fees.24

In the instant Petition for Review on Certiorari, CCCIC assails the

aforementioned Decision and Resolution of the Court of Appeals on six
grounds, viz.:

A.

THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO

CONSIDER THE TRUE NATURE OF THE TRANSACTION
BETWEEN THE PARTIES AND THE TRUE NATURE OF A
COUNTER-GUARANTEE.

23
Id. at 48.
24
Id. at 54.
DECISION 8 G.R. No. 156162

B.

THE COURT OF APPEALS, CONTRARY TO LAW, FAILED TO

APPRECIATE THE APPLICABILITY OF ARTICLE 2079 OF THE
CIVIL CODE, WHICH PROVIDES THAT AN EXTENSION
GRANTED TO THE DEBTOR BY THE CREDITOR WITHOUT THE
CONSENT OF THE GUARANTOR EXTINGUISHES THE
GUARANTY.

C.

THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY

FAILED TO CONSIDER THE FACT THAT KAWASAKI AND
FFMCCI HAVE NOVATED THEIR ORIGINAL AGREEMENT
WITHOUT THE KNOWLEDGE AND CONSENT OF CCCIC,
THEREBY RELEASING THE LATTER FROM ANY OBLIGATION
UNDER THE BONDS IT ISSUED.

D.

THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY

RENDERED CCCIC LIABLE TO PAY THE FULL AMOUNT OF THE
SURETY AND PERFORMANCE BONDS DESPITE THE FACT THAT
FFMCCI WAS ABLE TO PARTIALLY EXECUTE ITS PORTION OF
THE WORK AND THAT KAWASAKI HAD BEEN FULLY
COMPENSATED FOR TAKING OVER THE UNFINISHED PORTION.

E.

THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY

AWARDED ATTORNEY’S FEES TO KAWASAKI UNDER
PARAGRAPH 2 OF ARTICLE 2208 OF THE CIVIL CODE.

F.

THE COURT OF APPEALS, CONTRARY TO LAW, ERRONEOUSLY

RULED THAT THERE WAS NO VALID SERVICE OF SUMMONS
UPON FFMCCI.25

CCCIC avers that its liabilities under the Surety and Performance
Bonds are directly linked with the obligation of the Kawasaki-FFMCCI
Consortium to finish the Project for the Republic, so that its liability as
surety of FFMCCI will only arise if the Republic made a claim on the PCIB
Letter of Credit furnished by Kawasaki, on behalf of the Consortium. Since
the Republic has not exercised its right against said Letter of Credit,
Kawasaki does not have a cause of action against CCCIC.

CCCIC also maintains that its obligations under the Surety and
Performance Bonds had been extinguished when (a) the Republic extended
the completion period for the Project upon the request of Kawasaki but
without the knowledge or consent of CCCIC, based on Article 2079 of the
Civil Code; and (b) when Kawasaki and FFMCCI executed the Agreement
25
Id. at 17-18.
DECISION 9 G.R. No. 156162

dated August 24, 1989, without the consent of CCCIC, there being a
novation of the Consortium Agreement.

CCCIC further argues that when Kawasaki, under the Agreement

dated August 24, 1989, voluntarily took over the Transferred Portion of
Work from FFMCCI, it resulted in the reduction of revenue of FFMCCI on
which CCCIC relied upon as a source of indemnification. CCCIC
additionally posits that Kawasaki already received compensation for doing
the Transferred Portion of Work, so the Court of Appeals had no basis for
still ordering Kawasaki to pay the full value of the Surety and Performance
Bonds, plus interest.

Moreover, CCCIC contends that the Court of Appeals erred in

awarding attorney’s fees in favor of Kawasaki based on paragraph 2 of
Article 2208 of the Civil Code as it is not a sound policy to place a penalty
on the right to litigate.

Lastly, CCCIC insists that there was proper service of summons upon
FFMCCI, through one of its directors, as authorized by the Rules of Court.

The Petition is partly meritorious.

The liability of CCCIC under the

Surety and Performance Bonds is
dependent on the fulfillment and/or
non-fulfillment of the obligation of
FFMCCI to KAWASAKI under the
Consortium Agreement.

The statutory definition of suretyship is found in Article 2047 of the

Civil Code, thus:

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.)

Jurisprudence also defines a contract of suretyship as “an agreement

where a party called the surety guarantees the performance by another party
called the principal or obligor of an obligation or undertaking in favor of a
third person called the obligee. Specifically, suretyship is a contractual
relation resulting from an agreement whereby one person, the surety,
engages to be answerable for the debt, default or miscarriage of another,
known as the principal.” 26 The Court expounds that “a surety’s liability is

26
Visayan Surety & Insurance Corporation v. Court of Appeals, 417 Phil. 110, 116-117 (2001).
DECISION 10 G.R. No. 156162

joint and several, limited to the amount of the bond, and determined strictly
by the terms of contract of suretyship in relation to the principal contract
between the obligor and the obligee. It bears stressing, however, that
although the contract of suretyship is secondary to the principal contract, the
surety’s liability to the obligee is nevertheless direct, primary, and
absolute.”27

At the outset, the Court ascertains that there are two principal
contracts in this case: (1) the Consortium Agreement wherein Kawasaki and
FFMCCI agreed to jointly enter into a contract with the Republic for the
Project, each assuming the performance of specific scopes of work in said
Project; and (2) the Construction Contract whereby the Republic awards the
Project to the Kawasaki-FFMCCI Consortium. While there is a connection
between these two contracts, they are each distinguishable from and
enforceable independently of one another: the first governs the rights and
obligations between Kawasaki and FFMCCI, while the second covers
contractual relations between the Republic and the Kawasaki-FFMCCI
Consortium. The Surety and Performance Bonds from CCCIC guaranteed
the performance by FFMCCI of its obligations under the Consortium
Agreement; whereas the Letter of Credit from PCIB warranted the
completion of the Project by the Kawasaki-FFMCCI Consortium. At the
crux of the instant controversy are the Surety and Performance Bonds issued
by CCCIC in relation to the Consortium Agreement.

FFMCCI secured the Surety and Performance Bonds from CCCIC in

compliance with Article 10 of the Consortium Agreement which provided:

ARTICLE 10 – BONDS

10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange, at [its]

own cost, all necessary bonds or guarantees as required under the
CONTRACT on behalf of the CONSORTIUM. [FFMCCI] shall,
at its own cost, furnish the CONSORTIUM LEADER [Kawasaki]
with a suitable counter guarantees of its advance payment under
the CONTRACT and the performance of its PORTION OF
WORK in the amount of fifteen (15%) percent (in the case of the
repayment guarantee for the advance) and ten (10%) percent (in
the case of the performance guarantee) of the price of its
PORTION OF THE WORK.

10.2 If the EMPLOYER [Republic] exercises its right on the bonds or

guarantees furnished by the CONSORTIUM LEADER, the
PARTIES shall decide the respective responsibilities according to
the provisions of this AGREEMENT and the necessary
reimbursement or compensation shall be made also according to
the provisions of this AGREEMENT.28

Pertinent portions of Surety Bond No. B-88/11191 read:

27
The Manila Insurance Company, Inc. v. Amurao, G.R. No. 179628, January 16, 2013, 688 SCRA
616-617.
28
Rollo, p. 79.
DECISION 11 G.R. No. 156162

SURETY BOND

KNOW ALL MEN BY THESE PRESENTS:

That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as

principal, and CCC Insurance Corporation, x x x, as SURETY, are held
and firmly bound unto KAWASAKI STEEL CORPORATION,
hereinafter referred to as the OBLIGEE: in the sum of PESOS: THREE
MILLION ONE HUNDRED THREE THOUSAND EIGHT HUNDRED
THREE & 90/100 ONLY (P3,103,803.90), Philippine currency, for the
payment of which, well and truly to be made, we bind ourselves, our heirs,
executors, administrators, successors and assigns, jointly and severally,
firmly bound from notice of acceptance, by these presents.

THE CONDITIONS OF THIS OBLIGATION ARE AS

FOLLOWS:

TO FULLY AND FAITHFULLY GUARANTEE

THE REPAYMENT OF THE DOWNPAYMENT
MADE BY THE PRINCIPAL TO THE OBLIGEE IN
CONNECTION WITH THE CONSTRUCTION OF THE
PANGASINAN FISHING PORT NETWORK PROJECT
AT PANGASINAN; AND

PROVIDED HOWEVER, THAT THE LIABILITY

OF THE HEREIN SURETY SHALL IN NO CASE
EXCEED THE AMOUNT OF PESOS: THREE MILLION
ONE HUNDRED THREE THOUSAND EIGHT
HUNDRED THREE & 90/100 ONLY (P3,103,803.90)
PHILIPPINE CURRENCY.

xxxx

WHEREAS, the said OBLIGEE requires said Principal to give a

good and sufficient bond in the above-stated sum to secure the full and
faithful performance on his part of said UNDERTAKING.

NOW, THEREFORE, if the above bounden principal shall in all

respects duly and fully observe and perform all and singular the aforesaid
covenants, conditions and agreements to the true intent and meaning
thereof, then this obligation shall be null and void, otherwise to remain in
full force and effect.

The liability of the Surety under this bond shall expire on October
26, 1989 and the Surety does not assume responsibility for any liability
incurred or created after said date. Any claims against this bond must be
presented to the Surety in writing not later than ten (10) days after said
expiry date; otherwise, failure to do so shall forthwith release the Surety
from all liabilities under this bond and shall be a bar to any court action
against it and which right to sue is hereby waived by the Obligee after the
lapse of said period of ten (10) days above cited.29 (Emphases supplied.)

Performance Bond No. B-88/11193 contains the following terms and

conditions:
29
Id. at 99.
DECISION 12 G.R. No. 156162

PERFORMANCE BOND

KNOW ALL MEN BY THESE PRESENTS:

That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x, as

principal, and CCC Insurance Corporation, x x x, as SURETY, are held
and firmly bound unto KAWASAKI STEEL CORPORATION,
hereinafter referred to as the OBLIGEE: in the sum of PESOS: TWO
MILLION SIXTY-NINE THOUSAND TWO HUNDRED TWO &
60/100 ONLY (P2,069,202.60), Philippine currency, for the payment of
which, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly bound
from notice of acceptance, by these presents.

THE CONDITIONS OF THIS OBLIGATION ARE AS

FOLLOWS:

TO GUARANTEE THE FULL AND FAITHFUL

PERFORMANCE OF THE PRINCIPAL OF ITS OBLIGATION IN
CONNECTION WITH THE PROJECT FOR THE
CONSTRUCTION OF PANGASINAN FISHING PORT NETWORK
LOCATED AT PANGASINAN IN ACCORDANCE WITH THE PLANS
AND SPECIFICATION OF THE CONTRACT, AND;

PROVIDED HOWEVER, THAT THE LIABILITY OF THE

HEREIN SURETY SHALL IN NO CASE EXCEED THE AMOUNT OF
PESOS: TWO MILLION SIXTY-NINE THOUSAND TWO HUNDRED
TWO & 60/100 ONLY (P2,069,202.60) PHILIPPINE CURRENCY.

xxxx

WHEREAS, the said OBLIGEE requires said Principal to give a

good and sufficient bond in the above-stated sum to secure the full and
faithful performance on his part of said UNDERTAKING.

NOW, THEREFORE, if the above bounden principal shall in all

respects duly and fully observe and perform all and singular the aforesaid
covenants, conditions and agreements to the true intent and meaning
thereof, then this obligation shall be null and void, otherwise to remain in
full force and effect.

The liability of the Surety under this bond shall expire on October
27, 1989 and the Surety does not assume responsibility for any liability
incurred or created after said date. Any claims against this bond must be
presented to the Surety in writing not later than ten (10) days after said
expiry date; otherwise, failure to do so shall forthwith release the Surety
from all liabilities under this bond and shall be a bar to any court action
against it and which right to sue is hereby waived by the Obligee after the
lapse of said period of ten (10) days above cited.30 (Emphasis supplied.)

The Court reiterates that a surety’s liability is determined strictly by

the terms of contract of suretyship, in relation to the principal contract

30
Id. at 101.
DECISION 13 G.R. No. 156162

between the obligor and the obligee. Hence, the Court looks at the Surety
and Performance Bonds, in relation to the Consortium Agreement.

According to the principle of relativity of contracts in Article 1311 of

the Civil Code,31 a contract takes effect only between the parties, their
assigns, and heirs; except when the contract contains a stipulation in favor of
a third person, which gives said person the right to demand fulfillment of
said stipulation. In this case, the Surety and Performance Bonds are
enforceable by and against the parties FFMCCI (the obligor) and CCCIC
(the surety), as well as the third person Kawasaki (the obligee) in whose
favor said bonds had been explicitly constituted; while the related
Consortium Agreement binds the parties Kawasaki and FFMCCI. Since the
Republic is neither a party to the Surety and Performance Bonds nor the
Consortium Agreement, any action or omission on its part has no effect on
the liability of CCCIC under said bonds.

The Surety and Performance Bonds state that their purpose was “to
secure the full and faithful performance on [FFMCCI’s] part of said
undertaking,” particularly, the repayment by FFMCCI of the downpayment
advanced to it by Kawasaki (in the case of the Surety Bond) and the full and
faithful performance by FFMCCI of its portion of work in the Project (in the
case of the Performance Bond). These are the only undertakings expressly
guaranteed by the bonds, the fulfillment of which by FFMCCI would release
CCCIC from its obligations as surety; or conversely, the non-performance of
which would give rise to the liabilities of CCCIC as a surety.

The Surety and Performance Bonds do not contain any condition that
CCCIC would be liable only if, in addition to the default on its undertakings
by FFMCCI, the Republic also made a claim against the PCIB Letter of
Credit furnished by Kawasaki, on behalf of the Kawasaki-FFMCCI
Consortium. The Court agrees with the observation of the Court of Appeals
that “it is not provided, neither in the Consortium Agreement nor in the
subject bonds themselves that before KAWASAKI may proceed against the
bonds posted by [FFMCCI] and CCCIC, the Philippine government as
employer must first exercise its rights against the bond issued in its favor by
the consortium.”32

The Court cannot give any additional meaning to the plain language
of the undertakings in the Surety and Performance Bonds. The extent of a
surety’s liability is determined by the language of the suretyship contract or
bond itself. Article 1370 of the Civil Code provides that “[i]f the terms of a
31
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand
its fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third person.
32
Rollo, p. 46.
DECISION 14 G.R. No. 156162

contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.”33

There is no basis for the interpretation by CCCIC of the word

“counter-guarantee” in Article 10 of the Consortium Agreement. The first
paragraph of Article 10 of the Consortium Agreement provides that
Kawasaki, as the Consortium Leader, shall arrange, at its own cost but on
behalf of the Kawasaki-FFMCCI Consortium, for all necessary bonds and
guarantees under the Construction Contract with the Republic. The same
paragraph requires, in turn, that FFMCCI, at its own cost, to furnish
Kawasaki with suitable counter-guarantees for the repayment by FFMCCI
for the advance payment from Kawasaki and performance by FFMCCI of its
portion of work in the Project. Clearly, the “guarantees” and “counter-
guarantees” were securities for the fulfillment of the obligations of the
Kawasaki-FFMCCI Consortium to the Republic under the Construction
Contract and of FFMCCI to the Consortium Leader Kawasaki under the
Consortium Agreement, respectively. The CCCIC Surety and Performance
Bonds were not counter-guarantees to the PCIB Letter of Credit. In fact, in
the event that the Republic did make a claim on the PCIB Letter of Credit,
the second paragraph of Article 10 of the Consortium Agreement stipulates
that Kawasaki and FFMCCI would still have to determine their respective
responsibilities, reimbursements, and/or compensations according to the
provisions of the Consortium Agreement, instead of simply allowing
Kawasaki to recover on the “counter-guarantees” of FFMCCI.

It is not disputed that FFMCCI, due to financial difficulties, was

unable to repay the advance payment it received from Kawasaki and to
finish its scope of work in the Project, thus, FFMCCI defaulted on its
obligations to Kawasaki. Given the default of FFMCCI, CCCIC as surety
became directly, primarily, and absolutely liable to Kawasaki as the obligee
under the Surety and Performance Bonds. The following pronouncements of
the Court in Asset Builders Corporation v. Stronghold Insurance Company,
Inc.34 are relevant herein:

Respondent, along with its principal, Lucky Star, bound itself to

the petitioner when it executed in its favor surety and performance
bonds. The contents of the said contracts clearly establish that the parties
entered into a surety agreement as defined under Article 2047 of the New
Civil Code. x x x.

xxxx

As provided in Article 2047, 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

33
Molino v. Security Diners International Corporation, 415 Phil. 587, 595 (2001).
34
647 Phil. 692, 702-704 (2010).
DECISION 15 G.R. No. 156162

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.

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass

Corporation, reiterating the ruling in Garcia v. Court of Appeals,
expounds on the nature of the surety's liability:

x x x. 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 - the

principal relationship between the obligee (petitioner) and the obligor
(Lucky Star), and the accessory surety relationship between the principal
(Lucky Star) and the surety (respondent). In this arrangement, the obligee
accepts the surety’s solidary undertaking to pay if the obligor does not
pay. Such acceptance, however, 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.

In the case at bench, when Lucky Star failed to finish the

drilling work within the agreed time frame despite petitioner’s
demand for completion, it was already in delay. Due to this default,
Lucky Star’s liability attached and, as a necessary consequence,
respondent’s liability under the surety agreement arose.

Undeniably, when Lucky Star reneged on its undertaking with the

petitioner and further failed to return the P575,000.00 downpayment that
was already advanced to it, respondent, as surety, became solidarily bound
with Lucky Star for the repayment of the said amount to petitioner. The
clause, “this bond is callable on demand,” strongly speaks of respondent’s
primary and direct responsibility to the petitioner.

Accordingly, after liability has attached to the principal, the

obligee or, in this case, the petitioner, can exercise the right to proceed
against Lucky Star or respondent or both. x x x. (Emphases supplied,
citations omitted.)
DECISION 16 G.R. No. 156162

Article 2079 of the New Civil Code is

not applicable to the instant case.

To free itself from its liabilities under the Surety and Performance
Bonds, CCCIC cites Article 2079 of the Civil Code, which reads:

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of time referred to
herein.

The aforequoted provision clearly speaks of an extension for the

payment of a debt granted by the creditor to a debtor without the consent of
the surety. The theory behind Article 2079 was further explained by the
Court in Trade and Investment Development Corporation of the Philippines
(Formerly Philippine Export and Foreign Loan Guarantee Corporation) v.
Asia Paces Corporation,35 thus:

Comparing a surety’s obligations with that of a guarantor, the

Court, in the case of Palmares v. CA, illumined that a surety is responsible
for the debt’s payment at once if the principal debtor makes default,
whereas a guarantor pays only if the principal debtor is unable to pay, viz.:

A surety is an insurer of the debt, whereas a guarantor is an

insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking
that the debtor shall pay. Stated differently, a surety promises to
pay the principal’s debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding against the
principal, may proceed against the guarantor if the principal is
unable to pay. A surety binds himself to perform if the principal
does not, without regard to his ability to do so. A guarantor, on the
other hand, does not contract that the principal will pay, but simply
that he is able to do so. In other words, a surety undertakes directly
for the payment and is so responsible at once if the principal debtor
makes default, while a guarantor contracts to pay if, by the use of
due diligence, the debt cannot be made out of the principal debtor.
x x x.

Despite these distinctions, the Court in Cochingyan, Jr. v. R&B

Surety & Insurance Co., Inc., and later in the case of Security Bank, held
that Article 2079 of the Civil Code, which pertinently provides that “[a]n
extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty,” equally applies to both contracts of
guaranty and suretyship. The rationale therefor was explained by the Court
as follows:

The theory behind Article 2079 is that an extension of

time given to the principal debtor by the creditor without the
surety’s consent would deprive the surety of his right to pay
the creditor and to be immediately subrogated to the creditor’s

35
G.R. No. 187403, February 12, 2014, 716 SCRA 67, 78-83.
DECISION 17 G.R. No. 156162

remedies against the principal debtor upon the maturity date.

The surety is said to be entitled to protect himself against the
contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. x x x.

Applying these principles, the Court finds that the payment

extensions granted by Banque Indosuez and PCI Capital to TIDCORP
under the Restructuring Agreement did not have the effect of
extinguishing the bonding companies’ obligations to TIDCORP under the
Surety Bonds, notwithstanding the fact that said extensions were made
without their consent. This is because Article 2079 of the Civil Code
refers to a payment extension granted by the creditor to the principal
debtor without the consent of the guarantor or surety. In this case, the
Surety Bonds are suretyship contracts which secure the debt of ASPAC,
the principal debtor, under the Deeds of Undertaking to pay TIDCORP,
the creditor, the damages and liabilities it may incur under the Letters of
Guarantee, within the bounds of the bonds’ respective coverage periods
and amounts. No payment extension was, however, granted by TIDCORP
in favor of ASPAC in this regard; hence, Article 2079 of the Civil Code
should not be applied with respect to the bonding companies’ liabilities to
TIDCORP under the Surety Bonds.

The payment extensions granted by Banque Indosuez and PCI

Capital pertain to TIDCORP’s own debt under the Letters of Guarantee
wherein it (TIDCORP) irrevocably and unconditionally guaranteed full
payment of ASPAC’s loan obligations to the banks in the event of its
(ASPAC) default. In other words, the Letters of Guarantee secured
ASPAC’s loan agreements to the banks. Under this arrangement,
TIDCORP therefore acted as a guarantor, with ASPAC as the principal
debtor, and the banks as creditors.

Proceeding from the foregoing discussion, it is quite clear that

there are two sets of transactions that should be treated separately
and distinctly from one another following the civil law principle of
relativity of contracts “which provides that contracts can only bind the
parties who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge
thereof.” Verily, as the Surety Bonds concern ASPAC’s debt to
TIDCORP and not TIDCORP’s debt to the banks, the payments
extensions (which conversely concern TIDCORP’s debt to the banks
and not ASPAC’s debt to TIDCORP) would not deprive the bonding
companies of their right to pay their creditor (TIDCORP) and to be
immediately subrogated to the latter’s remedies against the principal
debtor (ASPAC) upon the maturity date. It must be stressed that these
payment extensions did not modify the terms of the Letters of Guarantee
but only provided for a new payment scheme covering TIDCORP’s
liability to the banks. In fine, considering the inoperability of Article 2079
of the Civil Code in this case, the bonding companies’ liabilities to
TIDCORP under the Surety Bonds – except those issued by Paramount
and covered by its Compromise Agreement with TIDCORP – have not
been extinguished. Since these obligations arose and have been duly
demanded within the coverage periods of all the Surety
Bonds, TIDCORP’s claim is hereby granted. x x x. (Emphases supplied,
citations omitted.)
DECISION 18 G.R. No. 156162

Similarly, there are two sets of transactions in the present case

covered by two different contracts: the Consortium Agreement between
Kawasaki and FFMCCI and the Construction Contract between the Republic
and the Kawasaki-FFMCCI Consortium. The Surety and Performance
Bonds guaranteed the performance of the obligations of FFMCCI to
Kawasaki under the Consortium Agreement. The Republic was not a party
in either the Surety and Performance Bonds or the Consortium Agreement.
Under these circumstances, there was no creditor-debtor relationship
between the Republic and FFMCCI and Article 2079 of the Civil Code did
not apply. The extension granted by the Republic to Kawasaki modified the
deadline for the completion of the Project under the Construction Contract,
but had no effect on the obligations of FFMCCI to Kawasaki under the
Consortium Agreement, much less, on the liabilities of CCCIC under the
Surety and Performance Bonds.

CCCIC failed to discharge the

burden of proving the novation of
the Consortium Agreement which
would have extinguished its
obligations under the Surety and
Performance Bonds.

CCCIC argues that it was released from its obligations as surety under
the Surety and Performance Bonds because of the novation of the
Consortium Agreement by the subsequent Agreement dated August 24, 1989
executed between Kawasaki and FFMCCI, without the consent of CCCIC.

The Court first notes that the default of FFMCCI preceded the
execution of the Agreement on August 24, 1989 which purportedly novated
the Consortium Agreement and, in effect, extinguished the Surety and
Performance Bonds. As early as his letter dated July 20, 1989, Mañacop,
FFMCCI President, already admitted the inability of FFMCCI to continue
with its portion of work in the Project and authorized Kawasaki to continue
the same. It was precisely because FFMCCI defaulted on its obligations
under the Consortium Agreement that necessitated the execution of the
Agreement dated August 24, 1989 between Kawasaki and FFMCCI, and this
is evident from one of the “whereas” clauses in the said Agreement which
says that “due to some financial reverses[, FFMCCI] can no longer do its
portion of the work under the Contract.” The liabilities of CCCIC as surety
to Kawasaki under the Surety and Performance Bonds had already attached
upon the default of FFMCCI while the said bonds were still in effect and
prior to the alleged novation of the Consortium Agreement by the
Agreement dated August 24, 1989 which resulted in the extinguishment of
the bonds.
DECISION 19 G.R. No. 156162

The Court expounded on the concept of novation in Reyes v. BPI

Family Savings Bank, Inc.36:

Novation is defined as the extinguishment of an obligation by the

substitution or change of the obligation by a subsequent one which
terminates the first, either by changing the object or principal conditions,
or by substituting the person of the debtor, or subrogating a third person in
the rights of the creditor.

Article 1292 of the Civil Code on novation further provides:

Article 1292. In order that an obligation may be

extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point
incompatible with each other.

The cancellation of the old obligation by the new one is a

necessary element of novation which may be effected either expressly or
impliedly. While there is really no hard and fast rule to determine what
might constitute sufficient change resulting in novation, the touchstone,
however, is irreconcilable incompatibility between the old and the new
obligations.

In Garcia, Jr. v. Court of Appeals, we held that:

In every novation there are four essential requisites:

(1) a previous valid obligation; (2) the agreement of all the
parties to the new contract; (3) the extinguishment of the
old contract; and (4) validity of the new one. There must
be consent of all the parties to the substitution, resulting in
the extinction of the old obligation and the creation of a
valid new one. x x x. (Citations omitted.)

It is well-settled that novation is never presumed – novatio non

praesumitur. As the party alleging novation, the onus of showing clearly
and unequivocally that novation had indeed taken place rests on CCCIC.37
The Court laid down guidelines in establishing novation, viz.:

Novation is never presumed, and the animus novandi, whether

totally or partially, must appear by express agreement of the parties, or by
their acts that are too clear and unequivocal to be mistaken.

The extinguishment of the old obligation by the new one is a

necessary element of novation which may be effected either expressly or
impliedly. The term “expressly” means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is
to extinguish the old one. Upon the other hand, no specific form is
required for an implied novation, and all that is prescribed by law would
be an incompatibility between the two contracts. While there is really no
hard and fast rule to determine what might constitute to be a sufficient
change that can bring about novation, the touchstone for contrariety,

36
520 Phil. 801, 806-807 (2006).
37
St. James College of Parañaque v. Equitable PCI Bank, 641 Phil. 452, 464 (2010).
DECISION 20 G.R. No. 156162

however, would be an irreconcilable incompatibility between the old and

the new obligations.

There are two ways which could indicate, in fine, the presence of
novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. The first is when novation has been
explicitly stated and declared in unequivocal terms. The second is when
the old and the new obligations are incompatible on every point. The test
of incompatibility is whether or not the two obligations can stand together,
each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily,
changes that breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.38 (Citations
omitted.)

CCCIC failed to discharge the burden of proving novation of the

Consortium Agreement by the Agreement dated August 24, 1989. The
Court failed to see the presence of the essential requisites for a novation of
contract, specifically, the irreconcilable incompatibility between the old and
new contracts. Indeed, Kawasaki and FFMCCI executed the Agreement
dated August 24, 1989 pursuant to Article 8.3 of the Consortium Agreement:

8.3 If, for any reason, any PARTY should fail in the performance of its
PORTION OF WORK or contractual obligations and if such
defaulting PARTY refuses to cure or makes no remedial action,
without presenting any valid cause, within fifteen (15) days
following demand of rectification by registered letter sent by the
other PARTY, the defaulting PARTY’s PORTION OF WORK
may be performed at the account and responsibility of the
defaulting PARTY, by the non-defaulting PARTY or by any other
contractor selected by the non-defaulting PARTY and approved by
the EMPLOYER. In such event, the defaulting PARTY or its
representative shall, in no way, interfere with the performance of
the CONTRACT or impede the progress thereof, on any ground,
and shall allow such performing PARTY or the said contractor to
use the materials and equipment of such defaulting PARTY, for
the purpose of remedial action.

FFMCCI was unable to finish its portion of work in the Project

because of business reverses, and by the Agreement dated August 24, 1989,
Kawasaki assumed the Transferred Portion of Work from FFMCCI and was
accorded the right to receive the profits and benefits corresponding to said
portion. Although the Agreement dated August 24, 1989 resulted in the
reallocation of the respective portions of work of Kawasaki and FFMCCI, as
well as their corresponding shares in the profits and benefits under the
Consortium Agreement, such changes were not incompatible with the object,
cause, and principal conditions of the Consortium Agreement.
Consequently, the changes under the Agreement dated August 24, 1989

38
Quinto v. People, 365 Phil. 259, 267-268 (1999).
DECISION 21 G.R. No. 156162

were only modificatory and did not extinguish the original obligations under
the Consortium Agreement.

Even granting that there is novation, the Court in Stronghold

Insurance Company, Incorporated v. Tokyu Construction Company, Ltd.,39
held that to release the surety, the material change in the principal contract
must make the obligation of the surety more onerous. The Court
ratiocinated in Stronghold as follows:

Petitioner’s liability was not affected by the revision of the contract

price, scope of work, and contract schedule. Neither was it extinguished
because of the issuance of new bonds procured from Tico.

As early as February 10, 1997, respondent already sent a letter to

Gabriel informing the latter of the delay incurred in the performance of the
work, and of the former’s intention to terminate the subcontract agreement
to prevent further losses. Apparently, Gabriel had already been in default
even prior to the aforesaid letter; and demands had been previously made
but to no avail. By reason of said default, Gabriel’s liability had arisen; as
a consequence, so also did the liability of petitioner as a surety arise.

xxxx

By the language of the bonds issued by petitioner, it guaranteed the

full and faithful compliance by Gabriel of its obligations in the
construction of the SDS and STP specifically set forth in the subcontract
agreement, and the repayment of the 15% advance payment given by
respondent. These guarantees made by petitioner gave respondent the
right to proceed against the former following Gabriel’s non-compliance
with her obligation.

Confusion, however, transpired when Gabriel and respondent

agreed, on February 26, 1997, to reduce the scope of work and,
consequently, the contract price. Petitioner viewed such revision as
novation of the original subcontract agreement; and since no notice was
given to it as a surety, it resulted in the extinguishment of its obligation.

We wish to stress herein the nature of suretyship, which actually

involves two types of relationship --- the underlying principal relationship
between the creditor (respondent) and the debtor (Gabriel), and the
accessory surety relationship between the principal (Gabriel) and the
surety (petitioner). The creditor accepts the surety’s solidary undertaking
to pay if the debtor does not pay. Such acceptance, however, does not
change in any material way the creditor’s relationship with the principal
debtor nor does it make the surety an active party to the principal creditor-
debtor relationship. In other words, the acceptance does not give the surety
the right to intervene in the principal contract. The surety’s role arises only
upon the debtor’s default, at which time, it can be directly held liable by
the creditor for payment as a solidary obligor.

The surety is considered in law as possessed of the identity of the

debtor in relation to whatever is adjudged touching upon the obligation of
the latter. Their liabilities are so interwoven as to be inseparable. Although
39
606 Phil. 400, 411-413 (2009).
DECISION 22 G.R. No. 156162

the contract of a surety is, in essence, secondary only to a valid principal

obligation, the surety’s liability to the creditor is direct, primary, and
absolute; he becomes liable for the debt and duty of another although he
possesses no direct or personal interest over the obligations nor does he
receive any benefit therefrom.

Indeed, a surety is released from its obligation when there is a

material alteration of the principal contract in connection with which the
bond is given, such as a change which imposes a new obligation on the
promising party, or which takes away some obligation already imposed, or
one which changes the legal effect of the original contract and not merely
its form. However, a surety is not released by a change in the contract,
which does not have the effect of making its obligation more onerous.

In the instant case, the revision of the subcontract agreement did

not in any way make the obligations of both the principal and the surety
more onerous. To be sure, petitioner never assumed added obligations, nor
were there any additional obligations imposed, due to the modification of
the terms of the contract. Failure to receive any notice of such change did
not, therefore, exonerate petitioner from its liabilities as surety. (Emphasis
supplied, citations omitted.)

There is no showing herein that the obligations of CCCIC as surety

had become more onerous with the execution of the Agreement dated
August 24, 1989 between Kawasaki and FFMCCI. The Agreement dated
August 24, 1989 did not alter in any way the original coverage and the terms
and conditions of the Surety and Performance Bonds of CCCIC. If truth be
told, the Agreement dated August 24, 1989 made it more onerous for
Kawasaki which had to take over the Transferred Portion of Work from
FFMCCI.

That Kawasaki was to receive the profits and benefits corresponding

to the Transferred Portion of Work would not extinguish the liabilities of
CCCIC under the Surety and Performance Bonds. The right of Kawasaki to
the profits and benefits corresponding to the Transferred Portion of Work
was granted under the Agreement dated August 24, 1989 because Kawasaki
was the one that would actually perform the remaining portion of work and
complete the Project and should be duly compensated for the same. It is
separate and distinct from the right of Kawasaki to demand payment of the
amounts guaranteed by CCCIC as surety upon the default of FFMCCI on its
undertakings under the Surety and Performance Bonds. CCCIC cannot
standby passively and be benefitted by payments made by the Republic, as
owner of the Project, to Kawasaki, as contractor, for the Transferred Portion
of Work. The only way CCCIC can extinguish its liabilities as surety, which
already attached upon the default of FFMCCI, is to make its own payments
to Kawasaki of the amounts guaranteed under the Surety and Performance
Bonds.

Equally without merit is the averment of CCCIC that by executing the

Agreement dated August 24, 1989, which gave Kawasaki the right to the
profits and benefits corresponding to the Transferred Portion of Work,
DECISION 23 G.R. No. 156162

Kawasaki and FFMCCI colluded or connived to deprive CCCIC of its

source of indemnification. Other than its allegation, CCCIC failed to present
any evidence of collusion or connivance between Kawasaki and FFMCCI to
intentionally prejudice CCCIC. The Court reiterates that the execution of
the Agreement dated August 24, 1989 was actually authorized under Article
8.3 of the Consortium Agreement. Kawasaki was given the right to the
profits and benefits corresponding to the Transferred Portion of Work
because it would be the one to perform the same. It would be the height of
inequity to allow FFMCCI to continue collecting payments for work it was
not able to do. Besides, there is utter lack of basis for the claim of CCCIC
that without the compensation for the Transferred Portion of Work, FFMCCI
would have no means to indemnify CCCIC for any payments the latter
would have to make to Kawasaki under the Surety and Performance Bonds.
As the succeeding discussion will show, it is premature for CCCIC to
question the capacity of FFMCCI to indemnify it.

CCCIC must first pay its liabilities to

Kawasaki under the Surety and
Performance Bonds before it could
be indemnified and subrogated to the
rights of Kawasaki against FFMCCI.

The rights of a guarantor who pays for the debt of the debtor are
governed by the following provisions of the Civil Code:

Art. 2066. The guarantor who pays for a debtor must be

indemnified by the latter.

The indemnity comprises:

(1) The total amount of the debt;

(2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn interest for the
creditor;

(3) The expenses incurred by the guarantor after having

notified the debtor that payment had been demanded of him;

(4) Damages, if they are due.

Art. 2067. The guarantor who pays is subrogated by virtue thereof

to all the rights which the creditor had against the debtor.

If the guarantor has compromised with the creditor, he cannot

demand of the debtor more than what he has really paid.

Although the foregoing provisions only speak of a guarantor, they

also apply to a surety, as the Court held in Escaño v. Ortigas, Jr.40:

40
553 Phil. 24, 43-44 (2007).
DECISION 24 G.R. No. 156162

What is the source of this right to full reimbursement by the

surety? We find the right under Article 2066 of the Civil Code, which
assures that “[t]he guarantor who pays for a debtor must be indemnified by
the latter,” such indemnity comprising of, among others, “the total amount
of the debt.” Further, Article 2067 of the Civil Code likewise establishes
that “[t]he guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.”

Articles 2066 and 2067 explicitly pertain to guarantors, and one

might argue that the provisions should not extend to sureties, especially in
light of the qualifier in Article 2047 that the provisions on joint and
several obligations should apply to sureties. We reject that argument, and
instead adopt Dr. Tolentino’s observation that “[t]he reference in the
second paragraph of [Article 2047] to the provisions of Section 4, Chapter
3, Title I, Book IV, on solidary or several obligations, however, does not
mean that suretyship is withdrawn from the applicable provisions
governing guaranty.” For if that were not the implication, there would be
no material difference between the surety as defined under Article 2047
and the joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as

established and granted to the guarantor by Articles 2066 and 2067 extend
as well to sureties as defined under Article 2047. x x x. (Citations
omitted.)

Pursuant to Articles 2066 and 2067, the rights of CCCIC as surety to

indemnification and subrogation will arise only after it has paid its
obligations to Kawasaki as the debtor-obligee. In Autocorp Group v. Intra
Strata Assurance Corporation,41 the Court ruled that:
The benefit of subrogation, an extinctive subjective novation by a
change of creditor, which “transfers to the person subrogated, the credit
and all the rights thereto appertaining, either against the debtor or against
third persons,” is granted by the Article 2067 of the Civil Code only to
the “guarantor (or surety) who pays.” (Emphases supplied, citations
omitted.)

In the present case, CCCIC has yet to pay Kawasaki.

While summons was validly served

upon FFMCCI, the Third-Party
Complaint of CCCIC against
FFMCCI is dismissed on the ground
of lack of cause of action.

The Court disagrees with the ruling of the Court of Appeals that there
was no proper service of summons upon FFMCCI. The appellate court
overlooked the fact that the service of summons on FFMCCI at its principal
address at #86 West Avenue, Quezon City failed because FFMCCI had
already vacated said premises without notifying anyone as to where it

41
578 Phil. 804, 822-823 (2008).
DECISION 25 G.R. No. 156162

transferred. For this reason, the RTC, upon the motion of CCCIC, issued an
Order42 dated September 4, 1991, directing the issuance and service of Alias
Summons to the individual directors of FFMCCI. Eventually, the Alias
Summons was personally served upon FFMCCI director Vicente
Concepcion on September 25, 1991.43

Rule 14, Section 13 of the 1964 Rules of Court, which was then in
force, allowed the service of summons upon a director of a private domestic
corporation:

Sec. 13. Service upon private domestic corporation or partnership.

– If the defendant is a corporation organized under the laws of the
Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent, or any of its directors.

The aforementioned rule does not require that service on the private
domestic corporation be served at its principal office in order for the court to
acquire jurisdiction over the same. The Court, in Talsan Enterprises, Inc. vs.
Baliwag Transit, Inc.,44 citing Baltazar v. Court of Appeals,45 affirmed that:

[S]ervice on respondent’s bus terminal at the address stated in the

summons and not in its main office in Baliwag do not render the service of
summons invalid. In Artemio Baltazar v. Court of Appeals, we held:

“The regular mode, in other words, of serving summons

upon a private Philippine Corporation is by personal service upon
one of the officers of such corporation identified in Section 13.
Ordinarily, such personal service may be expected to be made at
the principal office of the corporation. Section 13, does not,
however, impose such requirement, and so personal service
upon the corporation may be effected through service upon,
for instance, the president of the corporation at his office or
residential address.” x x x.

In fine, the service of summons upon respondent Baliwag Transit

is proper. Consequently, the trial court validly acquired jurisdiction over
respondent Baliwag. (Citation omitted.)

Hence, the personal service of the Alias Summons on an FFMCCI

director was sufficient for the RTC to acquire jurisdiction over FFMCCI
itself.

Nevertheless, the Third-Party Complaint filed by CCCIC against

FFMCCI and Mañacop must be dismissed on the ground of lack of cause of
action.

42
Records (Vol. I), p. 250.
43
Id. at 255.
44
369 Phil. 409, 419-420 (1999).
45
250 Phil. 349, 360-361 (1988).
DECISION 26 G.R. No. 156162

A cause of action is defined as the act or omission by which a party

violates a right of another. The essential elements of a cause of action are:
(a) the existence of a legal right in favor of the plaintiff; (b) a correlative
legal duty of the defendant to respect such right; and (c) an act or omission
by such defendant in violation of the right of the plaintiff with a resulting
injury or damage to the plaintiff for which the latter may maintain an action
for the recovery of relief from the defendant.46

As discussed earlier, the rights to indemnification and subrogation of

a surety only arise upon its payment of the obligation to the obligee. In the
case at bar, since CCCIC up to this point refuses to acknowledge and pay its
obligation to Kawasaki under the Surety and Performance Bonds, it has not
yet acquired the rights to seek indemnification from FFMCCI and
subrogation to Kawasaki as against FFMCCI. In the same vein, the
corresponding obligation of FFMCCI to indemnify CCCIC under the
Indemnity Agreements has yet to accrue. Thus far, there is no act or
omission on the part of FFMCCI which violated the right of CCCIC and for
which CCCIC may seek relief from the courts. In the absence of these
elements, CCCIC has no cause of action against FFMCCI and/or FFMCCI
President Mañacop. Resultantly, the Third-Party Complaint of CCCIC
should be dismissed.

There is no basis for awarding

attorney’s fees in favor of Kawasaki.
In addition, the rate of legal interest
imposed shall conform with latest
jurisprudence.

Article 2208(2) of the Civil Code allows the award of attorney’s fees
“[w]hen the defendant’s act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest[.]” In
Servicewide Specialists, Incorporated v. Court of Appeals,47 the Court
declared that:

Article 2208 of the Civil Code allows attorney’s fees to be

awarded by a court when its claimant is compelled to litigate with third
persons or to incur expenses to protect his interest by reason of an
unjustified act or omission on the part of the party from whom it is sought.
To be sure, private respondents were forced to litigate to protect their
rights but as we have previously held: “where no sufficient showing of bad
faith would be reflected in a party’s persistence in a case other than an
erroneous conviction of the righteousness of his cause, attorney’s fee shall
not be recovered as cost.” (Citation omitted.)

Bad faith has been defined as “a breach of a known duty through

some motive of interest or ill will. It must, however, be substantiated by
evidence. Bad faith under the law cannot be presumed, it must be
46
Turner v. Lorenzo Shipping Corporation, 650 Phil. 372, 388 (2010).
47
326 Phil. 660, 669 (1996).
DECISION 27 G.R. No. 156162

established by clear and convincing evidence." 48 There is no evidence in

this case to show bad faith on the part of CCCIC. CCCIC, in refusing the
claim of Kawasaki, was merely acting based on its belief in the
righteousness of its defense. Hence, even though Kawasaki was compelled
to litigate to enforce its claim against CCCIC, the award of attorney's fees is
not proper.

Finally, the Court, in Nacar v. Gallery Frames, 49 modified the

guidelines in imposing interests, taking into account Bangko Sentral ng
Pilipinas-Monetary Board Resolution No. 796 dated May 16, 2013 and
Circular No. 799, series of 2013, which fixed the legal rate at 6% per annum
effective July 1, 2013. In the absence of stipulated interest in the present
case, the Court imposes upon the amounts covered by the Surety and
Performance Bonds the legal rate of 12% per annum from September 15,
1989, the date of demand, until June 30, 2013; and then the legal rate of 6%
per annum from July 1, 2013 until full payment of the same.

WHEREFORE, premises considered, the instant Petition for Review

on Certiorari is PARTLY GRANTED. The Decision dated May 30, 2002
and Resolution dated November 14, 2002 of the Court of Appeals are
AFFIRMED with the following MODIFICATIONS:

1) The Third-Party Complaint filed by CCC Insurance

Corporation against F .F. Mafiacop Construction Company, Inc. and Mr.
Florante F. Mafiacop is DISMISSED on the ground of lack of cause of
action;

2) The award of attorney's fees in favor of Kawasaki Steel

Corporation is DELETED; and

3) In addition to the amounts CCC Insurance Corporation is

ordered to pay Kawasaki Steel Corporation under Surety Bond No. B-
88/11191 and Performance Bond No. B-88/11193, CCC Insurance
Corporation is further ORDERED to pay Kawasaki Steel Corporation legal
interest on said amounts at the rates of 12% per annum from September 15,
1989 to June 30, 2013 and 6% per annum from July 1, 2013 until full
payment thereof.

SO ORDERED.

~~h~
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
48
GF Equity, Inc. v. Valenzona, 501 Phil. 153, 168 (2005).
49
G.R. No. 189871, August 13, 2013, 703 SCRA 439, 454-456.
DECISION 28 G.R. No. 156162

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice
Chairperson

REZ

JA{),~
ESTELA M. ''PJRLAS-BERNABE
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that

the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court's
Division.

MARIA LOURDES P. A. SERENO

Chief Justice