Extent of Liability of a Surety

Stronghold Insurance Company, Inc. v. Tokyu Construction Company, Ltd.

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the Court
of Appeals (CA) Decision1 dated January 21, 2003 and its Resolution2 dated June 25, 2003.

The factual and procedural antecedents follow:

Respondent Tokyu Construction Company, Ltd., a member of a consortium of four (4)

companies, was awarded by the Manila International Airport Authority a contract for the
construction of the Ninoy Aquino International Airport (NAIA) Terminal 2 (also referred to as "the
project"). On July 2, 1996, respondent entered into a Subcontract Agreement3 with G.A. Gabriel
Enterprises, owned and managed by Remedios P. Gabriel (Gabriel), for the construction of the
project's Storm Drainage System (SDS) for P33,007,752.00 and Sewage Treatment Plant (STP)
for P23,500,000.00, or a total contract price of P56,507,752.00. The parties agreed that the
construction of the SDS and STP would be completed on August 10, 1997 and May 31, 1997,
respectively.4

In accordance with the terms of the agreement, respondent paid Gabriel 15% of the contract
price, as advance payment, for which the latter obtained from petitioner Stronghold Insurance
Company, Inc. Surety Bonds5 dated February 26, 19966 and April 15, 1996,7 to guarantee its
repayment to respondent. Gabriel also obtained from petitioner Performance Bonds8 to
guarantee to respondent due and timely performance of the work.9 Both bonds were valid for a
period of one year from date of issue.

In utter defiance of the parties' agreements, Gabriel defaulted in the performance of her
obligations. On February 10, 1997, in a letter10 sent to Gabriel, respondent manifested its
intention to terminate the subcontract agreement. Respondent also demanded that petitioner
comply with its undertaking under its bonds.

On February 26, 1997, both parties (respondent and Gabriel) agreed to revise the scope of
work, reducing the contract price for the SDS phase from P33,007,752.00 to P1,175,175.0011
and the STP from P23,500,000.00 to P11,095,930.50,12 fixing the completion time on May 31,
1997.

Gabriel thereafter obtained from Tico Insurance Company, Inc. (Tico) Surety13 and
Performance14 Bonds to guarantee the repayment of the advance payment given by
respondent to Gabriel and the completion of the work for the SDS, respectively.
Still, Gabriel failed to accomplish the works within the agreed completion period. Eventually, on
April 26, 1997, Gabriel abandoned the project. On August 8, 1997, respondent served a letter15
upon Gabriel terminating their agreement since the latter had only completed 63.48% of the
SDS project, valued at P744,965.00; and 46.60% of the STP, valued at P5,171,032.48.
Respondent thereafter demanded from Gabriel the return of the balance of the advance
payment. Respondent, likewise, demanded the payment of the additional amount that it incurred
in completing the project.16 Finally, respondent made formal demands against petitioner and
Tico to make good their obligations under their respective performance and surety bonds.
However, all of them failed to heed respondent's demand. Hence, respondent filed a
complaint17 against petitioner, Tico, and Gabriel, before the Construction Industry Arbitration
Commission (CIAC).

In the complaint, respondent prayed that Gabriel, Tico, and petitioner be held jointly and
severally liable for the payment of the additional costs it incurred in completing the project
covered by the subcontract agreement; for liquidated damages; for the excess downpayment
paid to Gabriel; for exemplary damages; and for attorney's fees.18

Gabriel denied liability and argued that the delay in the completion of the project was caused by
respondent. She also contended that the original subcontract agreement was novated by the
revised scope of work and completion schedule. To counter respondent's monetary demands,
she claimed that it was, in fact, respondent who had an unpaid balance.

For its part, Tico averred that it actually treated respondent's demand as a claim on the
performance and surety bonds it issued; but it could not make payment since the claim was still
subject to determination, findings, and recommendation of its assigned independent adjuster.19

On the other hand, petitioner interposed the following special and affirmative defenses: 1) the
surety and performance bonds had expired; 2) the premium on the bonds had not been paid by
Gabriel; 3) the contract for which the bonds were issued was set aside/novated; 4) the requisite
notices were not made which thus barred respondent's claims against it; and 5) the damages
claimed were not arbitrable.20

On February 5, 1999, the parties signed the Terms of Reference21 (TOR) wherein their
admission of facts, their respective positions and claims, the issues to be determined, and the
amount of arbitration fees were summarized and set forth.

On August 24, 1999, the CIAC rendered a decision,22 the dispositive portion of which reads:
WHEREFORE, award is hereby made as follows:
On Tokyu's claims for cost overrun and cost of materials, equipment, manpower contributed
prior to alleged takeover, Gabriel is found liable to pay Tokyu the amount of P1,588,527.00.

On Tokyu's claim of liquidated damages, Gabriel is found liable to pay Tokyu the amount of
P662,666.44.

On Tokyu's claim against Tico, we find Tico to be jointly and severally liable with Gabriel on its
Performance Bond for the payment of the amounts stated in numbers 1 and 2 above but its
liability to Tokyu shall not exceed the amount of P238,401.39 on its performance bond. The
claim against Tico on its Surety Bond is hereby dismissed.

With regard to the claim for the return of the unrecouped down payment, we find that Gabriel is
liable to pay Tokyu the amount [of] P7,588,613.18.

With regard to Tokyu's claim against Stronghold on its Surety Bonds, we find Stronghold liable
jointly and severally with Gabriel for the payment of the unrecouped down payment but only up
to the amount of P6,701,063.60. The claim against Stronghold on its Performance Bonds is
hereby dismissed.

The counterclaim of Gabriel against Tokyu is not contested. Tokyu is held liable to pay Gabriel
on her counterclaim of P1,007,515.78.

The net amount due Gabriel for its unpaid progress billing is P1,190,108.41. Tokyu is held liable
to pay this amount to Gabriel.

The amount adjudged in favor of Tokyu against Gabriel is P9,642,182.43 The amount adjudged
in favor of Gabriel against Tokyu is P2,197,624.19. Offsetting these two amounts, there is a net
award in favor of Tokyu of P7,642,182.43. Payment of this amount or any portion thereof shall
inure to the benefit of and reduce pro tanto the liability of the respondents sureties. (Art. 1217,
Civil Code)
All other claims or counterclaims not included in the foregoing disposition are hereby denied.
The costs of arbitration shall be shared by the parties pro rata on the basis of their claims and
counterclaims as reflected in the TOR.

SO ORDERED.23
The CIAC refused to resolve the issue of novation since respondent had already terminated the
agreement by sending a letter to Gabriel. It further held that petitioner's liabilities under the
surety and performance bonds were not affected by the revision of the scope of work, contract
price, and completion time.

Petitioner and respondent separately appealed the CIAC decision to the CA via a petition for
review under Rule 43 of the Rules of Court. The appeals were docketed as CA-G.R. SP Nos.
54920 (petitioner) and 55167 (respondent) which were later consolidated. On January 21, 2003,
the CA rendered a decision24 modifying the awards made by the Arbitral Tribunal, thus:
WHEREFORE, the appealed decision/award of the Arbitral Tribunal is hereby MODIFIED in
that:
On TOKYU's claim for liquidated damages, GABRIEL is found liable to pay TOKYU the amount
of P1,699,843.95.

STRONGHOLD and TICO are ordered to pay TOKYU from their respective performance bonds,
jointly and severally with GABRIEL the cost of overrun and liquidated damages in the amount of
P1,588,570.00 and P1,699,843.95 or the total amount of P3,288,370.95 but TICO's liability for
liquidated damages shall be limited only to those accruing from the SDS phase of the Project
and only in the amount of P70,992.77.

STRONGHOLD is further ordered to pay TOKYU from its surety bonds, jointly and severally
with GABRIEL, the total unrecouped downpayments in the amount of P7,588,613.18.

The aggregate amount adjudged in favor of TOKYU against GABRIEL is P10,876,984.13 while
the total amount adjudged in favor of Gabriel is P2,197,624.19. Offsetting these two (2) amounts
against each other, there is a net award in favor of TOKYU in the amount of P8,679,359.94.
Payment of this net amount or any portion thereof by GABRIEL shall in (sic) inure to the benefit
and reduce pro tanto the liability of the sureties STRONGHOLD and TICO.
In all other respects, the same appealed decision/award is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.25
Hence, the instant petition, anchored on the following grounds:
5.1. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS
BONDS AFTER THE BONDS HAVE BEEN INVALIDATED, LAPSED AND EXPIRED.
5.2. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS
BONDS WHICH WERE ISSUED WITHOUT THE EXISTENCE OF ANY PRINCIPAL
CONTRACT.

5.3. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS

BONDS AND CONFUSED THE LEGAL EFFECTS, IMPORT AND SIGNIFICANCE BETWEEN
A GUARANTY (UNDER THE CIVIL CODE) AND SURETY UNDER THE INSURANCE CODE.

5.4. THE COURT OF APPEALS ERRED IN HOLDING STRONGHOLD LIABLE ON ITS

BONDS WHERE THE PRINCIPAL CONTRACT UNDER WHICH THE BONDS WERE ISSUED
HAD BEEN NOVATED.26
Apart from the errors specifically assigned in its petition and memorandum, petitioner asks this
Court to address the issue of whether the CIAC had jurisdiction to take cognizance of insurance
claims. Petitioner insists that respondent's claim against it is not related to the construction
dispute, hence, it should have been lodged with the regular courts.

The argument is misplaced.

Section 4 of Executive Order (E.O.) No. 1008, or the Construction Industry Arbitration Law,
provides:
SEC. 4. Jurisdiction. - The CIAC shall have original and exclusive jurisdiction over disputes
arising from, or connected with, contracts entered into by parties involved in construction in the
Philippines, whether the dispute arises before or after the completion of the contract, or after the
abandonment or breach thereof. These disputes may involve government or private contracts.
For the Board to acquire jurisdiction, the parties to a dispute must agree to submit the same to
voluntary arbitration.

The jurisdiction of the CIAC may include but is not limited to violation of specifications for
materials and workmanship, violation of the terms of agreement, interpretation and/or
application of contractual time and delays, maintenance and defects, payment, default of
employer or contractor, and changes in contract cost.

Excluded from the coverage of the law are disputes arising from employer-employee
relationships which shall continue to be covered by the Labor Code of the Philippines.
Clearly, E.O. 1008 expressly vests in the CIAC original and exclusive jurisdiction over disputes
arising from or connected with construction contracts entered into by parties that have agreed to
submit their dispute to voluntary arbitration.27
In this case, the CIAC validly acquired jurisdiction over the dispute. Petitioner submitted itself to
the jurisdiction of the Arbitral Tribunal when it signed the TOR.28 The TOR states:
II. STIPULATION/ADMISSION OF FACTS

...
The Construction Industry Arbitration Commission has jurisdiction over the instant case by virtue
of Section 12.10 (Arbitration Clause) of the Subcontract Agreement.29
After recognizing the CIAC's jurisdiction, petitioner cannot be permitted to now question that
same authority it earlier accepted, only because it failed to obtain a favorable decision. This is
especially true in the instant case since petitioner is challenging the tribunal's jurisdiction for the
first time before this Court.

With the issue of jurisdiction resolved, we proceed to the merits of the case.

It is well to note that Gabriel did not appeal the CIAC decision and Tico's petition before this
Court has been denied with finality.30 Hence, the CIAC and CA decisions have become final
and executory as to Gabriel and Tico, and in that respect, they shall not be disturbed by this
Court.

Thus, the sole issue that confronts us is whether or not petitioner is liable under its bonds. To
resolve the same, we need to inquire into the following corollary issues:
1) whether the bonds (surety and performance) are null and void having been secured without a
valid and existing principal contract;

2) whether the bonds were invalidated by the modification of the subcontract agreement without
notice to the surety; and

3) whether the bonds for which petitioner was being made liable already expired.
Initially, petitioner argued that the surety and performance bonds (which were accessory
contracts) were of no force and effect since they were issued ahead of the execution of the
principal contract. To support this contention, it now adds that the bonds were actually secured
through misrepresentation, as petitioner was made to believe that the principal contract was
already in existence when the bonds were issued, but it was, in fact, yet to be executed.31
We are not persuaded.

In the first place, as correctly observed by respondent, the claim of misrepresentation was never
raised by petitioner as a defense in its Answer. Settled is the rule that points of law, theories,
issues, and arguments not adequately brought to the attention of the trial court need not be, and
ordinarily will not be, considered by a reviewing court. They cannot be raised for the first time on
appeal. To allow this would be offensive to the basic rules of fair play, justice, and due
process.32

Besides, even if we look into the merit of such contention, the CA is correct in holding that there
was no evidentiary support of petitioner's claim of misrepresentation.33 This being a factual
issue, we respect the finding made in the assailed decision. We have repeatedly held that we
are not a trier of facts. We generally rely upon, and are bound by, the conclusions on factual
matters made by the lower courts, which are better equipped and have better opportunity to
assess the evidence first-hand, including the testimony of the witnesses.34

Petitioner also contends that the principal contract (original subcontract agreement) was
novated by the revised scope of work and contract schedule, without notice to the surety,
thereby rendering the bonds invalid and ineffective. Finally, it avers that no liability could attach
because the subject bonds expired and were replaced by the Tico bonds.

Again, we do not agree.

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 letter35 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.

A contract of suretyship is an agreement whereby a party, called the surety, guarantees the
performance by another party, called the principal or obligor, of an obligation or undertaking in
favor of another party, called the obligee.36 By its very nature, under the laws regulating
suretyship, the liability of the surety is joint and several but is limited to the amount of the bond,
and its terms are determined strictly by the terms of the contract of suretyship in relation to the
principal contract between the obligor and the obligee.37

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.38

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 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.39

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.40

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.

Neither can petitioner be exonerated from liability simply because the bonds it issued were
replaced by those issued by Tico.

The Court notes that petitioner issued four bonds, namely: 1) Performance Bond No. 43601
which guaranteed the full and faithful compliance of Gabriel's obligations for the construction of
the SDS; 2) Performance Bond No. 13608 for the construction of the STP; 3) Surety Bond No.
065493 which guaranteed the repayment of the 15% advance payment for the SDS project; and
4) Surety Bond No. 068189 for the STP project. Under the surety agreements, the first and third
bonds were to expire on February 25, 1997 or one year from date of issue of the bonds, while
the second and fourth bonds were to expire one year from April 15, 1996.

The impending expiration of the first and third bonds prompted respondent to require Gabriel to
arrange for their (the bonds) immediate revalidation. Thus, in a letter dated February 21, 1997,
respondent asked that the performance bond for the SDS phase be extended until May 31,
1998; and for the surety bond, until June 30, 1997.41 Contrary to petitioner's contention, this
should not be construed as a recognition on the part of respondent that the bonds were no
longer valid by reason of the modification of the subcontract agreement. There was indeed a
need for the renewal of petitioner's bonds because they were about to expire, pursuant to the
terms of the surety agreements. Since petitioner refused to revalidate the aforesaid bonds,
Gabriel was constrained to secure the required bonds from Tico which issued, on February 25,
1997, the new performance and surety bonds (for the SDS phase) replacing those of
petitioner's. The performance bond was coterminous with the final acceptance of the project,
while the surety bond was to expire on February 26, 1998.

Notwithstanding the issuance of the new bonds, the fact remains that the event insured against,
which is the default in the performance of Gabriel's obligations set forth in the subcontract
agreement, already took place. By such default, petitioner's liability set in. Thus, petitioner
remains solidarily liable with Gabriel, subject only to the limitations on the amount of its liability
as provided for in the Bonds themselves.

Considering that the performance bonds issued by petitioner were valid only for a period of one
year, its liabilities should further be limited to the period prior to the expiration date of said
bonds. As to Performance Bond No. 43601 for the SDS project, the same was valid only for one
year from February 26, 1996; while Performance Bond No. 13608 was valid only for one year
from April 15, 1996. Logically, petitioner can be held solidarily liable with Gabriel only for the
cost overrun and liquidated damages accruing during the above periods. The assailed CA
decision is, therefore, modified in this respect.
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of
Appeals dated January 21, 2003 and its Resolution dated June 25, 2003 are AFFIRMED with
the MODIFICATION that petitioner Stronghold Insurance, Company, Inc. is jointly and severally
liable with Remedios P. Gabriel only for the cost overrun and liquidated damages accruing
during the effectivity of its bonds.

All other aspects of the assailed decision STAND.

Surety is not Liable if there is no Default or Delay on the Part of the Principal Debtor
Philippine Charter Insurance Corporation v. Central Colleges of the Philippines, G.R. Nos
180631-33, February 22, 2012

THE FACTS

On May 16, 2000, Central Colleges of the Philippines (CCP), an educational institution,
contracted the services of Dynamic Planners and Construction Corporation (DPCC) to be its
general contractor for the construction of its five (5)-storey school building at No. 39 Aurora
Boulevard, Quezon City, with a total contract price of P248,000,000.00. As embodied in a
Contract Agreement,3 the construction of the entire building would be done in two phases with
each phase valued at P124,000,000.00.

To guarantee the fulfillment of the obligation, DPCC posted three (3) bonds, all issued by the
Philippine Charter Insurance Corporation (PCIC), namely: (1) Surety Bond No. PCIC-45542,
dated June 25, 2003, amounting to P7,031,460.74;4 (2) Performance Bond No. PCIC-455415 in
the amount of P2,929,775.31 which was subsequently increased to P6,199,999.99 through
Bond Endorsement No. E-2003/12527;6 and (3) Performance Bond No. PCIC-46172 for
P692,890.74.7 All the bonds were callable on demand and set to expire on October 30, 2003.

The Phase 1 of the project was completed without issue. Thereafter, CCP paid DPCC
P14,880,000.00 or 12% of the agreed price of P124,000,000.00 with a check dated March 14,
2002 as downpayment for the Phase 2 of the project.

The Phase 2 of the project, however, encountered numerous delays. When CCP audited DPCC
on July 25, 2003, only 47% of the work to be done was actually finished.
Thus, in a letter dated October 29, 2003 addressed to DPCC and PCIC, CCP informed them of
the breach in the contract and its plan to claim on the construction bonds. Pertinent portions of
the letter are herein quoted:

You are both hereby NOTIFIED that the Bonds referred to above for the faithful performance of
a Contract, dated 16 May 2000 for the construction of CCP EXTENSION BLDG. (Phase 2) at 39
Aurora Blvd., Quezon City, Metro Manila and the Variation Order No. 2 has been breached by
the CONTRACTOR for which reason, the CENTRAL COLLEGES OF THE PHILIPPINES, as
owner, hereby gives NOTICE that it will file an action on the said performance and surety
bonds.8
On November 6, 2003, CCP notified DPCC and PCIC that only 51% of the project was
completed, which was way behind the construction schedule, prompting it to declare the
occurrence of default against DPCC. It formally requested PCIC to remit the proceeds of the
bonds.9

On November 14, 2003, DPCC wrote PCIC confirming the finding that Phase 2 was only 51%
finished and, at the same time, requesting for the extension of its performance and surety bonds
because the supposed revision of the plans would require more days.10

In a letter dated November 21, 2003, CCP notified PCIC that because of DPCCas inability to
complete the project on time, it decided to terminate its contract with the latter and to continue
the construction on its own. The full text of the letter is herein reproduced:

We acknowledge the receipt of your letter dated November 14, 2003 and we are in the process
of compiling the documents you requested. The said documents will be submitted as soon as
possible.

Furthermore, we would like to reiterate that your principal, the Dynamic Planners & Construction
Corporation has breached the Contract of Agreement dated May 16, 2000 by having completed
only an estimated 51% of the construction of the 5-storey CCP Extension Building, Phase 2 and
has therefore failed to perform the work within the agreed schedule.

In view thereof, as stated in our earlier letter of 6 November 2003, we were compelled to
declare the occurrence of a default on the part of your principal, and have terminated their
contract. Please remit to us the proceeds of the captioned Bonds within the earliest possible
time.
The Central Colleges of the Philippines will complete the construction of the 5-storey CCP
Extension Building, Phase 2 on its own.11
Meanwhile, on December 5, 2003, PCIC informed DPCC that it had approved its request for
extension of the bonds.12

Eventually, negotiations to continue on with the construction between CCP and DPCC reached
a dead end. CCP hired another contractor to work on the school site.

On August 13, 2004, CCP sent a letter to PCIC of its final demand for the payment of
P13,924,351.47 as indicated in the bonds.13

On August 20, 2004, PCIC denied CCPas claims against the three bonds.14

Thus, on October 28, 2004, CCP filed a complaint with request for arbitration before the
Construction Industry Arbitration Commission (CIAC) against DPCC and PCIC.15 In its
complaint, CCP prayed that CIAC hold DPCC and PCIC, jointly and severally liable, against the
following bonds:

1. Under Surety Bond No. 45542, the amount of Php7,031,460.74 plus legal interest from the
date of demand until full payment thereof;

2. Under Performance Bond Nos. PCIC-45541 [Bond Endorsement Nos. E-2003/12527] and
PCIC-46172, the amount of Php6,892,890.73 plus legal interest from the date of demand until
full payment thereof; and

3. Php100,000.00 as and for attorneyas fees.16

In their Answer,17 DPCC and PCIC denied any liability and proffered that CCP unlawfully
withheld the materials, equipment, formworks and scaffoldings left at the premises amounting to
P4,232,264.12.

On June 3, 2005, the CIAC rendered a decision in favor of CCP. It gave the following reasons:

1. Claimant was legally justified in terminating the Contract;

2. On the issue of whether claimant faithfully complied with its contractual obligation in respect
of (a) the release of the downpayment, (b) the delivery of the drawings for construction, and (c)
the payment of progress billings, there is no record that Dynamic protested the delay in the
delivery of the site, the delay in the submission of technical plans and demanded as a result
thereof the corresponding adjustment of the Contract Period or the Contract Price. The issue of
delay in the reduction of the down payment is moot since Dynamic acquiesced in the reduction
of the down payment from 15% to 12% and the issue of payment of the 12th progress billing
arose as a consequence of a legitimate issue as to the percentage of completion of the work by
Dynamic as of August 2003.

3. Dynamicas percentage of accomplishment as of the date of the termination of the Contract

was 57.33% at P71,089,200.

4. The original Contract Price was P124,000,000. To this amount shall be added the price of
Variation Order No. 2 of P13,857,814.87 or an adjusted Contract Price of P137,857,814.87.
Deducting P110,000,792.87, the overpayment to Dynamic is P27,779,022.00. However,
Claimant is entitled to an award not exceeding the amount of its claims in its Complaint and in
the Terms of Reference.

5. Dynamic failed to produce evidence to show that it was not paid the balance of the Contract
Price for Phase 1 of the Project.

6. Surety is liable to Claimant under the Performance and Surety Bonds it issued in favor of
Claimant. The liability of Surety is to indemnify Claimant for the un-recouped down payment
[which] shall not exceed P7,031,460.74 under the Surety Bond and for not more than
P6,892,890.73 under the Performance Bonds.

7. If Surety is obliged to pay these amounts to Claimant, it is entitled, on its cross-claim, to

indemnity from Dynamic.

8. Claimantas claims under the Surety and Performance Bonds are not time-barred.

9. Surety is not barred by estoppel from denying liability under the Surety and Performance
Bonds.

10. Claimantas request to Dynamic to extend the term of these bonds, Dynamicas request to
Surety to extend their terms and Suretyas grant of the extension requested have no adverse
legal effect upon the rights and obligations of the parties.
11. The contractual time-bar embodied in the bonds is valid and binding.

12. Dynamic is entitled to its claims for the payment of P1,732,264.14 for materials and of
P2,500,000.00 for the equipment, formworks and scaffolding left at the site.

13. The claims for payment of moral, exemplary and temperate damages and for attorneyas
fees are denied.

14. The parties shall bear their own cost of arbitration.18

Thus, CIAC disposed of the case finding DPCC liable to pay CCP P7,031,460.74 from the
Surety Bond representing the unrecouped downpayment and P6,892,890.73 from its
Performance Bond for a total of P13,924,351.47. The CIAC likewise ordered CCP to pay DPCC
P1,732,264.12 corresponding to the construction materials left at the site and P2,500,000.00 for
the cost of equipment, formworks and scaffoldings appropriated by CCP or a total of
P4,232,264.12. The fallo reads:

WHEREFORE, award is hereby made against Respondent Dynamic Planners and Construction
Corporation and Respondent Philippine Charter Insurance Corporation, ordering them, jointly
and severally, to pay Claimant, Central Colleges of the Philippines the amount of P7,031,460.74
under the Surety Bond as un-recouped down payment, and the amount of P6,892,890.73 under
the Performance Bond or the total amount of P13,924,351.47.

Award is likewise made against Claimant, Central Colleges of the Philippines, ordering the latter
to pay Respondent Dynamic Planners and Construction Corporation, the amount of
P1,732,264.12 for the latteras materials left at the Project Site and the amount of P2,500,000.00
as the cost of its equipment, formworks and scaffoldings which were appropriated by the former
or the total amount of P4,232,264.12.

Offsetting the amount due claimant Central Colleges of the Philippines from Respondent
Dynamic Planners and Construction Corporation and that due the latter from the former, there is
a net amount of P9,692,087.37 which Respondent Dynamic Planners and Construction
Corporation is hereby ordered to pay Claimant Central Colleges of the Philippines with interest
at the rate of 6% per annum from the date of this Final Award and 12% per annum from the time
this Final Award becomes final and executory and until it is fully paid in accordance with Eastern
Shipping Lines, Inc. vs. Court of Appeals (1994) 234 SCRA 78.
The joint and several liability of Respondent Philippine Charter Insurance Corporation with
Respondent Dynamic Planners and Construction Corporation is accordingly reduced to
P9,692,087.37. In the event of payment by Respondent Philippine Charter Insurance
Corporation, the latter is entitled to indemnity from its co-Respondent Dynamic Planners and
Construction Corporation up to the full amount of such payment. In the event of delay in making
payment to indemnify Respondent Philippine Charter Insurance Corporation, Respondent
Dynamic Planners Charter Insurance Corporation shall pay interest at the rate of 21% per
annum in accordance with the Indemnity Agreement between them.

All other claims, counterclaims and cross-claims not otherwise determined in this Final Award
are deemed denied for lack of merit.

SO ORDERED.19

All the parties appealed the CIAC decision to the CA. PCICas appeal was docketed as CA-G.R.
SP No. 90361;20 CCPas appeal was docketed as CA-G.R. SP No. 90383;21 and DPCCas
appeal was docketed as CA-G.R. SP No. 90384.22 Eventually, the cases were consolidated.23

On June 29, 2007, the CA modified CIACas earlier decision.24 The CA found that DPCC was
already in delay for managing to complete only 51% of the construction work necessary to finish
the Phase 2 of the project. It held that due to DPCCas inexcusable delay, CCP was legally
within its rights to terminate the contract with it. It likewise did not give weight to PCICas
defense that Bond No. 46172 was already released because the said issue was never raised
before the CIAC and was raised for the first time on appeal.25 The CA, however, deleted the
award of cost of the materials, equipment, formworks and scaffoldings allegedly left by DPCC at
the work site for its failure to prove the actual costs of said materials.26 It added, aIn any event,
the cost of such materials, equipment, formworks and scaffoldings cannot be deducted from
Philippine Charteras liability on the bond, as the credit does not belong to the latter but to
Dynamic.a27 Accordingly, the decretal portion of the CA decision reads:

WHEREFORE, the Final Award, dated 03 June 2005, of the Construction Industry Arbitration
Commission (CIAC) in CIAC Case No. 36-2004 is AFFIRMED with MODIFICATION, in that the
award to Dynamic Planners and Construction Corporation of its counterclaim for materials,
equipment, formworks and scaffoldings left at the work site in the total amount of P4,232,264.12
is DELETED.

Philippine Charter Insurance Corporation and Dynamic Planners and Construction Corporation
are ORDERED jointly and severally to pay Central Colleges of the Philippines the total amount
of P13,924,351.47 under Surety Bond No. PCIC-45542, Performance Bond No. PCIC-45541
(as modified by Bond Endorsement No. E-2003/12527), and Performance Bond No. PCIC-
46172. Said amount shall bear interest at the rate of 6% per annum from the date of demand
made on 29 October 2003. However, for any amount not yet paid after the date of the finality of
this decision, the rate of interest on the payable amount shall be increased to 12% per annum
from the date when this decision becomes final and executory until it is fully paid.

SO ORDERED.28
PCIC moved for the reconsideration of the said decision, but the CA disposed of it with a denial
in its November 19, 2007 Resolution.

Hence, this petition.29

In its Memorandum,30 PCIC submits the following issues for resolution:

1st Issue: Whether or not the CA grossly erred in sustaining the CIAC award finding petitioner
liable to respondent CCP under the performance bonds and the surety bond?

2nd Issue: Whether or not the CA grossly erred in upholding the CIAC award pronouncing
respondent CCP as rightfully and justifiably entitled to terminate the contract agreement?

3rd Issue: Whether or not the CA grossly erred in deleting the counterclaim of respondent
DPCC covering the costs of materials, equipment, formworks and scaffoldings left at site and in
denying petitioner to benefit from the counterclaim?31
PCIC argues that the CA erred in sustaining the award of P692,890.74 representing
Performance Bond PCIC-46172 because the obligation guaranteed by said performance bond
was already completed, therefore, no liability should attach against the said bond.32

In this regard, the petitioner has a point.

Although this particular issue was not expressly raised in the partiesa Terms of Reference,33
nevertheless, the issue on Performance Bond PCIC- 46172 was extensively discussed during
the arbitral tribunalas hearing of February 21, 2005. To accurately reflect what transpired on
said hearing, relevant portions of the transcript of stenographic notes are herein quoted:

ATTY. G. Q. ENRIQUEZ:34
I am calling your attention to Bond PCIC-45542.

MR. CRISPINO P. REYES:35

You are calling my attention where?

ATTY. G. Q. ENRIQUEZ:

In the terms of Reference, can we please get the copy of that so that we can be reminded?

ATTY. B.G. FAJARDO:

There are only two, Counsel-the Performance and the Surety Bond.

ATTY. G. Q. ENRIQUEZ:

Performance Bond in the amount of-

MR. CRISPINO P. REYES:

Weare interested in 45542 and weare interested in 45541. What weare no longer interested in,
we have to be candid to this Honorable Tribunal, we are no longer interested, [we] no longer
want to collect on Performance Bond 46172.

ATTY. A.V. CAMARA:36

At this point in time, we would like to be of record that although that Bond 46172 covering the
amount of P692,890.74 per their declaration had already been satisfied that is why only two
bonds now are beinga

ATTY. J.N. RABOCA:

May I make a qualification with that, your Honor? Itas not that it was satisfied. Itas that the
Claimant is not claiming anymore because all the works under this bond were already
accomplished.

ATTY. G. Q. ENRIQUEZ:

Yes, because you have already a Certificate of Acceptance.

ATTY. J.N. RABOCA:

Correct.

ATTY. G. Q. ENRIQUEZ:

So, weare just narrowing down into two bonds.

ATTY. A.V. CAMARA:

The two bonds.

ATTY. G. Q. ENRIQUEZ:

Okay.

ATTY. A.V. CAMARA:

Then therefore the liability on 46172 should be released. They are only covered by the
pleadings especially the Complaint.

MR. CRISPINO P. REYES:

We do not dispute this.37 [Emphases supplied]

It is clear from the testimony of Crispino P. Reyes, CCPas President, that the school no longer
wants to collect on Performance Bond PCIC 46172 (with a value of P692,890.74). This
statement before the arbitral tribunal is a judicial admission effectively settling the issue with
respect to PCIC 46172. Section 4, Rule 129 of the Rules of Court provides:

Sec. 4. Judicial admissions. a An admission, verbal or written, made by a party in the course of
the proceedings in the same case, does not require proof. The admission may be contradicted
only by showing that it was made through palpable mistake or that no such admission was
made.
A party may make judicial admissions in (a) the pleadings; (b) during the trial, either by verbal or
written manifestations or stipulations; or (c) in other stages of the judicial proceeding.38 It is an
established principle that judicial admissions cannot be contradicted by the admitter who is the
party himself39 and binds the person who makes the same, and absent any showing that this
was made thru palpable mistake, no amount of rationalization can offset it.40

Since CCP, through its President, judicially admitted that it is no longer interested in pursuing
PCIC-46172, the scope of its claim will just be confined to Surety Bond No. PCIC-45542 and
Performance Bond No. PCIC-45541.

PCIC claims that DPCC was already in default as early as September 4, 2003,41 hence, the
ten-day reglementary period to file a claim on the bonds should have been reckoned from such
date and filed on September 14, 2003. PCIC claims that CCP notified them only on October 29,
2003 which is already beyond the limitation that any claim on the bonds should be presented in
writing within ten (10) days from the expiration of the bond or from the occurrence of the default
or failure of the principal, whichever is earliest.42

The Court finds itself unable to agree. Article 1169 of the New Civil Code provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
The civil law concept of delay or default commences from the time the obligor demands,
judicially or extrajudicially, the fulfillment of the obligation from the obligee. In legal parlance,
demand is the assertion of a legal or procedural right.43 Hence, DPCC incurred delay from the
time CCP called its attention that it had breached the contract and extrajudicially demanded the
fulfillment of its commitment against the bonds.
It is the obligoras culpable delay, not merely the time element, which gives the obligee the right
to seek the performance of the obligation. As such, CCPas cause of action accrued from the
time that DPCC became in culpable delay as contemplated in the surety and performance
bonds. In fact, Surety Bond PCIC-45542,44 Performance Bond PCIC-4554145 and PCIC-46172
each specified how claims should be made against it:

Surety Bond PCIC-4554246

The liability of PHILIPPINE CHARTER INSURANCE CORPORATION, under this bond will
expire on October 30, 2003; Furthermore, it is hereby agreed and understood that PHILIPPINE
CHARTER INSURANCE CORPORATION will not be liable for any claim not presented to it in
writing within FIFTEEN (15) DAYS from the expiration of this bond, and that the Obligee hereby
waives its right to claim or file any court action against the surety after the termination of
FIFTEEN (15) DAYS from the time its cause of action accrues.

Performance Bond PCIC-4554147 and PCIC-46172:48

The liability of PHILIPPINE CHARTER INSURANCE CORPORATION, under this bond will
expire on October 30, 2003; Furthermore, it is hereby agreed and understood that PHILIPPINE
CHARTER INSURANCE CORPORATION will not be liable for any claim not presented to it in
writing within TEN (10) DAYS from the expiration of this bond or from the occurrence of the
default or failure of the Principal, whichever is the earliest, and the Obligee hereby waives its
right to file any claims against the Surety after termination of the period of ten (10) DAYS above
mentioned after which time this bond shall definitely terminate and be deemed absolutely
cancelled.
Thus, DPCC became in default on October 29, 2003 when CCP informed it in writing of the
breach of the contract agreement and demanded the fulfillment of its obligation against the
bonds. Consequently, the November 6, 2003 letter that CCP sent to PCIC properly complied
with the notice of claim requirement set forth in the said bonds.

Upon notice of default of obligor DPCC, PCICas liability, as surety, was already attached. A
surety under Article 2047 of the New Civil Code solidarily binds itself with the principal debtor to
assure the fulfillment of the obligation:

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]
The case of Asset Builders Corporation v. Stronghold Insurance Company, Inc.49 explains how
a surety agreement works:

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 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.50 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.51

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,52 reiterating the

ruling in Garcia v. Court of Appeals,53 expounds on the nature of the suretyas liability:

X x x. The suretyas 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 a the principal relationship between
the obligee and the obligor, and the accessory surety relationship between the principal and the
surety. In this arrangement, the obligee accepts the suretyas solidary undertaking to pay if the
obligor does not pay. Such acceptance, however, does not change in any material way the
obligeeas 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 suretyas role arises only upon the obligoras
default, at which time, it can be directly held liable by the obligee for payment as a solidary
obligor.54 [Emphases supplied]
Having acted as a surety, PCIC is duty bound to perform what it has guaranteed on its surety
and performance bonds, all of which are callable on demand, occasioned by its principalas
default.

PCIC also proffers that CCP did not file any claim against the bonds after its extension.55
The Court is not persuaded. CCP need not file another claim as to the supposed extended
bonds because the October 29, 2003 letter was sufficient notice to PCIC and DPCC of the
latteras default and its intention to proceed against the surety and performance bonds.
Moreover, the extension of the bonds was only approved and relayed by PCIC to DPCC on
December 5, 2003 or after the October 29, 2003 Notice of Default.

As to whether CCP was legally warranted in terminating the contract with DPCC for its failure to
comply with its obligation, the Court affirms the CAas disquisition. The option to terminate the
contract is clearly apparent in the partiesa agreement. Specifically, Article 16 of the Contract
Agreement provides:

ARTICLE 16
Termination

16.1 The OWNER shall have the right to terminate this CONTRACT after giving fifteen (15)
days notice in writing for any of the following causes:

16.1.1. Substantial failure on the part of the CONTRACTOR in fulfilling its obligation;

16.1.2. Assignment or sub-contracting of any of the works herein by the CONTRACTOR without
approval by the OWNER;

16.1.3 The CONTRACTOR is willfully violating any of the material conditions, stipulations and
covenants of this CONTRACT and/or the attachments hereto. In the event of termination of this
CONTRACT pursuant to the above, any amount owing to the CONTRACTOR at the time of
such termination for services already rendered and/or materials delivered and taken over by the
OWNER shall be withheld by the OWNER pending the determination of value of damages
sustained by the OWNER by reason of such termination and payment of such damages by the
CONTRACTOR.
The Court also finds nothing improper in the deletion by the CA of the award of actual damages
in favor of DPCC. Actual or compensatory damages means the adequate compensation for
pecuniary loss suffered and for profits the obligee failed to obtain. To be entitled to actual or
compensatory damages, it is basic that there must be pleading and proof of actual damages
suffered.56 Equally vital to the fact that the amount of loss must be capable of proof, such loss
must also be actually proven with a reasonable degree of certainty, premised upon competent
proof or the best evidence obtainable.57 The burden of proof of the damage suffered is,
consequently, imposed on the party claiming it58 who, in turn, should present the best evidence
available in support of his claim. It could include sales and delivery receipts, cash and check
vouchers and other pieces of documentary evidence of the same nature pertaining to the items
he is seeking to recover. In the absence of corroborative evidence, it has been held that self-
serving statements of account are not sufficient basis for an award of actual damages.59
Moreover, a claim for actual damages cannot be predicated on flimsy, remote, speculative, and
insubstantial proof.60 Thus, courts are required to state the factual bases of the award.61

In this case, DPCC was not able to establish that it is entitled to the actual damages that it
prayed for in its counterclaim. As the CA put it, awhile Dynamic (DPCC) presented receipts
issued by its suppliers of materials, equipment, formworks and scaffoldings, it failed to prove
that the items in the receipts correspond to the items allegedly left at the work site.a62 Besides,
the Court cannot grant a relief in its favor because DPCC did not appeal the decision of the CA.

WHEREFORE, the petition is PARTLY GRANTED. The June 29, 2007 Decision of the Court of
Appeals in CA-G.R. SP Nos. 90361, 90383 and 90384 is MODIFIED to read as follows:

Philippine Charter Insurance Corporation and Dynamic Planners and Construction Corporation
are ordered to, jointly and severally, pay Central Colleges of the Philippines the total amount of
P13,231,460.73 under Surety Bond No. PCIC-45542 and Performance Bond No. PCIC-45541
(as modified by Bond Endorsement No. E-2003/12527). Said amount shall bear interest at the
rate of 6% per annum from the date of demand made on October 29, 2003. For any amount not
yet paid after the date of the finality of this decision, however, the rate of interest on the payable
amount shall be increased to 12% per annum from the date when this decision becomes final
and executory until it is fully paid.
SO ORDERED.

Velasco, Jr., (Chairperson), Peralta, Abad, and Perlas-Bernabe, JJ., concur.

Palmares v Court of Appeals, et al., G.R. No. 126490, March 31, 1998

Subic Bay Dsitribution, Inc. v, Western Guaranty Corp., G.R. No. 220613, November 11,
2021
Petitioner Subic Bay Distribution, Inc. (SBDI) entered into a Distributor Agreement3 with Prime
Asia Sales and Services, Inc. (PASSI) where the latter would purchase petroleum products from
petitioner to be paid within fifteen (15) days, provided that the credit limit did not exceed
P5,000,000.00.4 The agreement was effective for two (2) years, from April 16, 2001 to April 16,
2003, and shall continue on an annual basis unless sooner terminated by either party.5 Under
Item No. 6.3 of the agreement, PASSI obligated itself to post a performance bond to secure its
obligation, viz.:
6.3 DISTRIBUTOR agrees, when required by SELLER to put up securities real or personal, or,
to furnish SELLER a performance bond issued by a reputable bonding company to be chosen
by the SELLER to secure and answer for DISTRIBUTOR'S outstanding account, and/or for the
faithful performance of the obligations of DISTRIBUTOR contained herein, or arising out of, and
by virtue of this Agreement.6
The agreement also provided that in case of default, all unpaid amounts shall immediately
become due and payable without need of notice or demand.7

In compliance, PASSI secured a performance bond from respondent Western Guaranty

Corporation (WGC).8 When PASSI subsequently defaulted in its payments, petitioner sent a
demand letter dated January 7, 2002 for payment of the total outstanding obligation in the
amount of P100,256,601.17. It was followed by another letter dated February 11, 2002. PASSI,
however, failed to settle its outstanding obligation.

Meantime, petitioner also went after the performance bond and sought payment from
respondent of the full amount of its surety contract, i.e. P8.5 Million through three (3) demand
letters it sent respondent on January 15, 2002, February 12, 2002, and February 27, 2002.
Petitioner even sought the assistance of the Insurance Commission to recover payment from
respondent. But petitioner failed to recover payment from respondent.

Consequently, petitioner filed a complaint9 for sum of money against respondent with the RTC-
Makati City. The case was raffled to Branch 136.

Respondent countered10 that there was collusion between petitioner and PASSI to collect on
the performance bond as petitioner did not include PASSI as party defendant in the
complaint.11 Too, petitioner had allegedly already lost its cause of action against respondent
because the terms of the principal contract, the Distributor Agreement, were violated/novated
without respondent's consent.12

RULING OF THE RTC

By Decision dated September 7, 2011, the trial court ruled in petitioner's favor, viz.:

WHEREFORE, the Court renders judgment ORDERING defendant Western Guaranty

Corporation to pay plaintiff Subic Bay Distribution, Inc. the following amounts:
Php8,500,000.00 plus annual legal interest of six percent from July 12, 2002 until full payment;
Ten percent of the total amount due as attorney's fees; and
Cost of suit.
The Court dismisses defendant's counterclaim for lack of merit.

SO ORDERED.
RULING OF THE COURT OF APPEALS

On appeal, the Court of Appeals reversed under Decision dated April 14, 2015. It ruled that
petitioner failed to establish that there was actual delivery to and/or acceptance by PASSI of the
petroleum products subject of the obligation.13 The various sales invoices offered in evidence
by petitioner did not convincingly prove transfer of ownership of the thing sold to the buyer. A
sales invoice is simply a list of the items sent to the purchaser, factor, consignee, etc. which
also indicates the prices and charges, quantity, and cost or price of the items invoiced. The
sales invoice alone cannot be taken as proof of delivery or transfer of the goods as, by their
nature, invoices could be accomplished anytime by the issuer, even before or after the
purported delivery of the products themselves.14

In the alternative, the Court of Appeals decreed that there was a substantial alteration in the
conditions set forth in the Distributor Agreement, particularly as regards the credit term and
credit limit.15 Under the Distributor Agreement, petitioner granted PASSI a P5 Million credit limit
but this limit was increased to P8.5 Million. Too, the original credit term agreed on was for
monthly deliveries but the obligations upon which petitioner sought to collect covered deliveries
made on a daily/weekly basis, as shown by the invoices. The increase in credit limit and change
in the delivery terms were made without amending the Distributor Agreement, nor with
respondent's knowledge or consent. These amendments contravened respondent's surety bond
guaranteeing "payment/remittance of the cost of fuel products withdrawn within the stipulated
time in accordance with terms and conditions of the agreement."16 In view of this alteration,
respondent was deemed released from its obligation as surety, as well as from any liability for
actual damages.17

THE PRESENT PETITION

Petitioner now seeks affirmative relief from the assailed dispositions of the Court of Appeals
hinged on the following alleged erroneous findings, viz.: (1) that it failed to adequately prove that
the petroleum products were in fact delivered to PASSI; and (2) there were material alterations
in the terms and conditions of the Distributor Agreement which effectively released respondent
from liability.

Petitioner asserts that prior, contemporaneous, and subsequent acts indubitably established
delivery of the petroleum products to PASSI.18 While indeed a sales invoice is a unilateral
document which identifies the trading parties, describes and quantifies the items sold, and
indicates the shipment and mode of transport, prices and payment terms, the sales invoices
involved in this case are more than that. For the sales invoices presented here were signed by
the seller's agents themselves who confirmed receipt of the petroleum products, thus, making
these bills of sale as competent proofs of the fact of delivery. More, the transactions involved
here are forty-four (44) orders placed by PASSI within a period of just one (1) month. The sheer
volume of these orders proved that PASSI had received its prior orders. Otherwise, it would not
have placed such numerous orders if in the first place, it had not received its prior orders.19

Petitioner also faults the Court of Appeals for overlooking the fact that PASSI itself never denied
actual receipt of the deliveries in question. For instance, in respondent's January 24, 2002 letter
to PASSI, respondent asked the latter to settle its obligation and even advised that, " x x x if
there is any reason for your nonpayment, kindly let us know within five (5) days from receipt of
this letter, otherwise, we will have no further choice but to release your assigned deposit with us
to the oblige."20 Too, in its letter dated February 27, 2002, respondent sought PASSI's
affirmation of the correctness of its outstanding account with petitioner with notice that should
PASSI fail to reply, respondent shall "presume that the aforesaid amount (of P8.5 Million
outstanding obligation) is confirmed and accepted by (PASSI)."21 Petitioner further asserts that
PASSI's inaction or silence on this score equated to its affirmance that the statement of
accounts was correct. Respondent, therefore, is estopped from questioning the fact of delivery
and its actual receipt by PASSI itself.22

Petitioner further faults the Court of Appeals for its erroneous conclusion that the Distributor
Agreement was materially altered, hence, had resulted in the extinguishment of respondent's
liability as surety.

In its Comment,23 respondent defends the assailed dispositions of the Court of Appeals.

ISSUE

Did the Court of Appeals commit reversible error when it deemed as extinguished respondent's
liability under the contract of surety?
OUR RULING

The petition is meritorious.

As a rule, only legal issues come within the ambit of a Rule 45 petition. The Court, not being a
trier of facts, is precluded from ruling on factual issues, let alone, from calibrating anew the
respective evidence of the contending parties. There are, however, recognized exceptions to
this rule, as when (1) the conclusion is grounded on speculations, surmises or conjectures; (2)
the inference is manifestly mistaken, absurd, or impossible; (3) there is grave abuse of
discretion; (4) the judgment is based on a misapprehension of facts; (5) the findings of facts are
conflicting; (6) there is no citation of specific evidence on which the factual findings are based;
(7) the finding of absence of facts is contradicted by the presence of evidence on record; (8) the
findings of the Court of Appeals are contrary to the findings of the trial court; (9) the Court of
Appeals manifestly overlooked certain relevant and undisputed facts that, if properly considered,
would justify a different conclusion; (10) the findings of the Court of Appeals are beyond the
issues of the case; and (11) such findings are contrary to the admissions of both parties.24

The present case falls under the 8th exception. The Court, therefore, will review the factual
findings of both the trial court and the appellate court in order to arrive at a correct and just
disposition of the present case.

Article 2047 of the Civil Code defines a surety, 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
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 x x x."

The Court expounds that "a surety's liability is 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. We emphasize, 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."25
In other words, even though the contract of a surety is secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses no
direct or personal interest over the obligations nor receives any benefit therefrom.26 In fact,
since the surety is a solidary debtor, it is not necessary that the original debtor first failed to pay
before the surety could be made liable; it is enough that a demand for payment is made by the
creditor for the surety's liability to attach.27

People's Trans-East Asia Insurance Corp. v. Doctors of New Millenium28 elucidated on the
nature of the contracts involved in a suretyship and the effect on the surety agreement of any
material alteration in the principal contract, in this wise:

...

A suretyship consists of two different contracts: (1) the surety contract and (2) the principal
contract which it guarantees. Since the insurer's liability is strictly based only on the terms stated
in the surety contract in relation to the principal contract, any change in the principal contract,
which materially alters the principal's obligations would, in effect, constitute an implied novation
of the surety contract:

[A] surety is released from its obligation when there is a material alteration of the 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. A surety, however, is
not released by a change in the contract which does not have the effect of making its obligation
more onerous.

...
As shown, the Court of Appeals here reversed the trial court's finding that respondent is liable
under the surety contract. The Court of Appeals relied on its factual findings that first, there was
no conclusive proof that there was actual delivery of the petroleum products in question to
PASSI as to hold the latter liable therefor; and second, there had been material alterations of
the principal contract which made respondent's obligation more onerous. As these amendments
were purportedly made without respondent's knowledge and consent, respondent's obligation
as surety should be deemed extinguished.

The Court disagrees.

DELIVERY AND SALES INVOICE

On the matter of the alleged non-delivery, it is rather unusual for PASSI to have failed to
demand delivery of the petroleum products it ordered from petitioner if the same had indeed not
been delivered. Customarily, failure to deliver the goods should have prompted PASSI to follow
up on the orders and ensure that the same is delivered at the earliest opportunity.29 It is also
unnatural for PASSI to not have called the attention of petitioner when it received the billing and
demand letters for payment of the cost of the petroleum products if the same had not been
delivered to it. In the ordinary course of business, in case of unwarranted claims of payment of a
sum of money, one would immediately protest the same.30 As it was, however, no such action
was taken by respondent. In the absence of any protestation from PASSI, there can be no other
conclusion but that it (PASSI) received the petroleum products which entitles petitioner to collect
payment from PASSI, or in its default, from its duly constituted surety, respondent in this case.

As pointed out by petitioner, at the time that it demanded payment from respondent after
PASSI's default, respondent even advised PASSI through letter dated January 25, 2002 that "x
x x if there is any reason for your (PASSI's) nonpayment, kindly let us know within five (5) days
from receipt of this letter, otherwise we will have no further choice but to release your assigned
deposit with us to the obligee." Respondent again wrote PASSI on February 27, 2002 to inquire
into the "correctness" of its outstanding account. Respondent further informed PASSI that in the
absence of a reply, it would "presume that the amount (outstanding obligation) is confirmed and
accepted by PASSI." Despite the inquiry and clarification initiated by respondent, PASSI never
raised the issue of the alleged non-delivery of the goods. Its silence could only mean that there
was in fact delivery of petroleum products to PASSI.

Notably, the Court of Appeals accorded weight to respondent's assertion that the sales invoices
cannot be deemed as adequate proof of delivery of the petroleum products to PASSI. It ruled
that delivery should have been established by presenting the document designated as
"authority/authorization to load" which contained the name of the driver and plate number of the
truck authorized by PASSI to receive the goods, viz.:
...
x x x For one, even granting that the sales invoice could be used as proof of delivery, SBDI
utterly failed to show that the delivery was made by PASSI or any of its authorized
representatives. During the testimonies of SBDI's witnesses, they made mention of a document
designated as an "authority/authorization to load" which contained the name of the driver and
plate number of the truck, as the authorized truck drivers or haulers of PASSI, to whom the
goods would be released. However, SBDI failed to present the "authority/authorization to load"
documents which could have lent support to its claim that goods were delivered to PASSI.

Because SBDI failed to prove, and present, these "authority/authorization to load" documents,
which allegedly authorized the individuals whose signatures appear on the sales invoices to
sign on behalf of PASSI, the signatures cannot be admitted to prove the proposition that PASSI
accepted the purported delivery of petroleum products. In sum, SBDI utterly failed to prove that
the goods appearing on, and listed in, the sales invoice were actually delivered to, and received
by, PASSI or any of its authorized representatives.31

...
Obviously, the Court of Appeals focused on the document being denominated
"authority/authorization to load" and on petitioner's alleged failure to produce the same. But how
about the sales invoices which are equally competent proofs of the actual delivery of the goods,
the same having been accomplished and issued by petitioner in the ordinary course of business
pertaining to the products purchased by its customers? These sales invoices bore the
signatures of PASSI's representative evidencing actual receipt of the goods.

Petitioner's witnesses, Credit and Collection Manager Mr. Clemente Tangkeh and Marketing
Executive Mr. Winston Rodriguez testified on the company practice in the processing and
delivery of orders to its customers and how the latter would acknowledge receipt of the goods,
thus:

Mr. Clemente Tangkeh:

...

Q: Okay what proof if any do [you have to] show that Prime Asia Sales and Services received its
orders?

A: We do have invoices to show that the products were received by Prime Asia Sales and
Services.

Q: Okay. Have you ever seen this (sic) invoices?

A: Yes, sir.

Q: If I show to you copies of these invoices, would you be able to identify them?

A: Yes, sir.
Q: Would you please take a look at these invoices and then tell me if these are the invoices you
are referring to earlier?

A: (Witness going over the invoices presented to him by the counsel and answered) Yes. These
are the invoices I am referring to.

...

Q: By looking at those invoices, Mr. Witness, how are you able to tell that Prime Asia Sales and
Services were (sic) able to receive their petroleum orders?

A: At the bottom right of the invoices, there would be signatures affixed at the bottom right of the
invoices and ... right underneath that, it would have a statement that says, [RECEIVED GOODS
IN GOOD CONDITION].32
Mr. Winston Rodriguez:

...

Q: In this case, Mr. Witness, if I were to ask you to identify which fuel oil orders were picked-up
and which were delivered, would you be able to tell us?

A: Yes, sir.

Q: How would you be able to tell us Mr. Witness?

A: Through the invoice... if I can see the invoice, I can really say if it's delivered or picked-up, sir.

Q: Mr. Witness I will show you Sales Invoices pertaining to Prime Asia Sales and I would like
you to go over them one by one... I want you to point out which of these sales invoices that
would reflect which fuel orders were picked-up and were delivered or let's limit it to which fuel
orders were delivered?
...

Q: Now, Mr. Witness, how were you able to tell from the sales invoice... by merely looking at the
sales invoice that the fuel orders was, let us say delivered by your company?

A: It is stated in the sales invoice if company delivered, there appears a freight charge which
means that the company charged the customers freight charges because it is company
delivered, sir.

Q: So in the invoices which you went through and which you said were delivered by Subic Bay,
did you find these freight charges that you mentioned?

A: Yes, sir.33

...
In Memita v. Masongsong,34 the Court acknowledged the value of sales invoices as the best
evidence of the transaction through which the buyer acknowledged receipt of the deliveries
without protest. The Court in fact held that the load order manifest which the buyer relied on to
disprove delivery was not the only evidence to establish delivery of the customer's orders, thus:

...

Memita, in alleging "questionable" and "short" deliveries, in effect alleges that Masongsong
committed fraud. As the party invoking fraud, Memita has the burden of proof. Whoever alleges
fraud or mistake affecting a transaction must substantiate his allegation, since it is presumed
that a person takes ordinary care of his concerns and private concerns have been lair and
regular. Memita chose to present evidence which did not "set forth the facts" nor the "substance
of the matters upon which he relies to support his denial." Memita chose to present the
concepts of the load order manifest and the issue form. He also presented witnesses who are
current and former employees of San Miguel Foods, Inc. However, per the explanation of Mr.
Alberto Valenzuela, a former issuer/receiver and route salesman of San Miguel Foods, Inc., the
load order manifest shows the goods ordered by Masongsong from San Miguel Foods, Inc. But
the load order manifest cannot be considered as the only basis of a customer's order as the
customer is not precluded from calling up the San Miguel Foods, Inc. office and make additional
orders. Mr. Reynaldo Geaga, an employee in charge of the warehouse of San Miguel Foods,
Inc., explained that the issue form reflects the quantity of goods actually obtained by
Masongsong from San Miguel Foods, Inc. San Miguel Foods, Inc. then uses the issue form as
basis for billing Masongsong.
The best evidence of the transaction between Memita and Masongsong are the sales invoices.
The sales invoices show that Memita or his representative acknowledged receipt of
Masongsong's deliveries without protest. Memita aired his doubts about the amounts only after
Masongsong asked him to pay his credit. Moreover, although Memita confronted Masongsong
with a check dated 1 July 1996 in the amount of P127,238.40 payable to RM Integrated
Services, Masongsong stated that the said amount did not include any transaction in the
present case. (Emphases supplied).

...
More, respondent cannot discredit the sales invoices by alleging that the persons who issued
them failed to testify on their genuineness and due execution. Section 8, Rule 8 of the Revised
Rules of Court provides:

Section 8. How to contest such documents. - When an action or defense is founded upon a
written instrument, or attached to the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall be deemed admitted unless
the adverse party, under oath specifically denies them, and sets forth what he or she claims to
be the facts; but the requirement of an oath does not apply when the adverse party does not
appear to be a party to the instrument or when compliance with an order for an inspection of the
original instrument is refused, (as amended) (Emphases supplied)
Section 10 of Rule 8 further describes how a specific denial should be made:

Section 10. Specific denial. - A defendant must specify each material allegation of fact the truth
of which he or she does not admit and, whenever practicable, shall set forth the substance of
the matters upon which he or she relies to support his or her denial. Where a defendant desires
to deny only a part of an averment, he or she shall specify so much of it as is true and material
and shall deny only the remainder.
Where a defendant is without knowledge or information sufficient to form a belief as to the truth
of a material averment made to the complaint, he or she shall so state, and this shall have the
effect of a denial. (as amended)

Here, respondent failed to specifically deny the genuineness and due execution of the sales
invoices in its Answer.35 By its failure to specifically deny the same, respondent is deemed to
have admitted the genuineness and due execution of these documents. Spouses Santos vs.
Alcazar36 is apropos:

...
The effect of this is that the genuineness and due execution of the Acknowledgment is deemed
admitted. "By the admission of the genuineness and due execution [of such document] is meant
that the party whose signature it bears admits that he signed it or that it was signed by another
for him with his authority; that at the time it was signed it was in words and figures exactly as set
out in the pleading of the party relying upon it; that the document was delivered; and that any
formal requisites required by law, such as a seal, an acknowledgment, or revenue stamp, which
it lacks, are waived by him. Hence, such defenses as that the signature is a forgery x x x; or that
it was unauthorized x x x; or that the party charged signed the instrument in some other capacity
than that alleged in the pleading setting it out x x x; or that it was never delivered x x x, are cut
off by the admission of its genuineness and due execution."

...
So must it be.

MATERIAL ALTERATIONS

The Court of Appeals further ruled that even assuming that the sales invoices were accepted as
proof of delivery, respondent would still be absolved from liability due to the purported violations
of the Distributor Agreement, one of which is allegedly found in Item 6.2 thereof, viz.:

6.2 Payment for purchases by the DISTRIBUTOR shall be in accordance with a maximum credit
term of 15 days with a maximum credit limit of P5,000,000 for the life of this Agreement.37
Too, petitioner unduly extended the credit term from fifteen (15) days to thirty (30) days, as
shown by the sales invoices, and the credit limit, inordinately increased from P5 Million to P8.5
Million, in contravention of the express terms of the Distributor Agreement.

PCIC vs. Petroleum Distributors38 relevantly ordained:

x x x 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. x x x
As decreed, not all changes in the principal contract would work to absolve a surety from
liability. This liability is not extinguished when the modifications in the principal contract do not
substantially or materially alter the principal's obligations.39 Verily, the touchstone for
contrariety would be an irreconcilable incompatibility between the old and new obligations.40
Undeniably, there are no material alterations to speak of here.

Unlike in People Trans-East Asia Insurance Corp. v. Doctors of New Millenium,41 where a
waiver was inserted in the agreement, or in PCIC v. PDSC,42 where a memorandum of
agreement was subsequently executed to revise the work schedule of the project, the principal
contract here has remained materially the same from beginning to end; there was not even a
supplemental contract executed to change, vary, or modify the Distributor Agreement.

In any event, the Court of Appeals first pointed to the supposed change in the scheduled
delivery of the goods from a monthly to a daily/weekly basis as a material alteration which made
respondent's obligation more onerous as it would hasten PASSI's obligation to pay, thereby
increasing the risk of non-Apayment and the forfeiture of the performance bond.

This is at best conjectural. To be sure, no evidence was adduced to prove that the frequency of
the deliveries to PASSI increased its risk of nonApayment and accelerated the need to call on or
forfeit the performance bond. The deliveries, in the first place, were based on orders placed by
PASSI itself. Presumably, it would know if it has the capacity to pay for its orders. At any rate,
should the performance bond get forfeited, respondent has the right to be subrogated to the
remedies available to petitioner against PASSI.43

More important, there is really nothing in the Distributor Agreement that set the delivery of the
petroleum products on a monthly basis, thus:

...

DELIVERIES

SELLER shall exert its best efforts to make deliveries in approximately equal monthly quantities.
Inspection of deliveries shall be deemed waived in case of failure of DISTRIBUTOR'S
representative to appear at the appointed time and place of delivery. Deliveries are subject to
SELLER'S availability of supply and delivery facilities at supply point. x x x (Emphasis
supplied).44

...
By the language of the contract, delivery was not set on a monthly basis. The phrase "equal
monthly quantities" referred to the volume of products which petitioner bound itself to deliver to
PASSI per month and not on the frequency of delivery. This is understandable considering that
a regular monthly schedule for delivery would not be controlling as the delivery of petroleum
products would always depend on the orders actually placed by PASSI.

We now go to the second alleged material alteration pointed out by the Court of Appeals, i.e.,
the extension of the credit term from fifteen (15) days to thirty (30) days by petitioner was
deemed by the Court of Appeals to be more onerous to respondent.

But this extension should actually give PASSI more time to settle its obligations and reduce the
risk of default in the payment of its purchases. Consequently, this, too, is more favorable to
respondent as surety. Since the principal is given more time to settle its obligation, the risk of
the surety's performance bond to be immediately called upon or burdened is necessarily
reduced.

Now, as for the alleged increase of PASSI's credit limit from P5 Million to P8.5 Million, the
records should be set straight. Respondent was aware of the variance between the credit limit
indicated in the Distributor Agreement (P5 Million) and the amount of performance bond actually
applied for by PASSI (P8.5 Million). In fact, respondent admitted that it issued the surety bond
despite this variance because PASSI undertook to have the Distributor Agreement amended to
increase its credit limit, albeit, it did not eventually succeed. But notwithstanding PASSI's failure
to have the contract amended, respondent cannot negate its liability under the contract of
surety. For it bound itself to fulfill PASSI's obligation to petitioner up to the amount of P8.5
Million. Respondent cannot put up the defense that the effectivity of the surety contract
depended on the amendment of the Distributor Agreement because petitioner was not privy to
this supposed understanding, if at all there was, between respondent and PASSI.

Respondent's theory that petitioner and PASSI colluded so that the former may run after
respondent's bond45 is specious. A surety's liability is joint and several with the principal. Under
Article 2047 of the Civil Code, suretyship arises upon the solidary binding of a person deemed
to be the surety with the principal debtor for the purpose of fulfilling an obligation.46

A creditor's right to proceed against the surety exists independently of his right to proceed
against the principal. Article 121647 of the Civil Code states that the creditor may proceed
against any one of the solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has the right to proceed even
against the surety alone.48
Respondent may, thus, be sued separately or together with PASSI in view of the solidary nature
of its liability.49 As it was, petitioner opted to pursue collection against the surety only, without
impleading the principal debtor.

Basic is the principle that "a contract is law between the parties" for as long as it is "not contrary
to law, morals, good customs, public order, or public policy."50

Under the contract of surety, respondent guaranteed the full and faithful compliance by PASSI
of its obligations under the Distributor Agreement.

The primary purpose for the acquisition of the performance bond was to ensure the payment of
a sum of money for products purchased by PASSI from petitioner. Respondent's guarantee,
thus, gave petitioner the right to proceed against it (respondent) following PASSI's failure to
comply with its obligation.

LEGAL INTEREST

In its Decision dated September 7, 2011, the trial court awarded "annual legal interest of six
percent from July 12, 2002 until full payment." This must be modified, however, to conform with
the guidelines set forth in Nacar v. Gallery Frames,51 thus:

...
When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.
With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except
when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit. (Emphases added)
...
Here, it is beyond quibble that the case involves a breach of obligation to pay a sum of money.
To collect payment, petitioner sent extrajudicial demands to respondent on three (3) separate
occasions a January 15, 2002, February 12, 2002, and February 27, 2002. Respondent never
denied receipt of these demand letters, yet, it never complied with its obligation to pay. In
accordance with Articles 1169 and 1170 of the Civil Code, therefore, respondent was in default
and liable for damages by way of legal interest, thus:

...

Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

...

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene the tenor thereof, are liable for damages.
(Emphases added)

...
To clarify though, the principal amount due should earn legal interest the moment respondent
received the first demand dated January 15, 2002, for this is when respondent's delay set in.

As for the rate of interest, the Court rules that the principal amount due to petitioner shall earn
twelve percent (12%) legal interest per annum from respondent's receipt of the first demand
letter dated January 15, 2002 until June 30, 2013, and thereafter, six percent (6%) legal interest
per annum until fully paid.
ATTORNEY'S FEES

In the absence of stipulation, attorney's fees may be awarded as actual or compensatory

damages under any of the circumstances provided for in Article 2208 of the Civil Code. The
general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate. They are not to be awarded
every time a party wins a suit.52

An award of attorney's fees under Article 2208 demands factual, legal, and equitable
justification to avoid speculation and conjecture surrounding the grant thereof. Due to the
special nature of the award of attorney's fees, a rigid standard is imposed on the courts before
these fees could be granted. Hence, it is imperative that they clearly and distinctly set forth in
their decisions the basis for the award thereof. It is not enough that they merely state the
amount of the grant in the dispositive portion of their decisions. It bears reiteration that the
award of attorney's fees is an exception rather than the general rule; thus, there must be
compelling legal reason to bring the case within the exceptions provided under Article 2208 of
the Civil Code to justify the award.53

Here, the trial court's award of attorney's fees is not grounded on a stipulation in the surety
contract but on par. (2) Article 2208 of the Civil Code, viz.:

Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

...

(2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest;

...

In all cases, the attorney's fees and expenses of litigation must be reasonable.

...
Indeed, respondent reneged on its solidary undertaking under the contract of surety. Its failure
to comply with its obligation, despite demand, compelled petitioner to bring an action for sum of
money to enforce the guarantees under the contract of surety which, needless to say, had
dragged on for years. The Court, thus, finds that there is reasonable justification for the trial
court's award of 10% attorney's fees to petitioner. In Pacific Mills v. CA,54 the Court held that
10% attorney's fees is a reasonable award for the prevailing party.

ACCORDINGLY, the petition is GRANTED. The Decision dated April 14, 2015 and Resolution
dated September 17, 2015 of the Court of Appeals in CA-G.R. CV No. 101337 are REVERSED
AND SET ASIDE.

The Decision dated September 7, 2011 of the Regional Trial Court of Makati City in Civil Case
No. 02-1524 is REINSTATED with MODIFICATION. The principal amount of P8.5 Million due to
petitioner Subic Bay Distribution, Inc. shall earn twelve percent (12%) legal interest per annum
from respondent Western Guaranty Corporation's receipt of the demand letter dated January
15, 2002 until June 30, 2013, and thereafter, six percent (6%) per annum until fully paid.

Distinction between Guaranty and Suretyship

Philippine Export and Foreign Loan Guarantee Corp v V.P. Eusebio Construction Corp.,
et al., G.R. No. 140047, July 13, 2004