Civil Law

STRONGHOLD INSURANCE v. REPUBLIC-ASAHI GLASS CORPORATION G.R. No. 147561 June 22, 2006 Obligations and Contracts, Transmissibility of Obligation, Effect of the Death of the Principal Debtor, Surety, Solidary Liability

FACTS:

On May 24, 1989, [respondent] Republic-Asahi entered into a contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a drainage system in Republic-Asahi’s compound, which was supposed to be completed within a period of 240 days, where [respondent] was to pay x x x JDS P5,300,000.00. In order ‘to guarantee the faithful and satisfactory performance of its undertakings’ x x x JDS, shall post a performance bond of P795,000.00. x x x JDS executed, jointly and severally with [petitioner] Stronghold Insurance Co., Inc. (SICI).

“Two progress billings for the total amount of P274,621.01 were submitted by x x x JDS to [respondent], which the latter paid. 

Respondent’s engineers called the attention of x x x JDS to the alleged alarmingly slow pace of the construction, which resulted in the fear that the construction will not be finished within the stipulated 240-day period. However, said reminders went unheeded by x x x JDS.

Dissatisfied with the progress of the work undertaken by x x x JDS, [respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a letter to x x x JDS informing the latter of such rescission. Such rescission, according to Article XV of the contract shall not be construed as a waiver of [respondent’s] right to recover damages from x x x JDS and the latter’s sureties.

Respondent sent two letters to [petitioner] SICI filing its claim under the bond for not less than P795,000.00. Both letters allegedly went unheeded.

[Respondent] then filed [a] complaint against x x x JDS and SICI for the payment of P3,256,874.00 representing the additional expenses incurred by [respondent] for the completion of the project using another contractor, and from x x x JDS and SICI, jointly and severally, payment of P750,000.00 as damages in accordance with the performance bond; plus damages and attorney’s fees.

Petitioner SICI filed its answer, alleging that the [respondent’s] money claims against [petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr.

The trial court dismissed the complaint against x x x JDS and SICI, on the ground that the claim against JDS did not survive the death of its sole proprietor, Jose D. Santos, Jr.

While respondent’s Motion for Reconsideration was given due course, the trial court ultimately dismissed the complaint insofar as SICI is concerned.

On appeal, CA ruled that SICI’s obligation under the surety agreement was not extinguished by the death of Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after SICI for the bond. 

ISSUE:

Whether petitioner’s liability under the performance bond was automatically extinguished by the death of Santos, the principal.

RULING:

Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety bond. Consequently, it says, it is automatically released from any liability under the bond.

As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. 

Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the nature of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death.

In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the extinguishment of those obligations or liabilities, which merely passed on to his estate. Death is not a defense that he or his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot use his death to escape its monetary obligation under its performance bond.

As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as follows:

“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.”

x x x x

“Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.”

Elucidating on these provisions, the Court in Garcia v. Court of Appeals stated thus:

“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. x x x.”

Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner herein, in view of the solidary nature of their liability. 

The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond.

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