Tuesday, January 19, 2016

American Home Insurance of New York Co. vs. F.F. Cruz & Co., Inc. [GR No. 174926, August 10, 2011]

FACTS: Philippine Ports Authority awarded a project to F.F. Cruz & Genaro Reyes Construction, Inc. executed a Sub-Contract Agreement with a condition that the sub-contractor shall file immediately upon its receipt of Notice to Proceed, a performance bond from a duly accredited surety company equivalent to 10% of the subcontractor's total cost. F.F. Cruz gave G. Reyes an advance payment of Php 2.2 million guaranteed by a surety bond for the same amount issued by American Home Insurance of New York. G. Reyes finally admitted that continuing the project was no longer a wise investment and called on F.F. Cruz to take over the project. F.F. Cruz, thus took over the unfinished project. F.F. Cruz demanded from American Home the payment of Php 2.2 million representing the amount of the bond. American Home, in turn, informed G.Reyes of F.F. Cruz's demand. As the claim left unheeded, F.F. Cruz made a final demand on American Home on 10 July 1993. G. Reyes likewise ignored American Home's demand to fulfill its obligation set forth in the Indemnity Agreement it executed in favor of the latter.

ISSUE: Whether or not American Home Insurance of New York shall be liable as surety

RULING: Yes. The payment of the Php2.2 million advanced by F.F. Cruz is the principal liability of G. Reyes. However, with the issuance of the surety bond, a contract of suretyship was entered into making American Home Insurance of New York equally liable.

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. 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.

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 suretyship 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.

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