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PHILIPPINE EXPORT v. V.P. EUSEBIO CONSTRUCTION

FACTS:

The case involves a service contract entered into by a Filipino construction firm with the Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center in Baghdad, Iraq. The petitioner, Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee), filed a complaint seeking reimbursement from the respondents for the amount it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI). The State Organization of Buildings (SOB) awarded the construction contract to Ajyal Trading and Contracting Company, and later, respondent 3-Plex International, Inc. entered into a joint venture agreement with Ajyal, which was subsequently assigned to VPECI. To comply with the bond requirements of the SOB, respondents 3-Plex and VPECI applied for a guarantee from Philguarantee. Philguarantee issued letters of guarantee in favor of Al Ahli Bank of Kuwait, which were secured by a Deed of Undertaking and a surety bond issued by respondent First Integrated Bonding and Insurance Company, Inc. The construction project experienced delays, and the performance bond and advance payment bond were renewed or extended multiple times. The surety bond was also extended. The performance bond was further extended several times until it was cancelled, and the advance payment bond was cancelled after full refund or reimbursement by the joint venture contractor.

In this case, petitioner Philguarantee issued a performance bond in favor of respondent VPECI, a joint venture contractor, to guarantee the performance of a contract to design, construct, and complete the structures of the Southern Oil Pipeline Rehabilitation Project in Iraq. The performance bond was later extended until May 8, 1987. As of March 1986, the project was 51% accomplished, with only the electro-mechanical and sanitary works remaining. On October 26, 1986, Al Ahli Bank of Kuwait demanded full payment of its performance bond counter-guarantee. VPECI requested Iraq's Trade and Economic Development Minister to recall the demand, citing their mutual agreement to hold penalties in abeyance until project completion and to extend the time depending on loan negotiations. VPECI advised Philguarantee not to pay Al Ahli Bank, as efforts were being made for an amicable settlement. On April 14, 1987, Philguarantee received a demand for reimbursement from Al Ahli Bank. Philguarantee and VPECI sought assistance from Philippine government agencies. On August 27, 1987, the Central Bank authorized the remittance of the amount demanded by Al Ahli Bank to settle the performance counter-guarantee. Philguarantee informed VPECI that it would make the payment and demanded reimbursement. Philguarantee paid Al Ahli Bank on January 21, 1988, and paid interest and penalty charges on May 6, 1988. Philguarantee then demanded payment from VPECI, but the latter failed to pay. Philguarantee filed a civil case for collection of a sum of money against VPECI. The trial court ruled against Philguarantee, finding that the guarantee had expired and there was no valid renewal or extension. The Court of Appeals affirmed the trial court's decision, emphasizing that Philguarantee was aware of the violations committed by the project owner and the complications that would result from payment of the full guarantee.

The case involves a dispute between the petitioner, HILGUARANTEE, and the respondents over the reimbursement of payments made under a letter of guarantee issued by HILGUARANTEE. The guarantee was issued to Al Ahli Bank of Kuwait based on a deed of undertaking and surety bond provided by the respondents. The petitioner argues that its liability under the guarantee is analogous to that of a surety and that it is entitled to reimbursement for payments made due to the respondents' failure to complete a construction project in Baghdad. The court discusses the difference between guaranty and surety, with guaranty being a separate undertaking supported by a separate consideration while surety is bound with the principal debtor in the same instrument. The court also notes that a surety's liability is primary, while a guarantor's liability is secondary. The court examines the terms of the letter of guarantee issued by the petitioner and concludes that it is an unconditional and irrevocable guarantee to pay the specified amount upon demand in the event of default by the principal debtor.

ISSUES:

  1. Whether respondents are liable under the deed of undertaking they executed in favor of petitioner for the issuance of its counter-guarantee, thereby obligating them to reimburse petitioner for what it paid under the said counter-guarantee.

  2. Whether petitioner can claim subrogation.

  3. Whether holding respondents liable under their deed of undertaking is iniquitous and unjust.

RULING:

  1. Respondents are not liable under the deed of undertaking they executed in favor of petitioner for the issuance of its counter-guarantee.

    • The Court held that the delays and non-completion of the project were not primarily attributable to the contractor and were instead due to violations by the State Organization of Buildings (SOB) of the terms and conditions of the contract, particularly SOB's failure to pay 75% of the accomplished work in US Dollars.

  2. Petitioner cannot claim subrogation.

    • Since the payment made by the petitioner guarantor did not benefit the principal debtor (respondent contractor), and the debtor had valid defenses against SOB, the petitioner could not claim subrogation.

  3. Holding respondents liable under their deed of undertaking is iniquitous and unjust.

    • Given the circumstances, including the petitioner's awareness of the contractor’s ongoing receivables from SOB, and the payment made by the petitioner despite knowing that the project could not be completed due to factors beyond the respondent contractor's control, holding the respondents liable would be inequitable.

PRINCIPLES:

  • Guaranty vs. Surety

    • Guaranty involves a separate undertaking, often supported by separate consideration and is conditional upon the default of the principal debtor.

    • Suretyship involves a solidary obligation with the principal debtor, with primary liability from the beginning.

  • Conditional Guaranty

    • A guarantee can be unconditional yet still be a guaranty so long as it is subject to the condition that the principal debtor defaults first.

  • Default (Mora)

    • No party incurs in delay if the other party has not complied or is not ready to comply in a proper manner with what is incumbent upon him (Article 1169, last paragraph, of the Civil Code).

  • Excusion in Guaranty

    • The right of excussion allows the guarantor to require the creditor to exhaust the property of the principal debtor before proceeding against the guarantor.

  • Compensation

    • If the creditor owes the principal debtor amounts that can be set off against the debtor’s obligations, that compensation may discharge the debtor’s obligation to the extent of the set-off amount.

  • Subrogation and Indemnity

    • A guarantor paying the debtor’s obligation has the right to indemnity from the debtor, and subrogation to the creditor's rights, but only if the payment benefits the debtor and is not against the debtor's will.