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STRONGHOLD INSURANCE COMPANY v. REPUBLIC-ASAHI GLASS CORPORATION

FACTS:

The case involves a contract entered into by Republic-Asahi Glass Corporation (Republic-Asahi) and JDS Construction (JDS) for the construction of roadways and drainage system in Republic-Asahi's compound. JDS was required to post a performance bond of P795,000. Republic-Asahi made a downpayment and paid two progress billings amounting to P274,621.01. However, Republic-Asahi claimed that JDS performed the work at a slow pace and failed to complete the project within the agreed 240-day period. As a result, Republic-Asahi terminated the contract and incurred additional expenses of P3,256,874.00 to hire another contractor. Republic-Asahi then filed a complaint against JDS and Stronghold Insurance Co., Inc. (SICI), the surety company, seeking payment for the additional expenses and damages in accordance with the performance bond. However, JDS was no longer found at its address and its proprietor, Jose D. Santos, Jr., had already passed away. SICI filed an answer claiming that their liability has been extinguished by the death of Santos and that there was no liquidation of the liabilities under the performance bond. The lower court initially dismissed the complaint but granted Republic-Asahi's motion for reconsideration.

ISSUES:

  1. Whether the death of Jose D. Santos, Jr., the principal, extinguished petitioner's liability under the surety bond.

  2. Whether the lower court erred in pronouncing that the performance of the contract had become impossible by respondent's act of rescission.

RULING:

  1. The death of the principal did not extinguish petitioner's liability under the surety bond. Obligations are transmissible to the heirs, except when the transmission is prevented by 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 this case, the monetary liabilities or obligations of the principal were not intransmissible and did not result in the extinguishment of those obligations or liabilities upon his death. Therefore, petitioner remains liable under the surety bond.

  2. The lower court erred in pronouncing that the performance of the contract had become impossible by respondent's act of rescission. The contract was rescinded because of the slow pace of work and the non-performance by JDS Construction and the principal. Pursuant to the surety contract, petitioner is liable for the non-performance of the contract on the part of JDS Construction. Therefore, petitioner cannot use respondent's act of rescission as grounds for escaping its monetary obligation under the performance bond.

PRINCIPLES:

  • Obligations are transmissible to the heirs, except when the transmission is prevented by 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.

  • Claims arising from a contract can still be pursued against the estate of the deceased debtor.

  • The liability of a surety is contractual in nature, and the surety cannot escape its monetary obligation under the performance bond by using the death of the principal as a defense.

  • Surety's obligation is secondary or collateral to the obligation of the principal debtor, but the surety's liability to the creditor or promisee of the principal is direct, primary, and absolute.

  • The surety is directly and equally bound with the principal debtor.

  • 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 does not prevent subsequent demands against the others as long as the debt has not been fully collected.