FGU Insurance Corp Vs Sps. Roxas

A SURETYSHIP AGREEMENT IS A CONTRACT OF ADHESION
A suretyship agreement is a contract of adhesion ordinarily prepared by the surety or insurance company.
Therefore, its provisions are interpreted liberally in favour of the insured and strictly against the insurer who, as
the drafter of the bond, had the opportunity to state plainly the terms of its obligation. The liability of a surety is
determined strictly in accordance with the actual terms of the performance bond it issued. It may, however, set
up compensation against the amount owed by the creditor to the principal. (FGU Insurance Corp. vs Sps.
Roxas, G.R. No. 189526 & G.R. No. 189656.. August 9, 2017).
x—————x
FGU INSURANCE CORPORATION , petitioner, vs. SPOUSES FLORO
ROXAS AND EUFEMIA ROXAS, respondents.
G.R. No. 189526 & G.R. No. 189656.. August 9, 2017.
LEONEN, J
FACTS:
These Petitions for Review seek to reverse and set aside the Decision of the Court of Appeals holding, among
others, FGU as surety liable to pay the Spouses Roxas and Philtrust Bank the amount of P450,000.00 for
Dominguez's non-completion of the construction project within the stipulated period.
The Spouses Roxas entered into a Contract of Building Construction with Rosendo P. Dominguez, Jr.
(Dominguez) and Philtrust Bank to complete the construction of their housing project. Pursuant to the Contract
Dominguez secured a performance bond (Surety Bond) from FGU. FGU and Dominguez bound themselves to
jointly and severally pay Floro and Philtrust Bank the agreed amount in the event of Dominguez's non-
performance of his obligation under the Contract
Dominguez filed a Complaint against the Spouses Roxas and Philtrust Bank seeking the declaration of the
FGU Surety Bond as unenforceable, among others. Philtrust Bank averred that it sent several demand letters
to FGU to pay P450,000.00 for non-performance of its principal, but the latter refused to pay. Hence, Philtrust
Bank sought to implead FGU for non-payment of P450,000.00 under its Surety Bond.
FGU questions the Court of Appeals Decision, which held it liable to the Spouses Roxas for the full amount of
the Surety Bond. First, it argues that the face amount of P450,000.00 only indicates its maximum potential
liability in case Dominguez does not comply with its obligation under the Contract. FGU submits that it should
only be liable for the actual damages that may have been sustained by the Spouses Roxas or the cost that may
have been incurred by them to finish the contracted work. Second, FGU contends that under Article 2054 of
the Civil Code, its liability cannot be greater than the liability of the principal. Thus, it was erroneous for the
Court of Appeals to adjudge it liable for actual damages but without adjudging any liability upon Dominguez.
Third, FGU submits that the Spouses Roxas may only claim up to one-half (1/2) of the face amount because
Philtrust Bank is a joint creditor under the Surety Bond.
ISSUE:
Whether or not the Court of Appeals erred in holding FGU Insurance Corporation liable for the full amount of
P450,000.00 of its Surety Bond
HELD:
NO. The Court of Appeals is correct in holding FGU Insurance Corporation liable for the full amount of
P450,000.00 of its Surety Bond. Under Section 175 of Presidential Decree No. 612 or the Insurance Code, a
contract of suretyship is defined 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 party called the
obligee." A performance bond is a kind of suretyship agreement. It is "designed to afford the project owner
security that the contractor, will faithfully comply with the requirements of the contract and make good on the
damages sustained by the project owner in case of the contractor's failure to so perform. A surety's liability is
joint and several with the principal. Article 2047 of the Civil Code provides that suretyship arises upon the
solidary binding of a person deemed the surety with the principal debtor for the purpose of fulfilling an
obligation." Although the surety's obligation is merely secondary or collateral to the obligation contracted by the
principal, this Court has nevertheless characterized the surety's liability to the creditor of the principal as "direct,
primary, and absolute. In other words, the surety is directly and equally bound with the principal. Moreover,
Article 1216 in relation to Article 2047 68 of the Civil Code provides: 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. Pursuant to the foregoing provisions, FGU, as surety, may be sued by the creditor
separately or together with Dominguez as principal, in view of the solidary nature of its liability.
Liability under a surety bond is "limited to the amount of the bond" and is determined strictly in accordance with
the particular terms and conditions set out in this bond. The FGU Surety Bond is conditioned upon the full and
faithful performance by Dominguez of his obligations under the Contract of Building Construction. Under the
terms of this bond, FGU guaranteed to pay the amount of P450,000.00 should Dominguez be unable to
faithfully comply with the contract for the completion of the Spouses Roxas' housing project.
A suretyship agreement is a contract of adhesion ordinarily prepared by the surety or insurance company.
Therefore, its provisions are interpreted liberally in favour of the insured and strictly against the insurer who, as
the drafter of the bond, had the opportunity to state plainly the terms of its obligation. Thus, FGU is duty-bound
to perform what it has guaranteed — to pay P450,000.00 upon notice of Dominguez's default. FGU, on the
other hand, has the right to be indemnified for any payments made, both under the law and the indemnity
agreement. Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047.

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A SURETYSHIP AGREEMENT IS A CONTRACT OF ADHESION

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