American Home Insurance Co. v. F.F. Cruz & Co.

G.R. No. 174926 (August 10, 2011)

American Home Insurance Co. must pay due to F.F. Cruz's bond after G. Reyes abandoned a project.

Facts:

In June 1990, the Philippine Ports Authority (PPA) awarded a dredging project for the Cebu International Port to F.F. Cruz & Co., Inc. (FF Cruz). Subsequently, FF Cruz entered into a Sub-Contract Agreement with Genaro Reyes Construction, Inc. (G. Reyes) to perform 50% of the dredging work, which was estimated at 600,000 cubic meters. The Sub-Contract required G. Reyes to file a performance bond equivalent to 10% of the total cost of the subcontract upon receiving a Notice to Proceed.

FF Cruz provided G. Reyes with an advance payment of P2.2 million, secured by a surety bond issued by American Home Insurance Co. of New York (American Home). This bond was intended to guarantee the payment of the advance in case G. Reyes failed to comply with the subcontract's terms. To secure the bond, Genaro Reyes and his wife executed an Indemnity Agreement, agreeing to indemnify American Home for any losses incurred due to the bond.

In March 1991, FF Cruz notified G. Reyes to mobilize its equipment for the project. However, by October 1991, G. Reyes reported issues with siltation that hindered its work. By December 1991, G. Reyes decided to abandon the project, citing the siltation problems, and requested FF Cruz to take over.

FF Cruz subsequently demanded payment of the P2.2 million from American Home, which led to American Home filing a complaint against G. Reyes and its officers for the amount due under the Indemnity Agreement. G. Reyes denied liability, claiming it had not failed to comply with the subcontract and argued that FF Cruz was responsible for the project's abandonment due to its own failures.

The case progressed through the Regional Trial Court (RTC) and the Court of Appeals (CA), with both courts ultimately ruling in favor of FF Cruz and holding American Home liable under the surety bond.

Legal Issues:

  1. Is the surety bond issued by American Home a performance bond or merely a guarantee for the advance payment?
  2. Is American Home liable under the bond despite G. Reyes' abandonment of the project?
  3. What is the extent of American Home's liability under the bond?

Arguments:

  • Petitioner (American Home):

    • Contended that the bond was not a performance bond but a guarantee for the advance payment made to G. Reyes.
    • Argued that it should be discharged from liability due to G. Reyes' abandonment of the project without American Home's consent, constituting a material alteration of the bond's terms.
    • Asserted that it was not liable for the full amount of the bond since G. Reyes had allegedly reimbursed part of the advance payment.

  • Respondent (FF Cruz):

    • Maintained that the bond was indeed a performance bond and that G. Reyes failed to fulfill its contractual obligations by not completing the dredging work.
    • Argued that the abandonment of the project was unjustified and that American Home was liable under the bond for the full amount due to G. Reyes' failure to comply with the subcontract.

Court's Decision and Legal Reasoning:

The Supreme Court affirmed the decisions of the lower courts, holding that American Home was liable for the full amount of the surety bond. The Court clarified that the bond was issued to guarantee the advance payment made by FF Cruz to G. Reyes, and that G. Reyes had indeed failed to fulfill its obligations under the subcontract by not completing the required dredging work.

The Court emphasized that the conditions for American Home's liability were met: the advance payment remained unpaid, and G. Reyes did not comply with the subcontract terms. The Court rejected American Home's argument regarding the abandonment of the project, stating that G. Reyes' failure to complete the work constituted a breach of contract, which triggered American Home's liability under the bond.

The Court also noted that American Home's claims regarding reimbursement were not substantiated by evidence, and thus the lower courts' findings were upheld. The Court reiterated that factual findings of the trial court, especially when affirmed by the CA, are generally binding and not subject to review.

Significant Legal Principles Established:

  1. A surety bond can serve as a guarantee for advance payments, and the surety's liability is triggered by the principal's failure to comply with contractual obligations.
  2. The liability of a surety is joint and several, meaning that the surety can be held liable for the full amount of the bond regardless of the principal's actions.
  3. Points of law and arguments not raised during the trial cannot be introduced for the first time on appeal, emphasizing the importance of presenting all relevant issues at the trial level.