5 CCC PDF

5/7/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 759
G.R. No. 156162. June 22, 2015.*

CCC INSURANCE CORPORATION, petitioner, vs.
KAWASAKI STEEL CORPORATION, F.F. MAÑACOP
CONSTRUCTION CO., INC., and FLORANTE F.
MAÑACOP, respondents.
Civil Law; Suretyship; Words and Phrases; Jurisprudence

also defines a contract of suretyship 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 person called the obligee.—The statutory
definition of suretyship is found in Article 2047 of the Civil Code,
thus: Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If a person
binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract is called a suretyship. (Emphasis
supplied) Jurisprudence also defines a contract of suretyship 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 person called the
obligee. Specifically, suretyship is a contractual relation resulting
from an agreement whereby one person, the surety, engages to be
answerable for the debt, default or miscarriage of another, known
as the principal.” The Court expounds that “a surety’s liability is
joint and several, limited to the amount of the bond, and
determined strictly by the terms of contract of suretyship in
relation to the principal contract between the obligor and the
obligee. It bears stressing, however, that although the contract of
suretyship is secondary to the principal contract, the surety’s
liability to the obligee is nevertheless direct, primary, and
absolute.”
Same; Contracts; Principle of Relativity of Contracts;
According to the principle of relativity of contracts in Article 1311
of the Civil Code, a contract takes effect only between the parties,
their assigns, and heirs; except when the contract contains a
stipulation in favor of
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_______________
* FIRST DIVISION.
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a third person, which gives said person the right to demand

fulfillment of said stipulation.—According to the principle of
relativity of contracts in Article 1311 of the Civil Code, a contract
takes effect only between the parties, their assigns, and heirs;
except when the contract contains a stipulation in favor of a third
person, which gives said person the right to demand fulfillment of
said stipulation. In this case, the Surety and Performance Bonds
are enforceable by and against the parties FFMCCI (the obligor)
and CCCIC (the surety), as well as the third person Kawasaki
(the obligee) in whose favor said bonds had been explicitly
constituted; while the related Consortium Agreement binds the
parties Kawasaki and FFMCCI. Since the Republic is neither a
party to the Surety and Performance Bonds nor the Consortium
Agreement, any action or omission on its part has no effect on the
liability of CCCIC under said bonds.
Same; Novation; It is well-settled that novation is never
presumed — novatio non praesumitur.—It is well-settled that
novation is never presumed — novatio non praesumitur. As the
party alleging novation, the onus of showing clearly and
unequivocally that novation had indeed taken place rests on
CCCIC. The Court laid down guidelines in establishing novation,
viz.: Novation is never presumed, and the animus novandi,
whether totally or partially, must appear by express agreement of
the parties, or by their acts that are too clear and unequivocal to
be mistaken. The extinguishment of the old obligation by the new
one is a necessary element of novation which may be effected
either expressly or impliedly. The term “expressly” means that
the contracting parties incontrovertibly disclose that their object
in executing the new contract is to extinguish the old one. Upon
the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an
incompatibility between the two contracts. While there is really
no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone
for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations. There
are two ways which could indicate, in fine, the presence of
novation and thereby produce the effect of extinguishing an

obligation by another which substitutes the same. The first is
when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand to-
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gether, each one having its independent existence. If they

cannot, they are incompatible and the latter obligation novates
the first. Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility
must take place in any of the essential elements of the obligation,
such as its object, cause or principal conditions thereof; otherwise,
the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.
Same; Same; Subrogation; In Autocorp Group v. Intra Strata
Assurance Corporation, 556 SCRA 250 (2008), the Court ruled
that: The benefit of subrogation, an extinctive subjective novation
by a change of creditor, which “transfers to the person subrogated,
the credit and all the rights thereto appertaining, either against
the debtor or against third persons,” is granted by the Article 2067
of the Civil Code only to the “guarantor (or surety) who pays.”—
Pursuant to Articles 2066 and 2067, the rights of CCCIC as
surety to indemnification and subrogation will arise only after it
has paid its obligations to Kawasaki as the debtor-obligee. In
Autocorp Group v. Intra Strata Assurance Corporation, 556 SCRA
250 (2008), the Court ruled that: The benefit of subrogation,
an extinctive subjective novation by a change of creditor, which
“transfers to the person subrogated, the credit and all the rights
thereto appertaining, either against the debtor or against third
persons,” is granted by the Article 2067 of the Civil Code
only to the “guarantor (or surety) who pays.” (Emphases
supplied, citations omitted) In the present case, CCCIC has yet to
pay Kawasaki.
Remedial Law; Civil Procedure; Domestic Corporations;
Service of Summons; Rule 14, Section 13 of the 1964 Rules of
Court, which was then in force, allowed the service of summons
upon a director of a private domestic corporation.—Rule 14,
Section 13 of the 1964 Rules of Court, which was then in force,
allowed the service of summons upon a director of a private
domestic corporation: Sec. 13. Service upon private domestic
corporation or partnership.—If the defendant is a corporation

organized under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager,
secretary, cashier, agent, or any of its directors. The
aforementioned rule does not require that service on the private
domestic corporation be served at its principal office in order for
the court to acquire jurisdiction over the same. The Court, in
Talsan Enterprises, Inc. v. Baliwag Transit, Inc., 310 SCRA 156
(1999),
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citing Baltazar v. Court of Appeals, 168 SCRA 354 (1988),

affirmed that: [S]ervice on respondent’s bus terminal at the
address stated in the summons and not in its main office in
Baliwag do not render the service of summons invalid. In Artemio
Baltazar v. Court of Appeals, we held: “The regular mode, in other
words, of serving summons upon a private Philippine Corporation
is by personal service upon one of the officers of such corporation
identified in Section 13. Ordinarily, such personal service may be
expected to be made at the principal office of the corporation.
Section 13, does not, however, impose such requirement,
and so personal service upon the corporation may be
effected through service upon, for instance, the president
of the corporation at his office or residential address.”
x x x. In fine, the service of summons upon respondent Baliwag
Transit is proper. Consequently, the trial court validly acquired
jurisdiction over respondent Baliwag. (Citation omitted) Hence,
the personal service of the Alias Summons on an FFMCCI
director was sufficient for the RTC to acquire jurisdiction over
FFMCCI itself.
Same; Same; Cause of Action; Words and Phrases; A cause of
action is defined as the act or omission by which a party violates a
right of another.—Nevertheless, the Third-Party Complaint filed
by CCCIC against FFMCCI and Mañacop must be dismissed on
the ground of lack of cause of action. A cause of action is defined
as the act or omission by which a party violates a right of another.
The essential elements of a cause of action are: (a) the existence of
a legal right in favor of the plaintiff; (b) a correlative legal duty of
the defendant to respect such right; and (c) an act or omission by
such defendant in violation of the right of the plaintiff with a
resulting injury or damage to the plaintiff for which the latter

may maintain an action for the recovery of relief from the
defendant.
Attorney’s Fees; Article 2208(2) of the Civil Code allows the
award of attorney’s fees “[w]hen the defendant’s act or omission
has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest[.]”—Article 2208(2) of the Civil
Code allows the award of attorney’s fees “[w]hen the defendant’s
act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest[.]” In
Servicewide Specialists, Incorporated v. Court of Appeals, 256
SCRA 649 (1996), the Court declared that: Article 2208 of the
Civil Code allows attorney’s fees to be awarded by a court when
its claimant is compelled to
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litigate with third persons or to incur expenses to protect his

interest by reason of an unjustified act or omission on the part of
the party from whom it is sought. To be sure, private respondents
were forced to litigate to protect their rights but as we have
previously held: “where no sufficient showing of bad faith would
be reflected in a party’s persistence in a case other than an
erroneous conviction of the righteousness of his cause, attorney’s
fee shall not be recovered as cost.”
Bad Faith; Words and Phrases; Bad faith has been defined as
a breach of a known duty through some motive of interest or ill
will.—Bad faith has been defined as “a breach of a known duty
through some motive of interest or ill will. It must, however, be
substantiated by evidence. Bad faith under the law cannot be
presumed, it must be established by clear and convincing
evidence.” There is no evidence in this case to show bad faith on
the part of CCCIC. CCCIC, in refusing the claim of Kawasaki,
was merely acting based on its belief in the righteousness of its
defense. Hence, even though Kawasaki was compelled to litigate
to enforce its claim against CCCIC, the award of attorney’s fees is
not proper.
Interest Rates; The Supreme Court (SC), in Nacar v. Gallery
Frames, 703 SCRA 439 (2013), modified the guidelines in
imposing interests, taking into account Bangko Sentral ng
Pilipinas-Monetary Board (BSP-MB) Resolution No. 796 dated
May 16, 2013 and Circular No. 799, Series of 2013, which fixed
the legal rate at six percent (6%) per annum effective July 1, 2013.
—The Court, in Nacar v. Gallery Frames, 703 SCRA 439 (2013),
modified the guidelines in imposing interests, taking into account
Bangko Sentral ng Pilipinas-Monetary Board Resolution No. 796
dated May 16, 2013 and Circular No. 799, Series of 2013, which
fixed the legal rate at 6% per annum effective July 1, 2013. In the
absence of stipulated interest in the present case, the Court
imposes upon the amounts covered by the Surety and
Performance Bonds the legal rate of 12% per annum from
September 15, 1989, the date of demand, until June 30, 2013; and
then the legal rate of 6% per annum from July 1, 2013 until full
payment of the same.
PETITION for review on certiorari of the decision and

resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
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Buñag & Uy Law Offices for petitioner.

E.B. Astudillo & Associates for respondent Kawasaki.
LEONARDO-DE CASTRO, J.:

Assailed in this Petition for Review on Certiorari are: (1)
the Decision1 dated May 30, 2002 of the Court of Appeals in
C.A.-G.R. CV No. 54066, which reversed and set aside the
Decision2 dated May 2, 1996 of the Regional Trial Court
(RTC), Makati City, Branch 66, and held petitioner CCC
Insurance Corporation (CCCIC) liable under its Surety and
Performance Bonds to respondent Kawasaki Steel
Corporation (Kawasaki); and (2) the Resolution3 dated
November 14, 2002 of the appellate court in the same case
which denied the Motion for Reconsideration of CCCIC.
The antecedents of this case are as follows:
On August 16, 1988, Kawasaki, represented by its
Manager, Yoshimitsu Hosoya, and F.F. Mañacop
Construction Company, Inc. (FFMCCI), represented by its
President, Florante F. Mañacop (Mañacop), executed a
Consortium Agreement for Pangasinan Fishing Port
Network Project (Consortium Agreement).4 Kawasaki and
FFMCCI formed a consortium (Kawasaki-FFMCCI
Consortium) for the purpose of contracting with the
Philippine Government for the construction of a fishing
port network in Pangasinan (Project). According to their

Consortium Agreement, Kawasaki and FFMCCI undertook
to perform and accomplish their respective and specific
portions of work in the intended contract with the
Philippine Government.5
_______________
1 Rollo, pp. 37-49; penned by Associate Justice Perlita J. Tria-Tirona,

with Associate Justices Buenaventura J. Guerrero and Rodrigo V. Cosico,
concurring.
2 CA Rollo, pp. 71-79; penned by Judge Eriberto U. Rosario, Jr.
3 Rollo, pp. 51-54.
4 Id., at pp. 64-87.
5 Article 5, Consortium Agreement.
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The Project was awarded to the Kawasaki-FFMCCI

Consortium for the contract price of P62,000,441.00,
33.37% of which or P20,692,026.00 was the price of work of
FFMCCI. On October 4, 1988, the Republic of the
Philippines (Republic), through the Department of Public
Works and Highways (DPWH), represented by former
Secretary Romulo M. del Rosario, as owner, and the
Kawasaki-FFMCCI Consortium, represented by Shigeru
Kohda, as contractor, entered into a Contract Agreement
entitled Stage I-A Construction of Pangasinan Fishing Port
Network (Construction Contract).6
In accordance with Article 10 of the Consortium
Agreement,7 “Consortium Leader” Kawasaki, on behalf of
the Consortium, secured from the Philippine Commercial
International Bank (PCIB) Letter of Credit No. 38-001-
1836178 in the amount of P6,200,044.10 in favor of DPWH,
available from September 9, 1988 to November 19, 1990.
Said Letter of
6 Rollo, pp. 95-98.

7 ARTICLE 10 – BONDS
10.1 The CONSORTIUM LEADER shall arrange, at their own cost, all
necessary bonds or guarantees as required under the CONTRACT on
behalf of the CONSORTIUM. MAÑACOP shall, at its own cost, furnish
the CONSORTIUM LEADER with a suitable counter guarantees of its
advance payment under the CONTRACT and the performance of its

PORTION OF WORK in the amount of fifteen (15%) percent (in the case
of the repayment guarantee for the advance) and ten (10%) percent (in the
case of the performance guarantee) of the price of its PORTION OF THE
WORK.
10.2 If the EMPLOYER exercises its right on the bonds or guarantees
furnished by the CONSORTIUM LEADER, the PARTIES shall decide the
respective responsibilities according to the provisions of this
AGREEMENT and the necessary reimbursement or compensation shall be
made also according to the provisions of this AGREEMENT. (Rollo, p. 79)
8 Records (Vol. I), p. 130.
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Credit guaranteed the faithful performance by

Kawasaki-FFMCCI Consortium of its obligation under the
Construction Contract.
The Republic made an advance payment for the Project
to the Kawasaki-FFMCCI Consortium in the amount of
P9,300,066.15, representing 15% of the contract price of
P62,000,441.00.
For the release of its share in the advance payment
made by the Republic, and also pursuant to Article 10 of
the Consortium Agreement, FFMCCI secured from CCCIC
the following bonds in favor of Kawasaki: (a) Surety Bond
No. B-88/111919 in the amount of P3,103,803.90
(equivalent to 15% of the price of work of FFMCCI),
effective from October 26, 1988 to October 26, 1989, to
counter-guarantee the amount of advance payment
FFMCCI would receive from Kawasaki; and (b)
Performance Bond B-88/1119310 in the amount of
P2,069,202.60 (equivalent to 10% of the price of work of
FFMCCI), effective from October 27, 1988 to October 27,
1989, to guarantee completion by FFMCCI of its scope of
work in the Project. In turn, FFMCCI and Mañacop
executed two Indemnity Agreements11 promising to
compensate CCCIC for any damages the insurance
company might incur from issuing the Surety and
Performance Bonds.
In two letters dated October 27, 1998,12 FFMCCI
submitted the Surety and Performance Bonds to Kawasaki
and requested Kawasaki to release the advance payment in
the amount of P3,103,803.90. FFMCCI eventually received
the amount of advance payment it requested on a

staggered basis.13
_______________
9 Rollo, pp. 99-100.

10 Id., at pp. 101-102.
11 Records (Vol. I), pp. 220-223.
12 Id., at pp. 46-47.
13 Records (Vol. IV), pp. 59-60.
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The Project commenced in November 1988.14 Sometime

in April 1989, FFMCCI ceased performing its work in the
Project after suffering financial problems and/or business
reverses. After discussions, Kawasaki and FFMCCI then
executed a new Agreement15 on August 24, 1989 wherein
Kawasaki recognized the “Completed Portion of Work” of
FFMCCI as of April 25, 1989, and agreed to take over the
unfinished portion of work of FFMCCI, referred to as
“Transferred Portion of Work.” Kawasaki and FFMCCI
further agreed that “[a]ny profit or benefit arising from the
performance by [Kawasaki] of the Transferred Portion of
Work shall accrue to [Kawasaki].”
In a letter dated September 14, 1989,16 Kawasaki
informed CCCIC about the cessation of operations of
FFMCCI, and the failure of FFMCCI to perform its
obligations in the Project and repay the advance payment
made by Kawasaki. Consequently, Kawasaki formally
demanded that CCCIC, as surety, pay Kawasaki the
amounts covered by the Surety and Performance Bonds.
Because CCCIC did not act upon its demand, Kawasaki
filed on November 6, 1989 before the RTC a Complaint17
against CCCIC to collect on Surety Bond No. B-88/11191
and Performance Bond No. B-88/11193.
In its Answer with Counterclaims,18 CCCIC denied any
liability on its Surety and Performance Bonds on the
following grounds: (a) the rights of Kawasaki under the
Surety and Performance Bonds had not yet accrued since
the said Bonds were mere counter-guarantees, for which
CCCIC could only be held liable upon the filing of a claim
by the Republic against the Kawasaki-FFMCCI
Consortium; (b) Kawasaki and FFMCCI, without the
consent of CCCIC, executed a new Agreement dated

August 24, 1989 novating the terms of the
_______________
14 TSN, March 18, 1993, p. 32.

15 Records (Vol. I), pp. 165-167.
16 Id., at p. 50.
17 Id., at pp. 1-9.
18 Id., at pp. 157-164.
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Consortium Agreement, which prevented CCCIC from

being subrogated to the right of Kawasaki against
FFMCCI; (c) Kawasaki, in completing the Transferred
Portion of Work was correspondingly compensated, which
negated any allegation of loss on the part of Kawasaki; and
(d) the obligation of CCCIC was extinguished when the
Republic granted the Kawasaki-FFMCCI Consortium an
extension of time to complete the Project, without the
consent of CCCIC.
CCCIC subsequently filed on August 19, 1991 before the
RTC a Third-Party Complaint19 against FFMCCI and its
President Mañacop based on the two Indemnity
Agreements which FFMCCI and Mañacop executed in
favor of CCCIC. The RTC issued summonses but FFMCCI
and Mañacop failed to file any responsive pleading to the
Third-Party Complaint of CCCIC. Upon motion of CCCIC,
the RTC issued an Order20 dated December 2, 1991
declaring FFMCCI and Mañacop in default.
After trial, the RTC rendered a Decision on May 2, 1996
dismissing the Complaint of Kawasaki and the
counterclaim of CCCIC. The RTC agreed with CCCIC that
the Surety and Performance Bonds issued by the insurance
company were mere counter-guarantees and the cause of
action of Kawasaki based on said Bonds had not yet
accrued. Since the Republic did not exercise its right to
claim against the PCIB Letter of Credit No. 38-
001-183617, nor compelled Kawasaki to perform the
unfinished work of FFMCCI, Kawasaki could not claim
indemnification from CCCIC. Moreover, the RTC, citing
Article 2079 of the Civil Code, ruled that the obligations of
CCCIC under the Surety and Performance Bonds were
extinguished when the Republic granted the Kawasaki-

FFMCCI Consortium a 43-day extension to finish the
Project, absent the consent of CCCIC. The RTC found no
deliberate intent on the part of Kawasaki to cause
prejudice to CCCIC, so it did
_______________
19 Id., at pp. 207-210.

20 Id., at p. 271.
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not grant the counterclaims for moral and exemplary

damages and attorney’s fees of CCCIC against Kawasaki.
Kawasaki appealed before the Court of Appeals
assigning the following errors on the part of the RTC:
I. THE COURT A QUO GROSSLY ERRED IN HOLDING

THAT [CCCIC] CAN BE HELD LIABLE TO [Kawasaki] UNDER
THE SUBJECT BONDS ONLY “IF THE GOVERNMENT
EXERCISES ITS RIGHTS AGAINST THE GUARANTEE-
BONDS ISSUED TO IT BY [Kawasaki]” ON THE THEORY
ADVANCED BY [CCCIC], WHICH THE COURT A QUO FULLY
EMBRACED AND ADOPTED, THAT THE BONDS ARE MERE
“COUNTER-GUARANTEES.”
II. THE COURT A QUO GROSSLY ERRED IN HOLDING
THAT THE EXTENSION GRANTED BY THE GOVERNMENT
TO THE CONSORTIUM FOR THE CONSTRUCTION OF THE
PANGASINAN FISHING PORT NETWORK PROJECT
EXTINGUISHED THE LIABILITY OF [CCCIC].
III. THE COURT A QUO GROSSLY ERRED IN HOLDING
THAT ARTICLE 2079 OF THE CIVIL CODE OF THE
PHILIPPINES APPLIES TO THE CASE AT BAR. IN A LONG
LINE OF DECISIONS, THE SUPREME COURT HAS HELD
THAT THE RULE OF “STRICTISSIMI JURIS” DOES NOT
APPLY TO SURETY COMPANIES SUCH AS [CCCIC] HEREIN.
IV. THE SUBJECT BONDS ARE FIXED UNTIL OCTOBER
26 AND 27, 1989 RESPECTIVELY WHILE THE ORIGINAL
PERIOD OF THE CONTRACT WITH THE GOVERNMENT,
THE PERFORMANCE OF WHICH BY [CCCIC] ARE
PRECISELY GUARANTEED BY THESE BONDS, IS UNTIL
DECEMBER 30, 1989. ON THE OTHER HAND, THE DEFAULT
BY [FFMCCI] WHICH THE BONDS GUARANTEED AGAINST
OCCURRED ON [OR] ABOUT AUGUST 24, 1989. THEREFORE,

IRRESPECTIVE OF WHETHER THERE WAS AN EXTENSION
OR NOT AT THE END OF THE ORIGINAL CONTRACT
PERIOD AND IRRESPECTIVE
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OF WHETHER THIS EXTENSION IS KNOWN OR

UNKNOWN TO [CCCIC], THE LIABILITY THAT IT BOUND
ITSELF UNTO UNDER THE BONDS IS VERY CLEARLY AND
UNEQUIVOCALLY FIXED UNTIL OCTOBER 26 AND 27, 1989
RESPECTIVELY. THEREFORE, ARTICLE 2079 WILL NOT
APPLY. HENCE, THE COURT A QUO GROSSLY ERRED IN
HOLDING OTHERWISE.21

The Court of Appeals, in its Decision dated May 30,
2002, reversed the appealed RTC Decision, reasoning as
follows:
From the language of the aforesaid bonds, it is clear that, in

the case of the surety bond, the same was posted, jointly and
severally, by [FFMCCI] and CCCIC “to fully and faithfully
guarantee the repayment of the down payment made by the
principal ([FFMCCI]) to the obligee (KAWASAKI) in connection
with the construction of the Pangasinan Fishing Port Network
Project at Pangasinan” subject only to the condition that “the
liability of the [herein] surety shall in no case exceed the amount
of Pesos: THREE MILLION ONE HUNDRED THREE
THOUSAND EIGHT HUNDRED THREE & 90/100
(P3,103,803.90) Philippine currency; and in the case of the
performance bond, the same was posted, jointly and severally by
[FFMCCI] and CCCIC “to guarantee the full and faithful
performance of the principal ([FFMCCI]) of its obligation in
connection with the project for the construction of the Pangasinan
Fishing Port Network located at Pangasinan in accordance with
the plans and specifications of the contract” subject only to the
condition that “the liability of the [herein] surety shall in no case
exceed the amount of Pesos: TWO MILLION SIXTY-NINE
THOUSAND TWO HUNDRED TWO & 60/100 (P2,069,202.60)
Philippine currency.”
The right of KAWASAKI as the obligee/creditor of the said
bonds was not made subject to any other condition expressly so
provided in the Consortium Agreement,
_______________
21 CA Rollo, pp. 42-44.
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which was the reason for the bonds posted by [FFMCCI] and
CCCIC, or in the subject bonds themselves.
It is not provided, neither in the Consortium Agreement nor in
the subject bonds themselves that before KAWASAKI may
proceed against the bonds posted by [FFMCCI] and CCCIC, the
Philippine government as employer must first exercise its rights
against the bond issued in its favor by the consortium.
Hence, this Court finds that the court a quo did err in ruling
that “[u]nder the Consortium Agreement, the bonds are counter-
guarantees which only guarantee the plaintiff KAWASAKI for
reimbursement to the extent of the value of the bonds in case the
employer (government) successfully exercised its rights under the
bonds issued to it by plaintiff KAWASAKI”; and that
“[c]onsidering that the government did not exercise its rights
against the bond issued to it by the Consortium Leader, it follows
that the Consortium Leader cannot collect from the counter-
guarantees furnished by [FFMCCI].”
Time and again, the Supreme Court has stressed the rule that
a contract is the law between the parties, and courts have no
choice but to enforce such contract so long as they are not
contrary to law, morals, good customs or public policy.
With respect to the second, third and fourth issues raised,
suffice it to say that this Court finds Article 2079 of the Civil Code
of the Philippines not applicable.
[Kawasaki] claims that since the issue in this case is the
liability of CCCIC to KAWASAKI, the extension of forty-three (43)
days within which to complete the Pangasinan Fishing Port
Network Project granted by the Philippine government, who is
not a party to the two (2) bonds posted by [FFMCCI] and CCCIC,
to the consortium, does not absolve CCCIC’s liabilities to
KAWASAKI under the subject bonds.
We agree.
As stated earlier, the parties insofar as the surety bond and
performance bond are concerned are: KAWA-
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SAKI, as obligee, [FFMCCI], as principal; and CCCIC, as

surety.
Considering therefore that the extension of time within which
to complete the construction of the Pangasinan Fishing Port
Network Project was granted by the Philippine government, who
is not the creditor of the bonds, this Court finds that Article 2079
of the Civil Code of the Philippines does not apply and the
extension of time granted by the Philippine government, contrary
to the ruling of the trial court, does not absolve the surety of its
liabilities to KAWASAKI under the subject bonds.
The principle of relativity of contracts provides that contracts
can only bind the parties who entered into it.
Finally, this Court finds the award of attorney’s fees in favor of
the appellant warranted under the circumstance, pursuant to
paragraph (2) of Article 2208 of the Civil Code of the
Philippines.22

In the end, the Court of Appeals decreed:
WHEREFORE, the instant appeal is hereby GRANTED.

Accordingly, the assailed decision of the Regional Trial Court of
Makati City, Branch 66, is hereby REVERSED and SET ASIDE.
CCC Insurance Corporation is hereby ordered to pay
KAWASAKI the following:
1. The amount of P3,103,803.90 representing its liability to
Kawasaki Steel Corporation under Surety Bond No. B-88/11191,
plus legal interest at the rate of 12% per annum computed from
15 September 1989, until fully paid;
2. The amount of P2,069,202.80 representing its liability to
Kawasaki Steel Corporation under Performance Bond No. B--
88/11193, plus legal interest at the rate of 12% per annum
computed from 15 September 1989, until fully paid; and
_______________
22 Rollo, pp. 46-48.
346

Corporation
3. 15% of the total amount due as and for attorney’s fees.23

In its Resolution dated November 14, 2002, the Court of
Appeals denied the Motion for Reconsideration of CCCIC.
However, in the same Resolution, the appellate court
partially granted the Third-Party Complaint of CCCIC by
holding Mañacop liable under the Indemnity Agreements
he executed in favor of the insurance company, while
declaring the RTC was without jurisdiction over FFMCCI
due to invalid service of summons. The Court of Appeals
ultimately resolved:
WHEREFORE, judgment is hereby rendered in favor of third

party plaintiff CCC Insurance Corporation and against third
party defendant Florante F. Mañacop, ordering the latter to
indemnify the former the total amount paid by the former to
Kawasaki Steel Corporation representing CCC Insurance
Corporation’s liabilities under Surety Bond No. B-88/11191 and
Performance Bond No. B-88/11193 and to pay CCC Insurance
Corporation 25% of the total amount due, as and for attorney’s
fees.24

In the instant Petition for Review on Certiorari, CCCIC
assails the aforementioned Decision and Resolution of the
Court of Appeals on six grounds, viz.:
A.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED
TO CONSIDER THE TRUE NATURE OF THE TRANSACTION
BETWEEN THE PARTIES AND THE TRUE NATURE OF A
COUNTER-GUARANTEE.
_______________
23 Id., at p. 48.
24 Id., at p. 54.
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B.
THE COURT OF APPEALS, CONTRARY TO LAW, FAILED
TO APPRECIATE THE APPLICABILITY OF ARTICLE 2079 OF
THE CIVIL CODE, WHICH PROVIDES THAT AN EXTENSION
GRANTED TO THE DEBTOR BY THE CREDITOR WITHOUT
THE CONSENT OF THE GUARANTOR EXTINGUISHES THE

GUARANTY.
C.
THE COURT OF APPEALS, CONTRARY TO LAW,
ERRONEOUSLY FAILED TO CONSIDER THE FACT THAT
KAWASAKI AND FFMCCI HAVE NOVATED THEIR
ORIGINAL AGREEMENT WITHOUT THE KNOWLEDGE AND
CONSENT OF CCCIC, THEREBY RELEASING THE LATTER
FROM ANY OBLIGATION UNDER THE BONDS IT ISSUED.
D.
ERRONEOUSLY RENDERED CCCIC LIABLE TO PAY THE
FULL AMOUNT OF THE SURETY AND PERFORMANCE
BONDS DESPITE THE FACT THAT FFMCCI WAS ABLE TO
PARTIALLY EXECUTE ITS PORTION OF THE WORK AND
THAT KAWASAKI HAD BEEN FULLY COMPENSATED FOR
TAKING OVER THE UNFINISHED PORTION.
E.
ERRONEOUSLY AWARDED ATTORNEY’S FEES TO
KAWASAKI UNDER PARAGRAPH 2 OF ARTICLE 2208 OF
THE CIVIL CODE.
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Corporation
F.
ERRONEOUSLY RULED THAT THERE WAS NO VALID
SERVICE OF SUMMONS UPON FFMCCI.25

CCCIC avers that its liabilities under the Surety and
Performance Bonds are directly linked with the obligation
of the Kawasaki-FFMCCI Consortium to finish the Project
for the Republic, so that its liability as surety of FFMCCI
will only arise if the Republic made a claim on the PCIB
Letter of Credit furnished by Kawasaki, on behalf of the
Consortium. Since the Republic has not exercised its right
against said Letter of Credit, Kawasaki does not have a
cause of action against CCCIC.
CCCIC also maintains that its obligations under the
Surety and Performance Bonds had been extinguished
when (a) the Republic extended the completion period for
the Project upon the request of Kawasaki but without the
knowledge or consent of CCCIC, based on Article 2079 of

the Civil Code; and (b) when Kawasaki and FFMCCI
executed the Agreement dated August 24, 1989, without
the consent of CCCIC, there being a novation of the
Consortium Agreement.
CCCIC further argues that when Kawasaki, under the
Agreement dated August 24, 1989, voluntarily took over
the Transferred Portion of Work from FFMCCI, it resulted
in the reduction of revenue of FFMCCI on which CCCIC
relied upon as a source of indemnification. CCCIC
additionally posits that Kawasaki already received
compensation for doing the Transferred Portion of Work, so
the Court of Appeals had no basis for still ordering
Kawasaki to pay the full value of the Surety and
Performance Bonds, plus interest.
Moreover, CCCIC contends that the Court of Appeals
erred in awarding attorney’s fees in favor of Kawasaki
based on
_______________
25 Id., at pp. 17-18.
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Corporation
paragraph 2 of Article 2208 of the Civil Code as it is not

a sound policy to place a penalty on the right to litigate.
Lastly, CCCIC insists that there was proper service of
summons upon FFMCCI, through one of its directors, as
authorized by the Rules of Court.
The Petition is partly meritorious.

The liability of CCCIC under the Surety and
Performance Bonds is dependent on the fulfillment
and/or nonfulfillment of the obligation of FFMCCI to
KAWASAKI under the Consortium Agreement.

The statutory definition of suretyship is found in Article
2047 of the Civil Code, thus:
Art. 2047. By guaranty a person, called the guarantor, binds

himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,

the provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
(Emphasis supplied)

Jurisprudence also defines a contract of suretyship 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
person called the obligee. Specifically, suretyship is a
contractual relation resulting from an agreement whereby
one person, the surety, engages to be answerable for the
debt, default or miscarriage of another, known as the
principal.”26 The Court expounds
_______________
26 Visayan Surety & Insurance Corporation v. Court of Appeals, 417

Phil. 110, 116-117; 364 SCRA 631, 636 (2001).
350

Corporation
that “a surety’s liability is joint and several, limited to

the amount of the bond, and determined strictly by the
terms of contract of suretyship in relation to the principal
contract between the obligor and the obligee. It bears
stressing, however, that although the contract of
suretyship is secondary to the principal contract, the
surety’s liability to the obligee is nevertheless direct,
primary, and absolute.”27
At the outset, the Court ascertains that there are two
principal contracts in this case: (1) the Consortium
Agreement wherein Kawasaki and FFMCCI agreed to
jointly enter into a contract with the Republic for the
Project, each assuming the performance of specific scopes of
work in said Project; and (2) the Construction Contract
whereby the Republic awards the Project to the Kawasaki-
FFMCCI Consortium. While there is a connection between
these two contracts, they are each distinguishable from and
enforceable independently of one another: the first governs
the rights and obligations between Kawasaki and FFMCCI,
while the second covers contractual relations between the
Republic and the Kawasaki-FFMCCI Consortium. The
Surety and Performance Bonds from CCCIC guaranteed

the performance by FFMCCI of its obligations under the
Consortium Agreement; whereas the Letter of Credit from
PCIB warranted the completion of the Project by the
Kawasaki-FFMCCI Consortium. At the crux of the instant
controversy are the Surety and Performance Bonds issued
by CCCIC in relation to the Consortium Agreement.
FFMCCI secured the Surety and Performance Bonds
from CCCIC in compliance with Article 10 of the
Consortium Agreement which provided:
ARTICLE 10 – BONDS
10.1 The CONSORTIUM LEADER [Kawasaki] shall arrange,
at [its] own cost, all necessary bonds or
_______________
27 The Manila Insurance Company, Inc. v. Amurao, G.R. No. 179628,

January 16, 2013, 688 SCRA 609, 616-617.
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guarantees as required under the CONTRACT on behalf of the

CONSORTIUM. [FFMCCI] shall, at its own cost, furnish the
CONSORTIUM LEADER [Kawasaki] with a suitable counter
guarantees of its advance payment under the CONTRACT and
the performance of its PORTION OF WORK in the amount of
fifteen (15%) percent (in the case of the repayment guarantee for
the advance) and ten (10%) percent (in the case of the
performance guarantee) of the price of its PORTION OF THE
WORK.
10.2 If the EMPLOYER [Republic] exercises its right on the
bonds or guarantees furnished by the CONSORTIUM LEADER,
the PARTIES shall decide the respective responsibilities
according to the provisions of this AGREEMENT and the
necessary reimbursement or compensation shall be made also
according to the provisions of this AGREEMENT.28

Pertinent portions of Surety Bond No. B-88/11191 read:
SURETY BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x,
as principal, and CCC Insurance Corporation, x x x, as SURETY,
are held and firmly bound unto KAWASAKI STEEL

CORPORATION, hereinafter referred to as the OBLIGEE: in the
sum of PESOS: THREE MILLION ONE HUNDRED THREE
THOUSAND EIGHT HUNDRED THREE & 90/100 ONLY
(P3,103,803.90), Philippine currency, for the payment of which,
well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally,
firmly bound from notice of acceptance, by these presents.
_______________
28 Rollo, p. 79.
352

Corporation
THE CONDITIONS OF THIS OBLIGATION ARE AS

FOLLOWS:
TO FULLY AND FAITHFULLY GUARANTEE THE
REPAYMENT OF THE DOWNPAYMENT MADE BY THE
PRINCIPAL TO THE OBLIGEE IN CONNECTION WITH THE
CONSTRUCTION OF THE PANGASINAN FISHING PORT
NETWORK PROJECT AT PANGASINAN; AND
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE
HEREIN SURETY SHALL IN NO CASE EXCEED THE
AMOUNT OF PESOS: THREE MILLION ONE HUNDRED
THREE THOUSAND EIGHT HUNDRED THREE & 90/100
ONLY (P3,103,803.90) PHILIPPINE CURRENCY.
x x x x
WHEREAS, the said OBLIGEE requires said Principal to give
a good and sufficient bond in the above stated sum to secure the
full and faithful performance on his part of said
UNDERTAKING.
NOW, THEREFORE, if the above bounden principal shall in
all respects duly and fully observe and perform all and singular
the aforesaid covenants, conditions and agreements to the true
intent and meaning thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on
October 26, 1989 and the Surety does not assume responsibility
for any liability incurred or created after said date. Any claims
against this bond must be presented to the Surety in writing not
later than ten (10) days after said expiry date; otherwise, failure
to do so shall forthwith release the Surety from all liabilities
under this bond and shall be a bar to any court action against it
and which right to sue is hereby waived by the Obligee after the
lapse of said period of ten (10) days above cited.29 (Emphases
supplied)
_______________
29 Id., at p. 99.
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Corporation
Performance Bond No. B-88/11193 contains the

following terms and conditions:
PERFORMANCE BOND
KNOW ALL MEN BY THESE PRESENTS:
That we, F.F. MAÑACOP CONSTRUCTION CO., INC., x x x,
as principal, and CCC Insurance Corporation, x x x, as SURETY,
are held and firmly bound unto KAWASAKI STEEL
CORPORATION, hereinafter referred to as the OBLIGEE: in the
sum of PESOS: TWO MILLION SIXTY-NINE THOUSAND TWO
HUNDRED TWO & 60/100 ONLY (P2,069,202.60), Philippine
currency, for the payment of which, well and truly to be made, we
bind ourselves, our heirs, executors, administrators, successors
and assigns, jointly and severally, firmly bound from notice of
acceptance, by these presents.
THE CONDITIONS OF THIS OBLIGATION ARE AS
FOLLOWS:
TO GUARANTEE THE FULL AND FAITHFUL
PERFORMANCE OF THE PRINCIPAL OF ITS
OBLIGATION IN CONNECTION WITH THE PROJECT
FOR THE CONSTRUCTION OF PANGASINAN FISHING
PORT NETWORK LOCATED AT PANGASINAN IN
ACCORDANCE WITH THE PLANS AND SPECIFICATION OF
THE CONTRACT; AND
PROVIDED, HOWEVER, THAT THE LIABILITY OF THE
HEREIN SURETY SHALL IN NO CASE EXCEED THE
AMOUNT OF PESOS: TWO MILLION SIXTY-NINE
THOUSAND TWO HUNDRED TWO & 60/100 ONLY
(P2,069,202.60) PHILIPPINE CURRENCY.
x x x x
WHEREAS, the said OBLIGEE requires said Principal to give
a good and sufficient bond in the above stated sum to secure the
full and faithful performance on his part of said
UNDERTAKING.
354

Corporation
NOW, THEREFORE, if the above bounden principal shall in

all respects duly and fully observe and perform all and singular
the aforesaid covenants, conditions and agreements to the true
intent and meaning thereof, then this obligation shall be null and
void, otherwise to remain in full force and effect.
The liability of the Surety under this bond shall expire on
October 27, 1989 and the Surety does not assume responsibility
for any liability incurred or created after said date. Any claims
against this bond must be presented to the Surety in writing not
later than ten (10) days after said expiry date; otherwise, failure
to do so shall forthwith release the Surety from all liabilities
under this bond and shall be a bar to any court action against it
and which right to sue is hereby waived by the Obligee after the
lapse of said period of ten (10) days above cited.30 (Emphasis
supplied)

The Court reiterates that a surety’s liability is
determined strictly by the terms of contract of suretyship,
in relation to the principal contract between the obligor and
the obligee. Hence, the Court looks at the Surety and
Performance Bonds, in relation to the Consortium
Agreement.
According to the principle of relativity of contracts in
Article 1311 of the Civil Code,31 a contract takes effect only
between the parties, their assigns, and heirs; except when
the
_______________
30 Id., at p. 101.
31 Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising
from the contract are not transmissible by their nature, or by stipulation
or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.
If a contract should contain some stipulation in favor of a third person,
he may demand its fulfillment provided he communicated his acceptance
to the obligor before its revocation. A mere incidental benefit or interest of
a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
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Corporation
contract contains a stipulation in favor of a third person,

which gives said person the right to demand fulfillment of
said stipulation. In this case, the Surety and Performance
Bonds are enforceable by and against the parties FFMCCI
(the obligor) and CCCIC (the surety), as well as the third
person Kawasaki (the obligee) in whose favor said bonds
had been explicitly constituted; while the related
Consortium Agreement binds the parties Kawasaki and
FFMCCI. Since the Republic is neither a party to the
Surety and Performance Bonds nor the Consortium
Agreement, any action or omission on its part has no effect
on the liability of CCCIC under said bonds.
The Surety and Performance Bonds state that their
purpose was “to secure the full and faithful performance on
[FFMCCI’s] part of said undertaking,” particularly, the
repayment by FFMCCI of the down payment advanced to it
by Kawasaki (in the case of the Surety Bond) and the full
and faithful performance by FFMCCI of its portion of work
in the Project (in the case of the Performance Bond). These
are the only undertakings expressly guaranteed by the
bonds, the fulfillment of which by FFMCCI would release
CCCIC from its obligations as surety; or conversely, the
nonperformance of which would give rise to the liabilities of
CCCIC as a surety.
The Surety and Performance Bonds do not contain any
condition that CCCIC would be liable only if, in addition to
the default on its undertakings by FFMCCI, the Republic
also made a claim against the PCIB Letter of Credit
furnished by Kawasaki, on behalf of the Kawasaki-
FFMCCI Consortium. The Court agrees with the
observation of the Court of Appeals that “it is not provided,
neither in the Consortium Agreement nor in the subject
bonds themselves that before KAWASAKI may proceed
against the bonds posted by [FFMCCI] and CCCIC, the
Philippine government as employer must first
356

Corporation
exercise its rights against the bond issued in its favor by

the consortium.”32
The Court cannot give any additional meaning to the
plain language of the undertakings in the Surety and
Performance Bonds. The extent of a surety’s liability is
determined by the language of the suretyship contract or
bond itself. Article 1370 of the Civil Code provides that “[i]f
the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning
of its stipulations shall control.”33
There is no basis for the interpretation by CCCIC of the
word “counter-guarantee” in Article 10 of the Consortium
Agreement. The first paragraph of Article 10 of the
Consortium Agreement provides that Kawasaki, as the
Consortium Leader, shall arrange, at its own cost but on
behalf of the Kawasaki-FFMCCI Consortium, for all
necessary bonds and guarantees under the Construction
Contract with the Republic. The same paragraph requires,
in turn, that FFMCCI, at its own cost, to furnish Kawasaki
with suitable counter-guarantees for the repayment by
FFMCCI for the advance payment from Kawasaki and
performance by FFMCCI of its portion of work in the
Project. Clearly, the “guarantees” and “counter-guarantees”
were securities for the fulfillment of the obligations of the
Kawasaki-FFMCCI Consortium to the Republic under the
Construction Contract and of FFMCCI to the Consortium
Leader Kawasaki under the Consortium Agreement,
respectively. The CCCIC Surety and Performance Bonds
were not counter-guarantees to the PCIB Letter of Credit.
In fact, in the event that the Republic did make a claim on
the PCIB Letter of Credit, the second paragraph of Article
10 of the Consortium Agreement stipulates that Kawasaki
and FFMCCI would still have to determine their re-
_______________
32 Rollo, p. 46.
33 Molino v. Security Diners International Corporation, 415 Phil. 587,
595; 363 SCRA 358, 367-368 (2001).
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Corporation
spective responsibilities, reimbursements, and/or

compensations according to the provisions of the
Consortium Agreement, instead of simply allowing

Kawasaki to recover on the “counter-guarantees” of
FFMCCI.
It is not disputed that FFMCCI, due to financial
difficulties, was unable to repay the advance payment it
received from Kawasaki and to finish its scope of work in
the Project, thus, FFMCCI defaulted on its obligations to
Kawasaki. Given the default of FFMCCI, CCCIC as surety
became directly, primarily, and absolutely liable to
Kawasaki as the obligee under the Surety and Performance
Bonds. The following pronouncements of the Court in Asset
Builders Corporation v. Stronghold Insurance Company,
Inc.34 are relevant herein:
Respondent, along with its principal, Lucky Star, bound itself

to the petitioner when it executed in its favor surety and
performance bonds. The contents of the said contracts clearly
establish that the parties entered into a surety agreement as
defined under Article 2047 of the New Civil Code. x x x.
x x x x
As provided in Article 2047, the surety undertakes to be bound
solidarily with the principal obligor. That undertaking makes a
surety agreement an ancillary contract as it presupposes the
existence of a principal contract. Although the contract of a surety
is in essence secondary only to a valid principal obligation, the
surety becomes liable for the debt or duty of another although it
possesses no direct or personal interest over the obligations nor
does it receive any benefit therefrom. Let it be stressed that
notwithstanding the fact that the surety contract is secondary to
the principal obligation, the surety assumes liability as a regular
party to the undertaking.
_______________
34 647 Phil. 692, 702-704; 633 SCRA 370, 379 (2010).
358

Corporation
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass

Corporation, reiterating the ruling in Garcia v. Court of Appeals,
expounds on the nature of the surety’s liability:
x x x. The surety’s obligation is not an original and direct one
for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence

secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary
and absolute; in other words, he is directly and equally bound
with the principal.
Suretyship, in essence, contains two types of relationship —
the principal relationship between the obligee (petitioner) and the
obligor (Lucky Star), and the accessory surety relationship
between the principal (Lucky Star) and the surety (respondent). In
this arrangement, the obligee accepts the surety’s solidary
undertaking to pay if the obligor does not pay. Such acceptance,
however, does not change in any material way the obligee’s
relationship with the principal obligor. Neither does it make the
surety an active party to the principal obligee-obligor
relationship. Thus, the acceptance does not give the surety the
right to intervene in the principal contract. The surety’s role
arises only upon the obligor’s default, at which time, it can
be directly held liable by the obligee for payment as a
solidary obligor.
In the case at bench, when Lucky Star failed to finish the
drilling work within the agreed time frame despite
petitioner’s demand for completion, it was already in
delay. Due to this default, Lucky Star’s liability attached
and, as a necessary consequence, respondent’s liability
under the surety agreement arose.
Undeniably, when Lucky Star reneged on its undertaking with
the petitioner and further failed to return the P575,000.00
downpayment that was already ad-
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Corporation
vanced to it, respondent, as surety, became solidarily bound

with Lucky Star for the repayment of the said amount to
petitioner. The clause, “this bond is callable on demand,” strongly
speaks of respondent’s primary and direct responsibility to the
petitioner.
Accordingly, after liability has attached to the principal,
the obligee or, in this case, the petitioner, can exercise the
right to proceed against Lucky Star or respondent or both.
x x x. (Emphases supplied, citations omitted)
Article 2079 of the New Civil Code is not applicable to

the instant case.

To free itself from its liabilities under the Surety and

Performance Bonds, CCCIC cites Article 2079 of the Civil
Code, which reads:
Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the guaranty.
The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension of time referred to herein.

The aforequoted provision clearly speaks of an extension
for the payment of a debt granted by the creditor to a
debtor without the consent of the surety. The theory behind
Article 2079 was further explained by the Court in Trade
and Investment Development Corporation of the Philippines
(formerly Philippine Export and Foreign Loan Guarantee
Corporation) v. Asia Paces Corporation,35 thus:
Comparing a surety’s obligations with that of a guarantor, the

Court, in the case of Palmares v. CA, illumined that a surety is
responsible for the debt’s pay-
_______________
35 G.R. No. 187403, February 12, 2014, 716 SCRA 67, 78-83.
360

Corporation
ment at once if the principal debtor makes default, whereas a

guarantor pays only if the principal debtor is unable to pay, viz.:
A surety is an insurer of the debt, whereas a guarantor is an
insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. Stated differently, a surety
promises to pay the principal’s debt if the principal will not pay,
while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the
principal is unable to pay. A surety binds himself to perform if the
principal does not, without regard to his ability to do so. A
guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other words, a
surety undertakes directly for the payment and is so responsible
at once if the principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence, the debt cannot be
made out of the principal debtor. x x x.
Despite these distinctions, the Court in Cochingyan, Jr. v.
R&B Surety & Insurance Co., Inc., and later in the case of
Security Bank, held that Article 2079 of the Civil Code, which
pertinently provides that “[a]n extension granted to the debtor by
the creditor without the consent of the guarantor extinguishes the
guaranty,” equally applies to both contracts of guaranty and
suretyship. The rationale therefor was explained by the Court as
follows:
The theory behind Article 2079 is that an extension of
time given to the principal debtor by the creditor without
the surety’s consent would deprive the surety of his right
to pay the creditor and to be immediately subrogated to
the creditor’s remedies against the principal debtor upon
the maturity date. The surety is said to be entitled to
protect himself against the contingency of the princi-
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Corporation
pal debtor or the indemnitors becoming insolvent

during the extended period. x x x.
Applying these principles, the Court finds that the payment
extensions granted by Banque Indosuez and PCI Capital to
TIDCORP under the Restructuring Agreement did not have the
effect of extinguishing the bonding companies’ obligations to
TIDCORP under the Surety Bonds, notwithstanding the fact that
said extensions were made without their consent. This is
because Article 2079 of the Civil Code refers to a payment
extension granted by the creditor to the principal debtor
without the consent of the guarantor or surety. In this case,
the Surety Bonds are suretyship contracts which secure the debt
of ASPAC, the principal debtor, under the Deeds of Undertaking
to pay TIDCORP, the creditor, the damages and liabilities it may
incur under the Letters of Guarantee, within the bounds of the
bonds’ respective coverage periods and amounts. No payment
extension was, however, granted by TIDCORP in favor of ASPAC
in this regard; hence, Article 2079 of the Civil Code should not be
applied with respect to the bonding companies’ liabilities to
TIDCORP under the Surety Bonds.
The payment extensions granted by Banque Indosuez and PCI
Capital pertain to TIDCORP’s own debt under the Letters of
Guarantee wherein it (TIDCORP) irrevocably and unconditionally
guaranteed full payment of ASPAC’s loan obligations to the banks
in the event of its (ASPAC) default. In other words, the Letters of

Guarantee secured ASPAC’s loan agreements to the banks. Under
this arrangement, TIDCORP therefore acted as a guarantor, with
ASPAC as the principal debtor, and the banks as creditors.
Proceeding from the foregoing discussion, it is quite clear
that there are two sets of transactions that should be
treated separately and distinctly from one another
following the civil law principle of relativity of contracts
“which provides that contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third person,
even if he is
362

Corporation
aware of such contract and has acted with knowledge thereof.”

Verily, as the Surety Bonds concern ASPAC’s debt to
TIDCORP and not TIDCORP’s debt to the banks, the
payments extensions (which conversely concern
TIDCORP’s debt to the banks and not ASPAC’s debt to
TIDCORP) would not deprive the bonding companies of
their right to pay their creditor (TIDCORP) and to be
immediately subrogated to the latter’s remedies against
the principal debtor (ASPAC) upon the maturity date. It
must be stressed that these payment extensions did not modify
the terms of the Letters of Guarantee but only provided for a new
payment scheme covering TIDCORP’s liability to the banks. In
fine, considering the inoperability of Article 2079 of the Civil Code
in this case, the bonding companies’ liabilities to TIDCORP under
the Surety Bonds — except those issued by Paramount and
covered by its Compromise Agreement with TIDCORP — have not
been extinguished. Since these obligations arose and have been
duly demanded within the coverage periods of all the Surety
Bonds, TIDCORP’s claim is hereby granted. x x x. (Emphases
supplied, citations omitted)

Similarly, there are two sets of transactions in the
present case covered by two different contracts: the
Consortium Agreement between Kawasaki and FFMCCI
and the Construction Contract between the Republic and
the Kawasaki-FFMCCI Consortium. The Surety and
Performance Bonds guaranteed the performance of the
obligations of FFMCCI to Kawasaki under the Consortium
Agreement. The Republic was not a party in either the
Surety and Performance Bonds or the Consortium

Agreement. Under these circumstances, there was no
creditor-debtor relationship between the Republic and
FFMCCI and Article 2079 of the Civil Code did not apply.
The extension granted by the Republic to Kawasaki
modified the deadline for the completion of the Project
under the Construction Contract, but had no effect on the
obligations of FFMCCI to Kawasaki under the Consortium
Agree-
363
VOL. 759, JUNE 22, 2015 363

Corporation
ment, much less, on the liabilities of CCCIC under the

Surety and Performance Bonds.

CCCIC failed to discharge the burden of proving the
novation of the Consortium Agreement which would
have extinguished its obligations under the Surety
and Performance Bonds.

CCCIC argues that it was released from its obligations
as surety under the Surety and Performance Bonds
because of the novation of the Consortium Agreement by
the subsequent Agreement dated August 24, 1989 executed
between Kawasaki and FFMCCI, without the consent of
CCCIC.
The Court first notes that the default of FFMCCI
preceded the execution of the Agreement on August 24,
1989 which purportedly novated the Consortium
Agreement and, in effect, extinguished the Surety and
Performance Bonds. As early as his letter dated July 20,
1989, Mañacop, FFMCCI President, already admitted the
inability of FFMCCI to continue with its portion of work in
the Project and authorized Kawasaki to continue the same.
It was precisely because FFMCCI defaulted on its
obligations under the Consortium Agreement that
necessitated the execution of the Agreement dated August
24, 1989 between Kawasaki and FFMCCI, and this is
evident from one of the “whereas” clauses in the said
Agreement which says that “due to some financial
reverses[, FFMCCI] can no longer do its portion of the work
under the Contract.” The liabilities of CCCIC as surety to
Kawasaki under the Surety and Performance Bonds had
already attached upon the default of FFMCCI while the
said bonds were still in effect and prior to the alleged

novation of the Consortium Agreement by the Agreement
dated August 24, 1989 which resulted in the
extinguishment of the bonds.
364

Corporation
The Court expounded on the concept of novation in

Reyes v. BPI Family Savings Bank, Inc.:36
Novation is defined as the extinguishment of an obligation by

the substitution or change of the obligation by a subsequent one
which terminates the first, either by changing the object or
principal conditions, or by substituting the person of the debtor,
or subrogating a third person in the rights of the creditor.
Article 1292 of the Civil Code on novation further provides:
Article 1292. In order that an obligation may be extinguished
by another which substitute the same, it is imperative that it be
so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.
The cancellation of the old obligation by the new one is a
necessary element of novation which may be effected either
expressly or impliedly. While there is really no hard and fast rule
to determine what might constitute sufficient change resulting in
novation, the touchstone, however, is irreconcilable
incompatibility between the old and the new obligations.
In Garcia, Jr. v. Court of Appeals, we held that:
In every novation there are four essential requisites: (1) a
previous valid obligation; (2) the agreement of all the parties to
the new contract; (3) the extinguishment of the old contract; and
(4) validity of the new one. There must be consent of all the
parties to the substitution, resulting in the extinction of the old
obligation and the creation of a valid new one. x x x. (Citations
omitted)
_______________
36 520 Phil. 801, 806-807; 486 SCRA 276, 281 (2006).
365
VOL. 759, JUNE 22, 2015 365

Corporation
It is well-settled that novation is never presumed —

novatio non praesumitur. As the party alleging novation,
the onus of showing clearly and unequivocally that
novation had indeed taken place rests on CCCIC.37 The
Court laid down guidelines in establishing novation, viz.:

Novation is never presumed, and the animus novandi, whether

totally or partially, must appear by express agreement of the
parties, or by their acts that are too clear and unequivocal to be
mistaken.
The extinguishment of the old obligation by the new one is a
necessary element of novation which may be effected either
expressly or impliedly. The term “expressly” means that the
contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the
other hand, no specific form is required for an implied novation,
and all that is prescribed by law would be an incompatibility
between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change
that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the
old and the new obligations.
There are two ways which could indicate, in fine, the presence
of novation and thereby produce the effect of extinguishing an
obligation by another which substitutes the same. The first is
when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates
the first. Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The in-
_______________
37 St. James College of Parañaque v. Equitable PCI Bank, 641 Phil.

452, 464; 627 SCRA 328, 341-342 (2010).
366

Corporation
compatibility must take place in any of the essential elements

of the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.38
(Citations omitted)

CCCIC failed to discharge the burden of proving
novation of the Consortium Agreement by the Agreement
dated August 24, 1989. The Court failed to see the presence
of the essential requisites for a novation of contract,
specifically, the irreconcilable incompatibility between the
old and new contracts. Indeed, Kawasaki and FFMCCI
executed the Agreement dated August 24, 1989 pursuant to
Article 8.3 of the Consortium Agreement:
8.3 If, for any reason, any PARTY should fail in the
performance of its PORTION OF WORK or contractual
obligations and if such defaulting PARTY refuses to cure or
makes no remedial action, without presenting any valid cause,
within fifteen (15) days following demand of rectification by
registered letter sent by the other PARTY, the defaulting
PARTY’s PORTION OF WORK may be performed at the account
and responsibility of the defaulting PARTY, by the non-defaulting
PARTY or by any other contractor selected by the non-defaulting
PARTY and approved by the EMPLOYER. In such event, the
defaulting PARTY or its representative shall, in no way, interfere
with the performance of the CONTRACT or impede the progress
thereof, on any ground, and shall allow such performing PARTY
or the said contractor to use the materials and equipment of such
defaulting PARTY, for the purpose of remedial action.
_______________
38 Quinto v. People, 365 Phil. 259, 267-268; 305 SCRA 708, 715-716
(1999).
367
VOL. 759, JUNE 22, 2015 367

Corporation
FFMCCI was unable to finish its portion of work in the

Project because of business reverses, and by the Agreement
dated August 24, 1989, Kawasaki assumed the Transferred
Portion of Work from FFMCCI and was accorded the right
to receive the profits and benefits corresponding to said
portion. Although the Agreement dated August 24, 1989

resulted in the reallocation of the respective portions of
work of Kawasaki and FFMCCI, as well as their
corresponding shares in the profits and benefits under the
Consortium Agreement, such changes were not
incompatible with the object, cause, and principal
conditions of the Consortium Agreement. Consequently,
the changes under the Agreement dated August 24, 1989
were only modificatory and did not extinguish the original
obligations under the Consortium Agreement.
Even granting that there is novation, the Court in
Stronghold Insurance Company, Incorporated v. Tokyu
Construction Company, Ltd.,39 held that to release the
surety, the material change in the principal contract must
make the obligation of the surety more onerous. The Court
ratiocinated in Stronghold as follows:
Petitioner’s liability was not affected by the revision of the

contract price, scope of work, and contract schedule. Neither was
it extinguished because of the issuance of new bonds procured
from Tico.
As early as February 10, 1997, respondent already sent a letter
to Gabriel informing the latter of the delay incurred in the
performance of the work, and of the former’s intention to
terminate the subcontract agreement to prevent further losses.
Apparently, Gabriel had already been in default even prior to the
aforesaid letter; and demands had been previously made but to no
avail. By reason of said default, Gabriel’s liability had arisen; as a
consequence, so also did the liability of petitioner as a surety
arise.
_______________
39 606 Phil. 400, 411-413; 588 SCRA 410, 421 (2009).
368

Corporation
x x x x
By the language of the bonds issued by petitioner, it
guaranteed the full and faithful compliance by Gabriel of its
obligations in the construction of the SDS and STP specifically set
forth in the subcontract agreement, and the repayment of the 15%
advance payment given by respondent. These guarantees made by
petitioner gave respondent the right to proceed against the former

following Gabriel’s noncompliance with her obligation.
Confusion, however, transpired when Gabriel and respondent
agreed, on February 26, 1997, to reduce the scope of work and,
consequently, the contract price. Petitioner viewed such revision
as novation of the original subcontract agreement; and since no
notice was given to it as a surety, it resulted in the
extinguishment of its obligation.
We wish to stress herein the nature of suretyship, which
actually involves two types of relationship — the underlying
principal relationship between the creditor (respondent) and the
debtor (Gabriel), and the accessory surety relationship between
the principal (Gabriel) and the surety (petitioner). The creditor
accepts the surety’s solidary undertaking to pay if the debtor does
not pay. Such acceptance, however, does not change in any
material way the creditor’s relationship with the principal debtor
nor does it make the surety an active party to the principal
creditor-debtor relationship. In other words, the acceptance does
not give the surety the right to intervene in the principal contract.
The surety’s role arises only upon the debtor’s default, at which
time, it can be directly held liable by the creditor for payment as a
solidary obligor.
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 a surety 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 pos-
369
VOL. 759, JUNE 22, 2015 369

Corporation
sesses no direct or personal interest over the obligations nor

does he receive any benefit therefrom.
Indeed, a surety is released from its obligation when there is a
material alteration of the principal contract in connection with
which the bond is given, such as a change which imposes a new
obligation on the promising party, or which takes away some
obligation already imposed, or one which changes the legal effect
of the original contract and not merely its form. However, a
surety is not released by a change in the contract, which
does not have the effect of making its obligation more
onerous.
In the instant case, the revision of the subcontract agreement

did not in any way make the obligations of both the principal and
the surety more onerous. To be sure, petitioner never assumed
added obligations, nor were there any additional obligations
imposed, due to the modification of the terms of the contract.
Failure to receive any notice of such change did not, therefore,
exonerate petitioner from its liabilities as surety. (Emphasis

There is no showing herein that the obligations of
CCCIC as surety had become more onerous with the
execution of the Agreement dated August 24, 1989 between
Kawasaki and FFMCCI. The Agreement dated August 24,
1989 did not alter in any way the original coverage and the
terms and conditions of the Surety and Performance Bonds
of CCCIC. If truth be told, the Agreement dated August 24,
1989 made it more onerous for Kawasaki which had to take
over the Transferred Portion of Work from FFMCCI.
That Kawasaki was to receive the profits and benefits
corresponding to the Transferred Portion of Work would
not extinguish the liabilities of CCCIC under the Surety
and Performance Bonds. The right of Kawasaki to the
profits and benefits corresponding to the Transferred
Portion of Work was granted under the Agreement dated
August 24, 1989 because Kawasaki was the one that would
actually perform
370

Corporation
the remaining portion of work and complete the Project

and should be duly compensated for the same. It is
separate and distinct from the right of Kawasaki to
demand payment of the amounts guaranteed by CCCIC as
surety upon the default of FFMCCI on its undertakings
under the Surety and Performance Bonds. CCCIC cannot
standby passively and be benefitted by payments made by
the Republic, as owner of the Project, to Kawasaki, as
contractor, for the Transferred Portion of Work. The only
way CCCIC can extinguish its liabilities as surety, which
already attached upon the default of FFMCCI, is to make
its own payments to Kawasaki of the amounts guaranteed
under the Surety and Performance Bonds.
Equally without merit is the averment of CCCIC that by

executing the Agreement dated August 24, 1989, which
gave Kawasaki the right to the profits and benefits
corresponding to the Transferred Portion of Work,
Kawasaki and FFMCCI colluded or connived to deprive
CCCIC of its source of indemnification. Other than its
allegation, CCCIC failed to present any evidence of
collusion or connivance between Kawasaki and FFMCCI to
intentionally prejudice CCCIC. The Court reiterates that
the execution of the Agreement dated August 24, 1989 was
actually authorized under Article 8.3 of the Consortium
Agreement. Kawasaki was given the right to the profits
and benefits corresponding to the Transferred Portion of
Work because it would be the one to perform the same. It
would be the height of inequity to allow FFMCCI to
continue collecting payments for work it was not able to do.
Besides, there is utter lack of basis for the claim of CCCIC
that without the compensation for the Transferred Portion
of Work, FFMCCI would have no means to indemnify
CCCIC for any payments the latter would have to make to
Kawasaki under the Surety and Performance Bonds. As
the succeeding discussion will show, it is premature for
CCCIC to question the capacity of FFMCCI to indemnify it.
371
VOL. 759, JUNE 22, 2015 371

Corporation
CCCIC must first pay its liabilities to Kawasaki

under the Surety and Performance Bonds before it
could be indemnified and subrogated to the rights of
Kawasaki against FFMCCI.

The rights of a guarantor who pays for the debt of the
debtor are governed by the following provisions of the Civil
Code:
Art. 2066. The guarantor who pays for a debtor must be

indemnified by the latter.
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment
was made known to the debtor, even though it did not earn
interest for the creditor;
(3) The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of him;
(4) Damages, if they are due.

Art. 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.

Although the foregoing provisions only speak of a
guarantor, they also apply to a surety, as the Court held in
Escaño v. Ortigas, Jr.:40
What is the source of this right to full reimbursement by the

surety? We find the right under Article 2066
_______________
40 553 Phil. 24, 43-44; 526 SCRA 26, 45-46 (2007).
372

Corporation
of the Civil Code, which assures that “[t]he guarantor who pays
for a debtor must be indemnified by the latter,” such indemnity
comprising of, among others, “the total amount of the debt.”
Further, Article 2067 of the Civil Code likewise establishes that
“[t]he guarantor who pays is subrogated by virtue thereof to all
the rights which the creditor had against the debtor.”
Articles 2066 and 2067 explicitly pertain to guarantors, and
one might argue that the provisions should not extend to sureties,
especially in light of the qualifier in Article 2047 that the
provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr.
Tolentino’s observation that “[t]he reference in the second
paragraph of [Article 2047] to the provisions of Section 4, Chapter
3, Title I, Book IV, on solidary or several obligations, however,
does not mean that suretyship is withdrawn from the applicable
provisions governing guaranty.” For if that were not the
implication, there would be no material difference between the
surety as defined under Article 2047 and the joint and several
debtors, for both classes of obligors would be governed by exactly
the same rules and limitations.
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.
x x x. (Citations omitted)

Pursuant to Articles 2066 and 2067, the rights of CCCIC
as surety to indemnification and subrogation will arise only
after it has paid its obligations to Kawasaki as the debtor-
obligee. In Autocorp Group v. Intra Strata Assurance
Corporation,41 the Court ruled that:

The benefit of subrogation, an extinctive subjective

novation by a change of creditor, which “transfers to the person
subrogated, the credit and all the rights thereto
_______________
41 578 Phil. 804, 822-823; 556 SCRA 250, 267 (2008).
373
VOL. 759, JUNE 22, 2015 373

Corporation
appertaining, either against the debtor or against third

persons,” is granted by the Article 2067 of the Civil Code
only to the “guarantor (or surety) who pays.” (Emphases

In the present case, CCCIC has yet to pay Kawasaki.

While summons was validly served upon FFMCCI, the
Third-Party Complaint of CCCIC against FFMCCI is
dismissed on the ground of lack of cause of action.

The Court disagrees with the ruling of the Court of
Appeals that there was no proper service of summons upon
FFMCCI. The appellate court overlooked the fact that the
service of summons on FFMCCI at its principal address at
#86 West Avenue, Quezon City failed because FFMCCI had
already vacated said premises without notifying anyone as
to where it transferred. For this reason, the RTC, upon the
motion of CCCIC, issued an Order42 dated September 4,
1991, directing the issuance and service of Alias Summons
to the individual directors of FFMCCI. Eventually, the
Alias Summons was personally served upon FFMCCI
director Vicente Concepcion on September 25, 1991.43
Rule 14, Section 13 of the 1964 Rules of Court, which
was then in force, allowed the service of summons upon a
director of a private domestic corporation:
Sec. 13. Service upon private domestic corporation or

partnership.—If the defendant is a corporation organized under
the laws of the Philippines or a partnership duly registered,
service may be made on the presi-
_______________
42 Records (Vol. I), p. 250.

43 Id., at p. 255.
374

Corporation
dent, manager, secretary, cashier, agent, or any of its directors.

The aforementioned rule does not require that service on
the private domestic corporation be served at its principal
office in order for the court to acquire jurisdiction over the
same. The Court, in Talsan Enterprises, Inc. v. Baliwag
Transit, Inc.,44 citing Baltazar v. Court of Appeals,45
affirmed that:
[S]ervice on respondent’s bus terminal at the address stated in

the summons and not in its main office in Baliwag do not render
the service of summons invalid. In
Artemio Baltazar v. Court of Appeals, we held:
“The regular mode, in other words, of serving summons upon a
private Philippine Corporation is by personal service upon one of
the officers of such corporation identified in Section 13.
Ordinarily, such personal service may be expected to be made at
the principal office of the corporation. Section 13, does not,
however, impose such requirement, and so personal
service upon the corporation may be effected through
service upon, for instance, the president of the corporation
at his office or residential address.” x x x.
In fine, the service of summons upon respondent Baliwag
Transit is proper. Consequently, the trial court validly acquired
jurisdiction over respondent Baliwag. (Citation omitted)

Hence, the personal service of the Alias Summons on an
FFMCCI director was sufficient for the RTC to acquire
jurisdiction over FFMCCI itself.
_______________
44 369 Phil. 409, 419-420; 310 SCRA 156, 165 (1999).

45 250 Phil. 349, 360-361; 168 SCRA 354, 362 (1988).
375
VOL. 759, JUNE 22, 2015 375

Corporation
Nevertheless, the Third-Party Complaint filed by CCCIC

against FFMCCI and Mañacop must be dismissed on the
ground of lack of cause of action.
A cause of action is defined as the act or omission by
which a party violates a right of another. The essential
elements of a cause of action are: (a) the existence of a legal
right in favor of the plaintiff; (b) a correlative legal duty of
the defendant to respect such right; and (c) an act or
omission by such defendant in violation of the right of the
plaintiff with a resulting injury or damage to the plaintiff
for which the latter may maintain an action for the
recovery of relief from the defendant.46
As discussed earlier, the rights to indemnification and
subrogation of a surety only arise upon its payment of the
obligation to the obligee. In the case at bar, since CCCIC up
to this point refuses to acknowledge and pay its obligation
to Kawasaki under the Surety and Performance Bonds, it
has not yet acquired the rights to seek indemnification
from FFMCCI and subrogation to Kawasaki as against
FFMCCI. In the same vein, the corresponding obligation of
FFMCCI to indemnify CCCIC under the Indemnity
Agreements has yet to accrue. Thus far, there is no act or
omission on the part of FFMCCI which violated the right of
CCCIC and for which CCCIC may seek relief from the
courts. In the absence of these elements, CCCIC has no
cause of action against FFMCCI and/or FFMCCI President
Mañacop. Resultantly, the Third-Party Complaint of
CCCIC should be dismissed.

There is no basis for awarding attorney’s fees in favor
of Kawasaki. In addition, the rate of legal interest
imposed shall conform with latest jurisprudence.
_______________
46 Turner v. Lorenzo Shipping Corporation, 650 Phil. 372, 388; 636

SCRA 13, 30 (2010).
376

Corporation
Article 2208(2) of the Civil Code allows the award of

attorney’s fees “[w]hen the defendant’s act or omission has
compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest[.]” In Servicewide
Specialists, Incorporated v. Court of Appeals,47 the Court
declared that:
Article 2208 of the Civil Code allows attorney’s fees to be

awarded by a court when its claimant is compelled to litigate with
third persons or to incur expenses to protect his interest by reason
of an unjustified act or omission on the part of the party from
whom it is sought. To be sure, private respondents were forced to
litigate to protect their rights but as we have previously held:
“where no sufficient showing of bad faith would be reflected in a
party’s persistence in a case other than an erroneous conviction of
the righteousness of his cause, attorney’s fee shall not be
recovered as cost.” (Citation omitted)

Bad faith has been defined as “a breach of a known duty
through some motive of interest or ill will. It must,
however, be substantiated by evidence. Bad faith under the
law cannot be presumed, it must be established by clear
and convincing evidence.”48 There is no evidence in this
case to show bad faith on the part of CCCIC. CCCIC, in
refusing the claim of Kawasaki, was merely acting based
on its belief in the righteousness of its defense. Hence, even
though Kawasaki was compelled to litigate to enforce its
claim against CCCIC, the award of attorney’s fees is not
proper.
Finally, the Court, in Nacar v. Gallery Frames,49
modified the guidelines in imposing interests, taking into
account Bangko Sentral ng Pilipinas-Monetary Board
Resolution No. 796 dated May 16, 2013 and Circular No.
799, Series of 2013,
_______________
47 326 Phil. 660, 669; 256 SCRA 649, 655 (1996).

48 GF Equity, Inc. v. Valenzona, 501 Phil. 153, 168; 462 SCRA 466,
482 (2005).
49 G.R. No. 189871, August 13, 2013, 703 SCRA 439, 454-456.
377
VOL. 759, JUNE 22, 2015 377

Corporation
which fixed the legal rate at 6% per annum effective

July 1, 2013. In the absence of stipulated interest in the
present case, the Court imposes upon the amounts covered
by the Surety and Performance Bonds the legal rate of 12%
per annum from September 15, 1989, the date of demand,
until June 30, 2013; and then the legal rate of 6% per
annum from July 1, 2013 until full payment of the same.
WHEREFORE, premises considered, the instant
Petition for Review on Certiorari is PARTLY GRANTED.
The Decision dated May 30, 2002 and Resolution dated
November 14, 2002 of the Court of Appeals are
AFFIRMED with the following MODIFICATIONS:
1) The Third-Party Complaint filed by CCC Insurance
Corporation against F.F. Mañacop Construction Company,
Inc. and Mr. Florante F. Mañacop is DISMISSED on the
ground of lack of cause of action;
2) The award of attorney’s fees in favor of Kawasaki
Steel Corporation is DELETED; and
3) In addition to the amounts CCC Insurance
Corporation is ordered to pay Kawasaki Steel Corporation
under Surety Bond No. B-88/11191 and Performance Bond
No. B-88/11193, CCC Insurance Corporation is further
ORDERED to pay Kawasaki Steel Corporation legal
interest on said amounts at the rates of 12% per annum
from September 15, 1989 to June 30, 2013 and 6% per
annum from July 1, 2013 until full payment thereof.
SO ORDERED.
Sereno (CJ., Chairperson), Bersamin, Perez and Perlas-

Bernabe, JJ., concur.
Petition partly granted, judgment and resolution

affirmed with modifications.
378

Corporation
Notes.—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. (American Home Insurance Co. of
New York vs. F.F. Cruz & Co., Inc., 655 SCRA 248 [2011])
Although the contract of suretyship is secondary only to
a valid principal obligation, the surety’s liability to the
creditor is direct, primary, and absolute. (Id.)
——o0o——
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5/7/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 759

G.R. No. 156162. June 22, 2015.*

Civil Law; Suretyship; Words and Phrases; Jurisprudence

VOL. 759, JUNE 22, 2015 333

a third person, which gives said person the right to demand

novation and thereby produce the effect of extinguishing an

334 SUPREME COURT REPORTS ANNOTATED

gether, each one having its independent existence. If they

corporation or partnership.—If the defendant is a corporation

VOL. 759, JUNE 22, 2015 335

citing Baltazar v. Court of Appeals, 168 SCRA 354 (1988),

resulting injury or damage to the plaintiff for which the latter

336 SUPREME COURT REPORTS ANNOTATED

litigate with third persons or to incur expenses to protect his

PETITION for review on certiorari of the decision and

VOL. 759, JUNE 22, 2015 337

Buñag & Uy Law Offices for petitioner.

LEONARDO-DE CASTRO, J.:

port network in Pangasinan (Project). According to their

1 Rollo, pp. 37-49; penned by Associate Justice Perlita J. Tria-Tirona,

338 SUPREME COURT REPORTS ANNOTATED

The Project was awarded to the Kawasaki-FFMCCI

6 Rollo, pp. 95-98.

advance payment under the CONTRACT and the performance of its

VOL. 759, JUNE 22, 2015 339

Credit guaranteed the faithful performance by

the amount of advance payment it requested on a

9 Rollo, pp. 99-100.

340 SUPREME COURT REPORTS ANNOTATED

The Project commenced in November 1988.14 Sometime

consent of CCCIC, executed a new Agreement dated

14 TSN, March 18, 1993, p. 32.

VOL. 759, JUNE 22, 2015 341

Consortium Agreement, which prevented CCCIC from

extinguished when the Republic granted the Kawasaki-

19 Id., at pp. 207-210.

342 SUPREME COURT REPORTS ANNOTATED

not grant the counterclaims for moral and exemplary

I. THE COURT A QUO GROSSLY ERRED IN HOLDING

OCCURRED ON [OR] ABOUT AUGUST 24, 1989. THEREFORE,

VOL. 759, JUNE 22, 2015 343

OF WHETHER THIS EXTENSION IS KNOWN OR

From the language of the aforesaid bonds, it is clear that, in

21 CA Rollo, pp. 42-44.

344 SUPREME COURT REPORTS ANNOTATED

VOL. 759, JUNE 22, 2015 345

CCC Insurance Corporation vs. Kawasaki Steel

SAKI, as obligee, [FFMCCI], as principal; and CCCIC, as

WHEREFORE, the instant appeal is hereby GRANTED.

22 Rollo, pp. 46-48.

346 SUPREME COURT REPORTS ANNOTATED

3. 15% of the total amount due as and for attorney’s fees.23

WHEREFORE, judgment is hereby rendered in favor of third

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THE CONSENT OF THE GUARANTOR EXTINGUISHES THE

348 SUPREME COURT REPORTS ANNOTATED

knowledge or consent of CCCIC, based on Article 2079 of

25 Id., at pp. 17-18.

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