FIRST DIVISION

G.R. No. 147561             June 22, 2006

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.

DECISION
PANGANIBAN, CJ:
A surety company’s liability under the performance bond it issues is solidary. The
death of the principal obligor does not, as a rule, extinguish the obligation and the
solidary nature of that liability.

The Case

Before us is a Petition for Review  under Rule 45 of the Rules of Court, seeking to
1

reverse the March 13, 2001 Decision  of the Court of Appeals (CA) in CA-GR CV
2

No. 41630. The assailed Decision disposed as follows:

"WHEREFORE, the Order dated January 28, 1993 issued by the lower court is
REVERSED and SET ASIDE. Let the records of the instant case be REMANDED to
the lower court for the reception of evidence of all parties."
3

The Facts

The facts of the case are narrated by the CA in this wise:

"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi)

entered into a contract with x x x Jose D. Santos, Jr., the proprietor of JDS
Construction (JDS), for the construction of roadways and a drainage system in
Republic-Asahi’s compound in Barrio Pinagbuhatan, Pasig City, where [respondent]
was to pay x x x JDS five million three hundred thousand pesos (P5,300,000.00)
inclusive of value added tax for said construction, which was supposed to be
completed within a period of two hundred forty (240) days beginning May 8, 1989. In
order ‘to guarantee the faithful and satisfactory performance of its undertakings’ x x x
JDS, shall post a performance bond of seven hundred ninety five thousand pesos
(P795,000.00). x x x JDS executed, jointly and severally with [petitioner] Stronghold
Insurance Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769.
"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand
pesos (P795,000.00) by way of down payment.

"Two progress billings dated August 14, 1989 and September 15, 1989, for the total
amount of two hundred seventy four thousand six hundred twenty one pesos and one
centavo (P274,621.01) were submitted by x x x JDS to [respondent], which the latter
paid. According to [respondent], these two progress billings accounted for only
7.301% of the work supposed to be undertaken by x x x JDS under the terms of the
contract.

"Several times prior to November of 1989, [respondent’s] engineers called the

attention of x x x JDS to the alleged alarmingly slow pace of the construction, which
resulted in the fear that the construction will not be finished within the stipulated 240-
day period. However, said reminders went unheeded by x x x JDS.

"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x
x JDS, [respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to
Article XIII of said contract, and wrote a letter to x x x JDS informing the latter of
such rescission. Such rescission, according to Article XV of the contract shall not be
construed as a waiver of [respondent’s] right to recover damages from x x x JDS and
the latter’s sureties.

"[Respondent] alleged that, as a result of x x x JDS’s failure to comply with the

provisions of the contract, which resulted in the said contract’s rescission, it had to
hire another contractor to finish the project, for which it incurred an additional
expense of three million two hundred fifty six thousand, eight hundred seventy four
pesos (P3,256,874.00).

"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim
under the bond for not less than P795,000.00. On March 22, 1991, [respondent] again
sent another letter reiterating its demand for payment under the aforementioned bond.
Both letters allegedly went unheeded.

"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x
x JDS payment of P3,256,874.00 representing the additional expenses incurred by
[respondent] for the completion of the project using another contractor, and from x x x
JDS and SICI, jointly and severally, payment of P750,000.00 as damages in
accordance with the performance bond; exemplary damages in the amount
of P100,000.00 and attorney’s fees in the amount of at least P100,000.00.
"According to the Sheriff’s Return dated June 14, 1991, submitted to the lower court
by Deputy Sheriff Rene R. Salvador, summons were duly served on defendant-
appellee SICI. However, x x x Jose D. Santos, Jr. died the previous year (1990), and x
x x JDS Construction was no longer at its address at 2nd Floor, Room 208-A, San
Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its whereabouts were
unknown.

"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondent’s]
money claims against [petitioner and JDS] have been extinguished by the death of
Jose D. Santos, Jr. Even if this were not the case, [petitioner] SICI had been released
from its liability under the performance bond because there was no liquidation, with
the active participation and/or involvement, pursuant to procedural due process, of
herein surety and contractor Jose D. Santos, Jr., hence, there was no ascertainment of
the corresponding liabilities of Santos and SICI under the performance bond. At this
point in time, said liquidation was impossible because of the death of Santos, who as
such can no longer participate in any liquidation. The unilateral liquidation on the
party (sic) of [respondent] of the work accomplishments did not bind SICI for being
violative of procedural due process. The claim of [respondent] for the forfeiture of the
performance bond in the amount of P795,000.00 had no factual and legal basis, as
payment of said bond was conditioned on the payment of damages which [respondent]
may sustain in the event x x x JDS failed to complete the contracted works.
[Respondent] can no longer prove its claim for damages in view of the death of
Santos. SICI was not informed by [respondent] of the death of Santos. SICI was not
informed by [respondent] of the unilateral rescission of its contract with JDS, thus
SICI was deprived of its right to protect its interests as surety under the performance
bond, and therefore it was released from all liability. SICI was likewise denied due
process when it was not notified of plaintiff-appellant’s process of determining and
fixing the amount to be spent in the completion of the unfinished project. The
procedure contained in Article XV of the contract is against public policy in that it
denies SICI the right to procedural due process. Finally, SICI alleged that
[respondent] deviated from the terms and conditions of the contract without the
written consent of SICI, thus the latter was released from all liability. SICI also prayed
for the award of P59,750.00 as attorney’s fees, and P5,000.00 as litigation expenses.

"On August 16, 1991, the lower court issued an order dismissing the complaint of
[respondent] against x x x JDS and SICI, on the ground that the claim against JDS did
not survive the death of its sole proprietor, Jose D. Santos, Jr. The dispositive portion
of the [O]rder reads as follows:
‘ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing
business under trade and style, ‘JDS Construction’ and Stronghold Insurance
Company, Inc. is ordered DISMISSED.
‘SO ORDERED.’
"On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking
reconsideration of the lower court’s August 16, 1991 order dismissing its complaint.
[Petitioner] SICI field its ‘Comment and/or Opposition to the Motion for
Reconsideration.’ On October 15, 1991, the lower court issued an Order, the
dispositive portion of which reads as follows:

‘WHEREFORE, premises considered, the Motion for Reconsideration is hereby given

due course. The Order dated 16 August 1991 for the dismissal of the case against
Stronghold Insurance Company, Inc., is reconsidered and hereby reinstated (sic).
However, the case against defendant Jose D. Santos, Jr. (deceased) remains
undisturbed.

‘Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold]
Insurance Company Inc., are set for hearing on November 7, 1991 at 2:00 o’clock in
the afternoon.

‘SO ORDERED.’

"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for Bondsman/Defendant
SICI (Re: Effect of Death of defendant Jose D. Santos, Jr.)’ reiterating its prayer for
the dismissal of [respondent’s] complaint.

"On January 28, 1993, the lower court issued the assailed Order reconsidering its
Order dated October 15, 1991, and ordered the case, insofar as SICI is concerned,
dismissed. [Respondent] filed its motion for reconsideration which was opposed by
[petitioner] SICI. On April 16, 1993, the lower court denied [respondent’s] motion for
reconsideration. x x x."
4

Ruling of the Court of Appeals

The CA ruled that SICI’s obligation under the surety agreement was not extinguished
by the death of Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after
SICI for the bond.

The appellate court also found that the lower court had erred in pronouncing that the
performance of the Contract in question had become impossible by respondent’s act
of rescission. The Contract was rescinded because of the dissatisfaction of respondent
with the slow pace of work and pursuant to Article XIII of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of
[respondent’s] fault, but because of the fault of JDS Construction and Jose D. Santos,
Jr. for failure on their part to make satisfactory progress on the project, which
amounted to non-performance of the same. x x x [P]ursuant to the [S]urety [C]ontract,
SICI is liable for the non-performance of said [C]ontract on the part of JDS
Construction." 5

Hence, this Petition.6

Issue

Petitioner states the issue for the Court’s consideration in the following manner:

"Death is a defense of Santos’ heirs which Stronghold could also adopt as its defense
against obligee’s claim." 7

More precisely, the issue is whether petitioner’s liability under the performance bond
was automatically extinguished by the death of Santos, the principal.

The Court’s Ruling

The Petition has no merit.

Sole Issue:

Effect of Death on the Surety’s Liability

Petitioner contends that the death of Santos, the bond principal, extinguished his
liability under the surety bond. Consequently, it says, it is automatically released from
any liability under the bond.

As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.  Obligations are transmissible to the heirs, except when the transmission is
8

prevented by the law, the stipulations of the parties, or the nature of the
obligation.  Only obligations that are personal  or are identified with the persons
9 10

themselves are extinguished by death. 11

Section 5 of Rule 86  of the Rules of Court expressly allows the prosecution of money
12

claims arising from a contract against the estate of a deceased debtor. Evidently, those
claims are not actually extinguished.  What is extinguished is only the obligee’s
13

action or suit filed before the court, which is not then acting as a probate court.
14

In the present case, whatever monetary liabilities or obligations Santos had under his
contracts with respondent were not intransmissible by their nature, by stipulation, or
by provision of law. Hence, his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his estate.  Death is not a defense
15

that he or his estate can set up to wipe out the obligations under the performance
bond. Consequently, petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.

The liability of petitioner is contractual in nature, because it executed a performance

bond worded as follows:

"KNOW ALL MEN BY THESE PRESENTS:

"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw
Blvd., Pasig, MM Philippines, as principal and the STRONGHOLD INSURANCE
COMPANY, INC. a corporation duly organized and existing under and by virtue of
the laws of the Philippines with head office at Makati, as Surety, are held and firmly
bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any individual,
firm, partnership, corporation or association supplying the principal with labor or
materials in the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND
(P795,000.00), Philippine Currency, for the payment of which sum, well and truly to
be made, we bind ourselves, our heirs, executors, administrators, successors and
assigns, jointly and severally, firmly by these presents.

"The CONDITIONS OF THIS OBLIGATION are as follows;

"WHEREAS the above bounden principal on the ___ day of __________, 19__
entered into a contract with the REPUBLIC ASAHI GLASS CORPORATION
represented by _________________, to fully and faithfully. Comply with the site
preparation works road and drainage system of Philippine Float Plant at Pinagbuhatan,
Pasig, Metro Manila.

"WHEREAS, the liability of the Surety Company under this bond shall in no case
exceed the sum of PESOS SEVEN HUNDRED NINETY FIVE THOUSAND
(P795,000.00) Philippine Currency, inclusive of interest, attorney’s fee, and other
damages, and shall not be liable for any advances of the obligee to the principal.

"WHEREAS, said contract requires the said principal to give a good and sufficient
bond in the above-stated sum to secure the full and faithfull performance on its part of
said contract, and the satisfaction of obligations for materials used and labor
employed upon the work;
"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and agreements of said contract during the
original term of said contract and any extension thereof that may be granted by the
obligee, with notice to the surety and during the life of any guaranty required under
the contract, and shall also perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of any and all duly authorized
modifications of said contract that may hereinafter be made, without notice to the
surety except when such modifications increase the contract price; and such principal
contractor or his or its sub-contractors shall promptly make payment to any
individual, firm, partnership, corporation or association supplying the principal of its
sub-contractors with labor and materials in the prosecution of the work provided for in
the said contract, then, this obligation shall be null and void; otherwise it shall remain
in full force and effect. Any extension of the period of time which may be granted by
the obligee to the contractor shall be considered as given, and any modifications of
said contract shall be considered as authorized, with the express consent of the Surety.

"The right of any individual, firm, partnership, corporation or association supplying

the contractor with labor or materials for the prosecution of the work hereinbefore
stated, to institute action on the penal bond, pursuant to the provision of Act No. 3688,
is hereby acknowledge and confirmed." 16

As a surety, petitioner is solidarily liable with Santos in accordance with the Civil
Code, which provides as follows:

"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
17

is called a suretyship."
 xxxxxxxxx
"Art. 1216. The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected."

Elucidating on these provisions, the Court in Garcia v. Court of Appeals  stated thus:
18

"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. x x x." 19

Under the law and jurisprudence, respondent may sue, separately or together, the
principal debtor and the petitioner herein, in view of the solidary nature of their
liability.

The death of the principal debtor will not work to convert, decrease or nullify the
substantive right of the solidary creditor. Evidently, despite the death of the principal
debtor, respondent may still sue petitioner alone, in accordance with the solidary
nature of the latter’s liability under the performance bond.

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals

AFFIRMED. Costs against petitioner.

SO ORDERED.

ARTEMIO V. PANGANIBAN
Chief Justice
Chairman, First Division

WE CONCUR:

CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice Asscociate Justice

ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO

Associate Justice Asscociate Justice
 CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions
in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.
ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes
1
 Rollo, pp. 9-20.
2
 Id. at 23-37. Seventeenth Division. Penned by Justice Remedios A. Salazar-
Fernando, with the concurrence of Justices Romeo A. Brawner (Division chair)
and Juan Q. Enriquez Jr. (member).
3
 Assailed CA Decision, p. 14; rollo, p. 36.
4
 Id. at 2-5; id. at 24-27.
5
 Id. at 13-14; id. at 35-36.
6
 To resolve old cases, the Court created the Committee on Zero Backlog of
Cases on January 26, 2006. Consequently, the Court resolved to prioritize the
adjudication of long-pending cases by redistributing them among all the
justices. This case was recently raffled and assigned to the
undersigned ponente for study and report.
7
 Petitioner’s Memorandum, p. 6; rollo, p. 172. Original in uppercase.
8
 A. Tolentino, Commentaries And Jurisprudence On The Civil Code 272, Vol.
IV (1991).
9
 Id. See also the Civil Code, Art. 1311, which states:

"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."

 Examples of purely personal actions are those for support, divorce, annulment
10

of marriage, legal separation (Lapuz Sy v. Eufemio, 43 SCRA 177, January 31,

1972). See also Javier Security Special Watchman Agency v. Shell-Craft &
Button Corp., 117 Phil. 218, January 31, 1963, for an illustration of a contract
that is not transmissible by its nature, as when the special or personal
 qualification of the obligor constitutes one of the principal motives of the
contract.
 A. Tolentino, Commentaries And Jurisprudence On The Civil Code, supra
11

note 8.
 "SEC. 5. Claims which must be filed under the notice. If not filed, barred;
12

exceptions.--All claims for money against the decedent, arising from contract,
express or implied, whether the same be due, not due, or contingent, all claims
for funeral expenses and expenses for the last sickness of the decedent, and
judgment for money against the decedent, must be filed within the time limited
in the notice; otherwise they are barred forever, except that they may be set
forth as counterclaims in any action that the executor or administrator may
bring against the claimants. x x x."
 E. Paras, Rules Of Court Annotated 125, Vol. 1 (1989).
13

 Id.
14

 See Limjoco v. Intestate of Fragante, 80 Phil. 776, April 27, 1948; Suiliong
15

&Co. v. Chio-Taysan, 12 Phil. 13, November 11, 1908; Pavia v. De La Rosa, 8

Phil. 70, March 18, 1907.
 Performance Bond; rollo, p. 69.
16

 This refers to the Civil Code, Arts. 1207 to 1222.

17

 191 SCRA 493, November 20, 1990. See also International Finance
18

Corporation v. Imperial Textile Mills, Inc., GR 160324, November 15, 2005.

 Id. at 495-496, per Cruz, J.
19

The Lawphil Project - Arellano Law Foundation