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Asset Builders vs Stronghold the surety becomes liable for the debt or duty of

another although it possesses no direct or personal


Asset Builders Corp (ABC) obligee, petitioner interest over the obligations nor does it receive any
benefit therefrom. Let it be stressed that
Lucky Star Drilling & Construction Corporation (Lucky
notwithstanding the fact that the surety contract is
Star) - obligor
secondary to the principal obligation, the surety
Stronghold Insurance Company (Stronghold) surety, assumes liability as a regular party to the undertaking.
respondent
Suretyship, in essence, contains two types of
relationship the principal relationship between the
obligee (petitioner) and the obligor (Lucky Star), and
ABC entered into an agreement with Lucky Star as part the accessory surety relationship between the
of the completion of its project to construct the ACG principal (Lucky Star) and the surety (respondent). In
Commercial Complex. Lucky Star was to supply labor, this arrangement, the obligee accepts the suretys
materials, tools, and equipment including technical solidary undertaking to pay if the obligor does not pay.
supervision to drill one (1) exploratory production well Such acceptance, however, does not change in any
on the project site. material way the obligees relationship with the
principal obligor. Neither does it make the surety an
To guarantee faithful compliance with their agreement, active party to the principal obligee-obligor
Lucky Star engaged respondent Stronghold which relationship. Thus, the acceptance does not give the
issued two (2) bonds in favor of petitioner ABC. surety the right to intervene in the principal contract.
The suretys role arises only upon the obligors
ABC paid Lucky Star P575,000.00 as advance payment, default, at which time, it can be directly held liable by
representing 50% of the contract price. Lucky Star, the obligee for payment as a solidary obligor.
thereafter, commenced the drilling work.
In the case at bench, when Lucky Star failed to finish
On agreed completion date, Lucky Star managed to the drilling work within the agreed time frame despite
accomplish only 10% of the drilling work. ABC sent a petitioners demand for completion, it was already in
demand letter to Lucky Star for the immediate delay. Due to this default, Lucky Stars liability
completion of the drilling work. However, Lucky Star attached and, as a necessary consequence,
failed to fulfill its obligation. respondents liability under the surety agreement
arose.
ABC sent Notice of Rescission of Contract with Demand
for Damages to Lucky Star and a Notice of Claim for Undeniably, when Lucky Star reneged on its
payment to Stronghold to make good its obligation undertaking with the petitioner and further failed to
under its bonds. return the P575,000.00 downpayment that was already
advanced to it, respondent, as surety, became
Despite notice, ABC did not receive any reply either
solidarily bound with Lucky Star for the repayment of
from Lucky Star or Stronghold, prompting it to file its
the said amount to petitioner.
Complaint for Rescission with Damages against both
before the RTC. Contrary to the trial courts ruling, respondent
insurance company was not automatically released
RTC rendered the assailed decision ordering Lucky Star
from any liability when petitioner resorted to the
to pay ABC but absolving Stronghold from liability.
rescission of the principal contract for failure of the
Relevant parts of the decision reads: The surety bond
other party to perform its undertaking. Precisely, the
and performance bond executed by defendants Lucky
liability of the surety arising from the surety contracts
Star and Stronghold Insurance are in the nature of
comes to life upon the solidary obligors default. It
accessory contracts which depend for its existence
should be emphasized that petitioner had to choose
upon another contract. Thus, when the agreement
rescission in order to prevent further loss that may
between the plaintiff Asset Builders and defendant
arise from the delay of the progress of the project.
Lucky Star was rescinded, the surety and performance
Without a doubt, Lucky Stars unsatisfactory progress
bond were automatically cancelled.
in the drilling work and its failure to complete it in due
Thus, Asset Builders filed this present petition for time amount to non-performance of its obligation.
review on certiorari assailing decision of RTC which
In fine, respondent should be answerable to petitioner
orders defendant Lucky Star to pay petitioner Asset
on account of Lucky Stars non-performance of its
Builders the sum of P575,000.00 with damages, but
obligation as guaranteed by the performance bond.
absolving respondent Stronghold Insurance of any
liability on its Surety Bond and Performance Bond. Finally, Article 1217 of the New Civil Code
acknowledges the right of reimbursement from a co-
Issue: Whether or not respondent insurance company,
debtor (the principal co-debtor, in case of suretyship)
as surety, can be held liable under its bonds.
in favor of the one who paid (the surety). Thus,
Held: Yes. respondent is entitled to reimbursement from Lucky
Star for the amount it may be required to pay
As provided in Article 2047, the surety undertakes to petitioner arising from its bonds.
be bound solidarily with the principal obligor. That
undertaking makes a surety agreement an ancillary WHEREFORE, Decision of the RTC, is AFFIRMED with
contract as it presupposes the existence of a principal MODIFICATION. Respondent Stronghold Insurance is
contract. Although the contract of a surety is in hereby declared jointly and severally liable with Lucky
essence secondary only to a valid principal obligation, Star for the payment of P575,000.00 and the payment
of P345,000.00 on the basis of its performance bond.