FIRST DIVISION "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rescinded the contract pursuant to Article XIII of said contract, and
[G.R. NO. 147561 : June 22, 2006]
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
STRONGHOLD INSURANCE COMPANY, construed as a waiver of [respondent's] right to recover damages from
INC., Petitioner, v. REPUBLIC-ASAHI GLASS x x x JDS and the latter's sureties.
CORPORATION, Respondent.
"[Respondent] alleged that, as a result of x x x JDS's failure to comply
DECISION 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
PANGANIBAN, C.J.: fifty six thousand, eight hundred seventy four pesos (P3,256,874.00).

Asurety company's liability under the performance bond it issues is "On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing
solidary. The death of the principal obligor does not, as a rule, its claim under the bond for not less than P795,000.00. On March 22,
extinguish the obligation and the solidary nature of that liability. 1991, [respondent] again sent another letter reiterating its demand for
payment under the aforementioned bond. Both letters allegedly went
The Case unheeded.

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, "[Respondent] then filed [a] complaint against x x x JDS and SICI. It
seeking to reverse the March 13, 2001 Decision2 of the Court of sought from x x x JDS payment of P3,256,874.00 representing the
Appeals (CA) in CA-GR CV No. 41630. The assailed Decision additional expenses incurred by [respondent] for the completion of the
disposed as follows: 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
"WHEREFORE, the Order dated January 28, 1993 issued by the lower of P100,000.00 and attorney's fees in the amount of at
court is REVERSED and SET ASIDE. Let the records of the instant least P100,000.00.
case be REMANDED to the lower court for the reception of evidence of
all parties."3
"According to the Sheriff's Return dated June 14, 1991, submitted to
the lower court by Deputy Sheriff Rene R. Salvador, summons were
The Facts 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
The facts of the case are narrated by the CA in this wise: 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 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 "On July 10, 1991, [petitioner] SICI filed its answer, alleging that the
roadways and a drainage system in Republic-Asahi's compound in [respondent's] money claims against [petitioner and JDS] have been
Barrio Pinagbuhatan, Pasig City, where [respondent] was to pay x x x extinguished by the death of Jose D. Santos, Jr. Even if this were not
JDS five million three hundred thousand pesos (P5,300,000.00) the case, [petitioner] SICI had been released from its liability under the
inclusive of value added tax for said construction, which was supposed performance bond because there was no liquidation, with the active
to be completed within a period of two hundred forty (240) days participation and/or involvement, pursuant to procedural due process,
beginning May 8, 1989. In order 'to guarantee the faithful and of herein surety and contractor Jose D. Santos, Jr., hence, there was
satisfactory performance of its undertakings' x x x JDS, shall post a no ascertainment of the corresponding liabilities of Santos and SICI
performance bond of seven hundred ninety five thousand pesos under the performance bond. At this point in time, said liquidation was
(P795,000.00). x x x JDS executed, jointly and severally with impossible because of the death of Santos, who as such can no longer
[petitioner] Stronghold Insurance Co., Inc. (SICI) Performance Bond participate in any liquidation. The unilateral liquidation on the party (sic)
No. SICI-25849/g(13)9769. 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
"On May 23, 1989, [respondent] paid to x x x JDS seven hundred had no factual and legal basis, as payment of said bond was
ninety five thousand pesos (P795,000.00) by way of downpayment. conditioned on the payment of damages which [respondent] may
sustain in the event x x x JDS failed to complete the contracted works.
"Two progress billings dated August 14, 1989 and September 15, [Respondent] can no longer prove its claim for damages in view of the
1989, for the total amount of two hundred seventy four thousand six death of Santos. SICI was not informed by [respondent] of the death of
hundred twenty one pesos and one centavo (P274,621.01) were Santos. SICI was not informed by [respondent] of the unilateral
submitted by x x x JDS to [respondent], which the latter paid. rescission of its contract with JDS, thus SICI was deprived of its right to
According to [respondent], these two progress billings accounted for protect its interests as surety under the performance bond, and
only 7.301% of the work supposed to be undertaken by x x x JDS therefore it was released from all liability. SICI was likewise denied due
under the terms of the contract. 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
"Several times prior to November of 1989, [respondent's] engineers contract is against public policy in that it denies SICI the right to
called the attention of x x x JDS to the alleged alarmingly slow pace of procedural due process. Finally, SICI alleged that [respondent]
the construction, which resulted in the fear that the construction will not deviated from the terms and conditions of the contract without the
be finished within the stipulated 240-day period. However, said written consent of SICI, thus the latter was released from all liability.
reminders went unheeded by x x x JDS. 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 Petitioner states the issue for the Court's consideration in the following
complaint of [respondent] against x x x JDS and SICI, on the ground manner:
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
"Death is a defense of Santos' heirs which Stronghold could also adopt
reads as follows:
as its defense against obligee's claim."7

'ACCORDINGLY, the complaint against the defendants Jose D.

More precisely, the issue is whether petitioner's liability under the
Santos, Jr., doing business under trade and style, 'JDS Construction'
performance bond was automatically extinguished by the death of
and Stronghold Insurance Company, Inc. is ordered DISMISSED.
Santos, the principal.

'SO ORDERED.'
The Court's Ruling

"On September 4, 1991, [respondent] filed a Motion for

The Petition has no merit.
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 Sole Issue:
October 15, 1991, the lower court issued an Order, the dispositive
portion of which reads as follows:
Effect of Death on the Surety's Liability

'WHEREFORE, premises considered, the Motion for Reconsideration

is hereby given due course. The Order dated 16 August 1991 for the Petitioner contends that the death of Santos, the bond principal,
extinguished his liability under the surety bond. Consequently, it says,
dismissal of the case against Stronghold Insurance Company, Inc., is
it is automatically released from any liability under the bond.
reconsidered and hereby reinstated (sic). However, the case against
defendant Jose D. Santos, Jr. (deceased) remains undisturbed.
As a general rule, the death of either the creditor or the debtor does
not extinguish the obligation.8Obligations are transmissible to the heirs,
'Motion for Preliminary hearing and Manifestation with Motion filed by
except when the transmission is prevented by the law, the stipulations
[Stronghold] Insurance Company Inc., are set for hearing on November
of the parties, or the nature of the obligation.9 Only obligations that are
7, 1991 at 2:00 o'clock in the afternoon.
personal10 or are identified with the persons themselves are
extinguished by death.11
'SO ORDERED.'
Section 5 of Rule 8612 of the Rules of Court expressly allows the
"On June 4, 1992, [petitioner] SICI filed its 'Memorandum for prosecution of money claims arising from a contract against the estate
Bondsman/Defendant SICI (Re: Effect of Death of defendant Jose D. of a deceased debtor. Evidently, those claims are not actually
Santos, Jr.)' reiterating its prayer for the dismissal of [respondent's] extinguished.13 What is extinguished is only the obligee's action or suit
complaint. filed before the court, which is not then acting as a probate court. 14

"On January 28, 1993, the lower court issued the assailed Order In the present case, whatever monetary liabilities or obligations Santos
reconsidering its Order dated October 15, 1991, and ordered the case, had under his contracts with respondent were not intransmissible by
insofar as SICI is concerned, dismissed. [Respondent] filed its motion their nature, by stipulation, or by provision of law. Hence, his death did
for reconsideration which was opposed by [petitioner] SICI. On April not result in the extinguishment of those obligations or liabilities, which
16, 1993, the lower court denied [respondent's] motion for merely passed on to his estate.15 Death is not a defense that he or his
reconsideration. x x x."4 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.
Ruling of the Court of Appeals

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

The CA ruled that SICI's obligation under the surety agreement was
performance bond worded as follows:
not extinguished by the death of Jose D. Santos, Jr. Consequently,
Republic-Asahi could still go after SICI for the bond.
"KNOW ALL MEN BY THESE PRESENTS:
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question had "That we, JDS CONSTRUCTION of 208-A San Buena Building,
become impossible by respondent's act of rescission. The Contract contractor, of Shaw Blvd., Pasig, MM Philippines, as principal and the
was rescinded because of the dissatisfaction of respondent with the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
slow pace of work and pursuant to Article XIII of its Contract with JDS. 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
The CA ruled that "[p]erformance of the [C]ontract was impossible, not
individual, firm, partnership, corporation or association supplying the
because of [respondent's] fault, but because of the fault of JDS
principal with labor or materials in the penal sum of SEVEN HUNDRED
Construction and Jose D. Santos, Jr. for failure on their part to make
NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for the
satisfactory progress on the project, which amounted to non-
payment of which sum, well and truly to be made, we bind ourselves,
performance of the same. x x x [P]ursuant to the [S]urety [C]ontract,
our heirs, executors, administrators, successors and assigns, jointly
SICI is liable for the non-performance of said [C]ontract on the part of
and severally, firmly by these presents.
JDS Construction."5

"The CONDITIONS OF THIS OBLIGATION are as follows;

Hence, this Petition.6

"WHEREAS the above bounden principal on the ___ day of

Issue
__________, 19__ entered into a contract with the REPUBLIC ASAHI
GLASS CORPORATION represented by _________________, to fully obligation, his liability to the creditor or promisee of the principal is said
and faithfully. Comply with the site preparation works road and to be direct, primary and absolute; in other words, he is directly and
drainage system of Philippine Float Plant at Pinagbuhatan, Pasig, equally bound with the principal. x x x."19
Metro Manila.
Under the law and jurisprudence, respondent may sue, separately or
"WHEREAS, the liability of the Surety Company under this bond shall together, the principal debtor and the petitioner herein, in view of the
in no case exceed the sum of PESOS SEVEN HUNDRED NINETY solidary nature of their liability. The death of the principal debtor will not
FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of work to convert, decrease or nullify the substantive right of the solidary
interest, attorney's fee, and other damages, and shall not be liable for creditor. Evidently, despite the death of the principal debtor, respondent
any advances of the obligee to the principal. may still sue petitioner alone, in accordance with the solidary nature of
the latter's liability under the performance bond.
"WHEREAS, said contract requires the said principal to give a good
and sufficient bond in the above-stated sum to secure the full and WHEREFORE, the Petition is DENIED and the Decision of the Court of
faithfull performance on its part of said contract, and the satisfaction of Appeals AFFIRMED. Costs against petitioner.
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 4,17 Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship."

xxx

"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

Appeals18 stated thus:

"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