Guaranty/Suretyship

Philippine Export and Foreign Loan Guarantee Corporation v V.P. Eusebio

Construction Inc.

Facts:

1. The State Organization of Buildings (SOB), Ministry of Housing and Construction,

Baghdad, Iraq awarded the construction of the Institute of Physical Therapy-Medical

Rehabilitation Center in Iraq to Ayjal Trading and Contracting Company for a total

contract price of about $18M.

2. Spouses Santos, in behalf of 3-Plex International, Inc., a local contractor engaged in

construction business, entered into a joint venture agreement with Ayjal wherein the

former undertook the execution of the entire a project, while the latter would be entitled

to a commission of 4%.

3. 3-Plex not accredited by the Philippine Overseas Construction Board (POCB)

assigned and transferred all its rights and interests to VPECI.

4. The SOB required the contractors to submit a performance bond representing 5% of

the total contract price, an advance payment bond representing 10% of the advance

payment to be released upon signing of the contract. To comply with these

requirements 3-Plex and VPECI applied for a guarantee with Philguarantee, a

government financial institution empowered to issue guarantees for qualified Filipino

contractors.
5. But what SOB required was a guarantee from the Rafidain Bank of Baghdad so

Rafidain Bank issued a performance bond in favor of SOB on the condition that another

foreign bank (not Phil Guarantee) would issue the counter-guarantee. Hence, Al Ahli

Bank of Kuwait was chosen to provide the counter guarantee.

6. Afterwards, SOB and the joint venture of VPECI and Ayjal executed the service

contract. Under the contract, the joint venture would supply manpower and materials,

SOB would refund 25% of the project cost in Iraqi Dinar and 75% in US dollars at an

exchange rate of 1 Dinar to $3.37.

7. The project was not completed. Upon seeing the impossibility of meeting the

deadline, the joint venture worked for the renewal or extension (12x) of the performance

bond up to December 1986.

8. In October 1986, Al Ahli Bank sent a telex call demanding full payment of its

performance bond counter-guarantee. Upon receipt, VPECI requested Iraq Trade and

Economic Development Minister Fadhi Hussein to recall the telex for being in

contravention of its mutual agreement that the penalty will be held in abeyance until

completion of the project. It also wrote SOB protesting the telex since the Iraqi

government lacks foreign exchange to pay VPECI and the non-compliance with the

75% billings in US dollars.

9. Philguarantee received another telex from Al Ahli stating that it already paid to

Rafidain Bank. The Central Bank authorized the remittance to Al Ahli Bank representing

the full payment of the performance counter-guarantee for VPECI's project in Iraq.
10. Philguarantee sent letters to respondents demanding the full payment of the surety

bond. Respondents failed to pay so petitioner filed a civil case for collection of sum of

money.

11. Trial Court ruling: Dismissed. Philguarantee had no valid cause of action against the

respondents. The joint venture incurred no delay in the execution of the project

considering that SOB's violations of the contract rendered impossible the performance

of its undertaking.

12. CA: Affirmed.

Issue:

1. WON the respondent contractor has defaulted in its obligations that

would justify resort to the guaranty.

2. WON petitioner as a guarantor can secure reimbursement from the

respondents for what it has paid under Letter of Guarantee No. 81-194F.

Ruling:

1. The trial court and the Court of Appeals were in unison that the respondent

contractor cannot be considered to have defaulted in its obligations

because the cause of the delay was not primarily attributable to it. The

delay or the non -completion of the Project was caused by factors not

imputable to the respondent contractor. It was rather due mainly to the

persistent violations by SOB of the terms and conditions of the contract,

particularly its failure to pay 75% of the accomplished work in US Dollars.

 Indeed, where one of the parties to a contract does not perform in a proper

manner the prestation which he is bound to perform under the contract, he is

not entitled to demand the performance of the other party. A party does not

incur in delay if the other party fails to perform the obligation incumbent upon

him.

2. As a rule, a guarantor who pays for a debtor should be indemnified by the

latter and would be legally subrogated to the rights which the creditor has

against the debtor. However, a person who makes payment without the

knowledge or against the will of the debtor has the right to recover only

insofar as the payment has been beneficial to the debtor. If the obligation was

subject to defenses on the part of the debtor, the same defenses which could

have been set up against the creditor can be set up against the paying

guarantor.

From the findings of the Court of Appeals and the trial court, it is clear that the

payment made by the petitioner guarantor did not in any way benefit the

principal debtor, given the project status and the conditions obtaining at the

Project site at that time. Moreover, the respondent contractor was found to

have valid defenses against SOB, which are fully supported by evidence and

which have been meritoriously set up against the paying guarantor, the

petitioner in this case. And even if the deed of undertaking and the surety

bond secured petitioners guaranty, the petitioner is precluded from enforcing

the same by reason of the petitioners undue payment on the guaranty.

Rights under the deed of undertaking and the surety bond do not arise
 because these contracts depend on the validity of the enforcement of the

guaranty. The petitioner guarantor should have waited for the natural course

of guaranty: the debtor VPECI should have, in the first place, defaulted in its

obligation and that the creditor SOB should have first made a demand from

the principal debtor. It is only when the debtor does not or cannot pay, in

whole or in part, that the guarantor should pay. When the petitioner guarantor

in this case paid against the will of the debtor VPECI, the debtor VPECI may

set up against it defenses available against the creditor SOB at the time of

payment.

Stronghold Insurance Co. Inc. v. Tokyu Construction Com. Ltd

Facts:

Exhaustion

JN Devt. Corp. v. Philippine Export and Foreign Loan Guarantee Corp

Facts:

Petitioner JN Development Corporation and Traders Royal Bank entered into an

agreement that the latter would extend to JN an Export Packing Credit Line for Two

Million Pesos. The loan was covered by several securities, including a real estate

mortgage and a letter of guarantee from respondent Philippine Export and Foreign

Loan Guarantee Corporation, covering seventy percent (70%) of the credit line.

With Phil Guarantee issuing a guarantee in favor of TRB. For failure of petitioner JN

to pay upon maturity, Phil Guarantee was made to pay. When JN failed to reimburse the
latter, respondent Phil Guarantee filed a Complaint for collection of money and

damages against herein petitioners.

The RTC dismissed Phil Guarantees complaint as well as the counterclaim of

petitioners. It ruled that the petitioners are not liable to reimburse Phil Guarantee what it

had paid to TRB since the latter was able foreclose the real estate mortgage executed

by JN, thus, extinguishing petitioners obligation. According to the RTC, the failure of

TRB to sue JN for the recovery of the loan precludes Phil Guarantee from seeking

recoupment from what it had paid to TRB. Thus, Phil Guarantees payment to TRB

amounts to a waiver of its right under Art. 2058 of the Civil Code.

Issue:

WON petitioner is still liable to indemnify the guarantor despite the latter

seemingly waiving its right to excussion.

Ruling:

Yes. The Court held that Phil Guarantees waiver of the right of excussion cannot

prevent it from demanding reimbursement from petitioners. The law clearly requires the

debtor to indemnify the guarantor what the latter has paid. Under a contract of

guarantee, the guarantor binds himself to the credit to fulfill the obligation of the

principal debtor in case the latter should fail to do so. The guarantor who pays for a

debtor, in turn, must be indemnified by the latter. However, the guarantor cannot

be compelled to pay the creditor unless the latter has exhausted all the property

of the debtor and resorted to all the legal remedies against the debtor. This is what

is otherwise known as the benefit of excussion.