“Any change in the principal contract, which materially alters the principal’s obligations would, in effect, constitute an implied novation of the surety contract”
(First of two parts)
Jurisprudence 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… in favor of a third person called the obligee…’”
“[A] surety’s liability is joint and several, limited to the amount of the bond, and determined strictly by the terms of [the] contract of suretyship in relation to the principal contract…” (G.R. 220613, Nov. 11, 2021).
While “the contract of suretyship is secondary to the principal contract, the surety’s liability to the obligee is nevertheless direct, primary, and absolute.”
“In other words, even though the contract of a surety is secondary… the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations…”
“[S]ince the surety is a solidary debtor, it is not necessary that the original debtor first failed to pay before the surety could be made liable; it is enough that a demand for payment is made by the creditor for the surety’s liability to attach.”
However, “any change in the principal contract, which materially alters the principal’s obligations would, in effect, constitute an implied novation of the surety contract” (op. cit.) citing People’s Trans-East Asia Insurance Corp. v. Doctors of New Millennium).
In the case of Subic Bay Distribution, Inc. v. Western Guaranty Corporation, “Subic Bay Distribution, Inc. (SBDI) entered into a Distributor Agreement with Prime Asia Sales and Services, Inc. (PASSI) where the latter… purchase[d] petroleum products from [SBDI] to be paid within fifteen (15) days, provided that the credit limit did not exceed P5,000,000.00.”
“Under… the agreement, PASSI obligated itself to post a performance bond to secure its obligation…” “In compliance, PASSI secured a performance bond from Western Guaranty Corporation (WGC)” and when PASSI subsequently defaulted on its payments, several demands were sent but the latter failed to settle its obligation.
“Meantime, [SBDI] also went after the performance bond and sought payment from [WGC] of the full amount of its surety contract, i.e. P8.5 million…”
“[SBDI] even sought the assistance of the Insurance Commission to recover payment from [WGC] [but] [SBDI] failed to recover payment from [WGC].”
“Consequently, [SBDI] filed a complaint for sum of money against [WGC] with the RTC-Makati City.”
The latter “countered that there was collusion between SBDI and PASSI to collect on the performance bond” since “[SBDI] did not include PASSI as party defendant in the complaint.”
RTC-Makati rendered judgment in favor of SBDI but, on appeal, the Court of Appeals reversed RTC-Makati’s Decision.
“It ruled that [SBDI] failed to establish that there was actual delivery to and/or acceptance by PASSI of the petroleum products subject of the obligation.”