**Facts:**
The case originated from a Consortium Agreement executed on August 16, 1988, between Kawasaki Steel Corporation (Kawasaki) and F.F. Mañacop Construction Co., Inc. (FFMCCI) to undertake the construction of the Pangasinan Fishing Port Network Project for the Philippine Government. Under this agreement, Kawasaki and FFMCCI were to fulfill specific portions of the work, with FFMCCI securing Surety and Performance Bonds from CCC Insurance Corporation (CCCIC) in favor of Kawasaki as guarantees for advance payments and performance, respectively. However, FFMCCI ceased its work on the project due to financial difficulties, leading to a subsequent agreement where Kawasaki agreed to take over FFMCCI’s remaining work. Kawasaki then demanded CCCIC to pay the amounts covered by the bonds after FFMCCI’s cessation of work, which CCCIC refused, leading to Kawasaki filing a complaint with the Regional Trial Court (RTC). The RTC dismissed Kawasaki’s claim, a decision reversed by the Court of Appeals, holding CCCIC liable under the bonds. CCCIC’s subsequent petition to the Supreme Court questioned the legal grounds of its liability and the applicability of Article 2079 of the Civil Code concerning the extension of project completion deadlines without its consent.
**Issues:**
1. Whether CCCIC’s liability under the Surety and Performance Bonds only arises upon the Philippine Government’s claim on a separate Letter of Credit.
2. Whether Article 2079 of the Civil Code, regarding extensions granted to the debtor without the consent of the guarantor, applies and extinguishes CCCIC’s liability.
3. Whether the agreements between Kawasaki and FFMCCI, particularly the one allowing Kawasaki to take over FFMCCI’s portion of the work, novated the original agreement and consequently extinguished CCCIC’s obligations under the bonds.
4. The applicability of awarding attorney’s fees and the imposition of legal interest rates.
**Court’s Decision:**
The Supreme Court partially granted the petition, affirming the appellate court’s decision with modifications. The Court clarified that CCCIC’s obligations under the Surety and Performance Bonds were independent of the separate Letter of Credit for the project and were directly triggered by FFMCCI’s failure to perform its obligations. The Court also found that Article 2079 does not apply as the extensions related to the project’s completion time do not affect the separate contractual relationships established by the bonds. Moreover, the Court held no novation of the Consortium Agreement occurred that would release CCCIC from its bond obligations. However, it dismissed CCCIC’s third-party complaint against FFMCCI and Mañacop due to lack of cause of action, deleted the award of attorney’s fees to Kawasaki, and updated the legal interest rates in line with recent jurisprudence.
**Doctrine:**
The case reiterates principles regarding suretyship, specifically that a surety’s obligations are determined solely by the terms of the suretyship contract in relation to the principal contract without requiring any separate claim against other securities established for the project. It also underscored that modifications in the principal contract do not per se extinguish a surety’s obligations unless these specifically make the surety’s obligations more onerous.
**Class Notes:**
– The liability of a surety is direct, primary, and absolute, dependent solely on the terms of the suretyship contract.
– Article 2079 of the Civil Code does not apply where the extension granted does not relate to the debtor-surety-creditor tripartite relationship under the bond.
– The principle of novation requires an express or implied declaration that the obligation is extinguished by the new one, which must be incompatible on every point with the old obligation.
– The right of subrogation and indemnification for a surety against the principal debtor arises only after the surety has fulfilled the obligation to the creditor.
**Historical Background:**
This case provides insight into the complexities involved in multi-party obligations concerning construction projects involving public and private entities. It underscores the specific legal frameworks governing suretyship and performance bonds in the context of contractual partnerships for government projects, revealing the judicial balance between strict contractual adherence and equitable considerations within Philippine jurisprudence.
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