PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, PETITIONER, VS. V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C. EUSEBIO; ED…

Philippine Export and Foreign Loan Guarantee Corporation versus V.P. Eusebio Construction

The Case

This is a collection suit brought by the Philippine Export and Foreign Loan Guarantee Corporation, known as Philguarantee, a government financial institution that issues guarantees for qualified Filipino contractors undertaking approved service contracts abroad, against V.P. Eusebio Construction, 3-Plex International, the spouses Vicente and Soledad Eusebio, the spouses Eduardo and Iluminada Santos, and First Integrated Bonding and Insurance Company. Philguarantee seeks reimbursement of the amount it paid to Al Ahli Bank of Kuwait under a counter-guarantee it issued to support a Filipino joint venture's construction project in Baghdad, Iraq. The case matters because it draws the dividing line between a guaranty and a suretyship, and because it shows when a guarantor may be compelled to pay at all.

Procedural History

Philguarantee filed a complaint for collection of a sum of money before the Regional Trial Court of Makati City. After trial, the trial court ruled against Philguarantee, holding that it had no valid cause of action: the guarantee had already lapsed when the call was made, there was no valid renewal without the respondents' express consent, the contractor incurred no delay, and no valid notice preceded the call. The trial court dismissed the complaint, the counterclaims, and the cross-claim, and ordered Philguarantee to pay attorney's fees to the respondents, plus costs. Philguarantee appealed to the Court of Appeals, which affirmed the trial court in its decision of June 1999. Philguarantee then came to the Supreme Court by petition for review under Rule 45 of the Rules of Court.

Facts

In November 1980 the State Organization of Buildings of Baghdad awarded a project, the Institute of Physical Therapy and Medical Rehabilitation Center, Phase II, to Ajyal Trading and Contracting Company. In March 1981 the Santos spouses, for 3-Plex International, entered a joint venture with Ajyal to execute the entire project. In April 1981 3-Plex, not accredited with the Philippine Overseas Construction Board, assigned its rights to V.P. Eusebio Construction, which was registered, and the two firms later agreed to joint management. The project owner required a performance bond and an advance payment bond. Philguarantee approved the contractors' application, but its letters of guarantee to Rafidain Bank were not accepted. Rafidain Bank required a counter-guarantee from another foreign bank, so Al Ahli Bank of Kuwait was engaged, and it in turn required a counter-guarantee from Philguarantee. Three layers of guarantees were thus arranged.

Philguarantee issued two letters of guarantee in favor of Al Ahli Bank of Kuwait, secured by a deed of undertaking executed by the respondents and by a surety bond issued by First Integrated Bonding. The service contract was signed in June 1981. Construction began late, and the project was not completed on schedule. The guarantees and the surety bond were repeatedly extended. As of March 1986 the project was about half accomplished, the unfinished portion requiring imported equipment and materials.

In October 1986 Al Ahli Bank demanded full payment under the counter-guarantee. V.P. Eusebio Construction protested, citing the project owner's failure to pay seventy-five percent of billings in United States dollars and asking that payment be held in abeyance. In April 1987 Al Ahli Bank reported that it had paid Rafidain Bank and demanded reimbursement. The Central Bank authorized the remittance, and Philguarantee paid Al Ahli Bank in January 1988, and later paid interest and penalty charges. When the respondents failed to reimburse despite demand, Philguarantee filed suit in July 1991.

Issues

• Whether or not Philguarantee is a surety rather than a guarantor, such that its liability attached upon the contractor's failure to finish the project.
• Whether or not the respondent contractor defaulted in its obligations, so as to justify resort to the guaranty.
• Whether or not Philguarantee is entitled to reimbursement of what it paid under its letter of guarantee, based on the deed of undertaking and the surety bond.

Applicable Provisions

Article 2047 of the Civil Code defines guaranty and suretyship:

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 contract is called suretyship.

This is the test the Court used to classify Philguarantee's undertaking.

Article 1169, last paragraph, of the Civil Code governs delay in reciprocal obligations:

In reciprocal obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a proper manner with what is incumbent upon him.

This provision, applied through the presumption that foreign law is the same as ours, decides whether the contractor was in default.

Ruling

On the first issue, the Court held that Philguarantee is a guarantor, not a surety. Reading Letter of Guarantee No. 81-194-F, the Court noted that Philguarantee bound itself to pay upon the event of default by V.P. Eusebio. The Court ruled that an unconditional and irrevocable guarantee does not make the guarantor a surety; it remains subsidiary and conditional, because it does not take effect until the principal obligor fails in his obligation. Surety is never presumed, and a party is not a surety where the contract stipulates that he acts only as a guarantor; only when the guarantor binds himself solidarily with the principal debtor does the contract become a suretyship.

On the second issue, the Court held that the contractor did not default. This was a question of fact on which the trial court and the Court of Appeals agreed, and their findings bind the Court. On the applicable law, the Court held that the intrinsic validity of a contract is governed by the proper law of the contract, and that the laws of Iraq bear substantial connection to the transaction. But since foreign law was not properly pleaded or proved, the presumption of identity applies, and our law governs. Under Article 1169, the project owner's failure to pay in the manner agreed meant the contractor incurred no delay.

On the third issue, because there was no default, no valid call could be made on the guaranty, and Philguarantee had no right to reimbursement from the respondents.

Doctrine

A guaranty is subsidiary and conditional; a suretyship is primary and solidary. An unconditional and irrevocable guarantee is still a guaranty, because it takes effect only upon the principal debtor's default. Surety is never presumed, and a party is not a surety where the contract stipulates that he acts only as a guarantor. In reciprocal obligations, neither party incurs delay if the other does not comply in a proper manner. Where foreign law is not pleaded or proved, it is presumed the same as Philippine law.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals, so the respondents won and Philguarantee recovered nothing.

Remember This

Memorize this line: an unconditional and irrevocable guarantee is still a guaranty, not a suretyship, because surety is never presumed. Examiners use this case to test the guaranty and suretyship distinction, the requisites of default in reciprocal obligations, and the processual presumption on unproved foreign law.