EASTERN ASSURANCE & SURETY CORPORATION, PETITIONER, VS. INTERMEDIATE APPELLATE COURT AND REPUBLIC OF THE PHILIPPINES (DEPT. OF AGRARIAN REFORM), RESPONDENTS.

The Petition at bar seeks a review of the Decision^[1]
dated 11 December 1984 rendered by the then Intermediate Appellate Court, in
AC-G.R. CV No. 67253.

On 8 January 1976, the Region 7 (Cebu)
Office of respondent Department of Agrarian Reform (“DAR”) put up for public bidding a job or project
consisting of the repair of seven
(7) units of (USAID) Willys Mitsubishi/Eisenhower
jeeps.  Among the bidders was Motor
City, an automotive repair company,
which later on emerged as the winning bidder.

The winning bid was accompanied by a Proposal Bond^[2]
— required by the DAR of all bidders — in the amount of P33,275.00
and issued by petitioner Eastern Assurance and Surety Corporation
(“Eastern”), as surety, on behalf of Motor
City, its principal.  The Proposal Bond provided, in pertinent
part:

“NOW, THEREFORE, the conditions of this obligation are such
that if the above-bounden principal [i.e., Motor City] shall, in the event of
his becoming a successful bidder in the above proposal:  (1) fails to guarantee the true and faithful performance of the contract in case
of award; (2) shall
refuse to accept the same or (3) shall not answer for any delay and/or
default in the execution of the contract as provided in the proposal; then
the DEPARTMENT OF AGRARIAN REFORM shall be entitled to be indemnified of any
loss or damage it may suffer by reason thereof not to exceed the sum of THIRTY
THREE THOUSAND TWO HUNDRED SEVENTY FIVE ONLY (P33,275.00) PESOS, Philippine
Currency, otherwise this obligation shall be void and without effect.” (Underscoring
supplied)

On 31 January 1976,
a Contract for Repair of Jeeps^[3]
was entered into between respondent DAR as owner and Motor
City as contractor, the latter
obligating itself thereunder as follows:

“1.     That for and/in
consideration of the sum of THIRTY THOUSAND PESOS (P30,000.00) Philippine
Currency, which the OWNER agrees to pay unto the CONTRACTOR, the said
CONTRACTOR agrees and undertakes to repair the owner’s seven (7) units of
(USAID) Willys Mitsubishi/Eisenhower Jeeps, which are
more particularly described as follows:

x x
x                          x
x x                             x x x

5.      That the
CONTRACTOR agrees to put up the amount of TEN THOUSAND PESOS P10,000.00) as Performance Bond upon award of the bid;

x x x                          x x
x                             x
x x

8.      That the CONTRACTOR
agrees to finish the repairs on all seven (7) units within ninety (90) working
days, counted from the day of the award of the bid, and should the CONTRACTOR
fail to finish the repairs within the said period, he (CONTRACTOR) shall
indemnify the OWNER the amount equivalent to 1% of the quoted lot price for
each day of late delivery.

x x x                          x x x                             x
x x“

(Underscoring supplied)

It turned out, however, that only six (6) out of the seven (7)
aforementioned jeeps were repaired fully and delivered promptly to respondent
DAR.  The seventh unit, bearing Motor No.
70750 and Chassis No. 36201 continued to remain undelivered, despite the grant
of several extensions in favor of and the issuance on 13 March 1978 of a final letter to Motor
City, demanding that the latter
complete the repair and effect delivery of the seventh vehicle.

On 12 July 1978,
respondent DAR commenced a suit^[4]
for specific performance and damages against Motor
City.  Included there as a co-defendant was
petitioner Eastern which, it was alleged, “had posted the performance bond
herewith attached as Annex ‘B’ undertaking to answer and guarantee the true and
faithful compliance and performance of the [Contract for Repair of
Jeeps].”

In an Answer with Cross-Claim,^[5]
petitioner Eastern (defendant below) denied having incurred any liability under
the Proposal Bond, alleging that such bond “did not bind answering
defendant as [the] same was a mere proposal and not an actual
undertaking.” That pleading also sought, by way of cross-claim, judgment
ordering Motor City
to indemnify Eastern in an amount equivalent to whatever the latter would be
ordered by the court to pay the complainant plus twenty percent (20%) thereof
as attorney’s fees.  Eastern submitted in
support of its cross-claim an Indemnity Agreement,^[6]
executed in its favor by Antonio Puchadez, who had
signed the document in his capacity as President and General Manager of Motor
City as well as in his own personal
capacity.

On 15 February 1980,
the trial court rendered a Decision,^[7]
the dispositive portion of which read:

“THE FOREGOING CONSIDERED, judgment is hereby rendered in
favor of the plaintiffs as follows: 
directing Motor City to deliver to the plaintiff one (1) unit of (USAID) Willys
Mitsubishi/Eisenhower Jeep with Motor No. MD-70750 already repaired pursuant to
the specifications in the “Contract for Repair of Jeeps;” directing
Motor City to pay an indemnity
equivalent to 1% of P30,000.00 for each day of late
delivery (the period starts from February 1, 1976 until delivery of the unit);
in case of default, the payment thereof to be assumed or to be liquidated by
Eastern Assurance and Surety Corporation but not to exceed P33,275.00.

If eventually Eastern Assurance and Surety Corporation should pay
following default by Motor City,
then the latter solidarily with Antonio Puchadez should reimburse Eastern Assurance Surety
Corporation all the amounts paid by the latter to the plaintiff with 20% of the amount as attorney’s fees.  With costs against both Motor City and Eastern Assurance and
Surety Corporation.

SO ORDERED.”

On appeal, the ruling of the trial court was affirmed with a
slight modification.  The appellate court
held that the one percent (1%) indemnity charge for late delivery stipulated
under the repair contract, “shall be [computed] from March 3, 1978”
and not 1 February 1976.

The instant Petition for Review, in essence, raises only one (1) issue: 
whether or not petitioner Eastern may be held liable to
respondent DAR for the contractual breach committed here by Motor
City.

The broadest argument of petitioner Eastern is that it incurred
no liability under the Proposal Bond after the Contract for Repair of Jeeps had
been entered into between the DAR and Motor City.  Eastern is here relying upon the difference, in conceptual terms, between a
proposal bond and a performance bond.  A proposal or bid bond has for its purpose to assure the owner of the project of
the good faith of the bidder and that the bidder will enter
into a contract with the project owner should his proposal be accepted.  A
performance bond is, upon the
other hand, designed to afford the project owner security that the bidder, now
the contractor, will faithfully comply with the requirements of the contract
awarded to the contractor and make good damages sustained by the project owner
in case of the contractor’s failure to so perform.^[8] Eastern’s argument
is, however, clearly too broad to be helpful; for liability under a surety bond
is determined not upon the basis of its abstract nature or its title or caption
but rather in accordance with the particular terms and conditions set out in
such bond.^[9] It is thus necessary to look into the actual
terms of the Proposal Bond in question.

Thereunder, liability on the part of petitioner Eastern
as surety would be incurred upon the happening of anyone of the following three
(3) events:  the failure or refusal of
Motor City as principal (1) “to guarantee the true and faithful
performance of the contract in case of an award; (2) “to accept the [award]; and (3) to “answer for any delay and/or default
in the execution of the contract as provided in the proposal.” There is no
dispute that the first condition refers to failure to post a performance bond
in the amount of P10,000.00; there is also no dispute that Eastern’s principal did not
in fact post any such performance bond. 
There should therefore be no question that there was a breach of
condition no. 1 of the Proposal Bond.  It
is urged by petitioner Eastern that the beneficiary of the bond, public
respondent DAR, had waived the stipulation
in the Repair Contract providing for the posting of such bond by entering into
the contract with Motor City although the latter had not posted the P10,000.00
Performance Bond.  We do not believe that
the DAR had waived the breach of this condition.  Certainly there was no express waiver.  Implied waiver of a contractual stipulation
for the giving of security or collateral is not favored and has to be clearly
shown.  There is also no dispute that the
second condition was not breached for Motor
City did accept the award of the
contract and did enter into the Contract for Repair of Jeeps.

In respect of the third condition, i.e., failure of Motor City to
answer for delay or default “in the execution of the contract as provided
in the proposal”, petitioner Eastern contends that this provision refers
merely to the execution, that is, the signing or conclusion of
the Contract for Repair of Jeeps, and not to the performance or implementation
or carrying out of the provisions of such contract.  There are at least two (2) difficulties with
this argument of Eastern.  First, the
ordinary or dictionary meaning of “to execute” a contract (and
especially to “execute a contract as provided in the proposal“)
is or includes

“x x x 1 :  to put into
effect :  carry out fully and
completely :  PERFORM, EFFECT
x x x 3 :  to give effect to :  do what is provided or required x x x :  perform the requirements of :  perform
the acts necessary to the effectiveness of x x
x 6 :  COMPLETE
x x x :  perform
what is required to give validity to (as by
signing and perhaps sealing and delivering) x x x.”^[10]

Thus,
the term “execution” is understood ordinarily and literally as
referring to both

“x x x 1
:  the act or process of executing :  PERFORMANCE, ACCOMPLISHMENT x x
x 3 x x x
c :  [and] the act of signing, sealing, and delivering a legal
instrument or giving it the forms required to make it valid x x x.”^[11]

Thus,
the ordinary meaning of execution is not limited to the signing or
concluding of a contract but includes as well the performance or implementation
or accomplishment of the terms and conditions of such contract.  Second, if one assumes, for purposes of
analysis only, that petitioner Eastern’s contention
is correct, then the second condition in the Proposal Bond (refusal “to
accept [the contract]”) and the third condition (failure to “answer
for any delay and/or default in the execution of the contract as provided in
the proposal”) must be taken to refer to the same thing or circumstance.  But
either the second or the third condition would then have to be regarded as
superfluous and meaningless, a result
that must be abjured in view of the principle of effectiveness in the
interpretation of contracts.

When viewed in its entirety, the Proposal Bond may be seen to be
not merely a proposal (or bid) bond but also a performance bond. 
For it covers not merely the acceptance of the award and the conclusion
of a contract but also the carrying out or performance of the provisions of the
contract.  We note also that the P10,000.00
Performance Bond explicitly required by paragraph 5 of the Contract for Repair
of Jeeps is lower in face amount than the Proposal Bond which has a maximum
value or face amount of P33,275.00.  If
petitioner Eastern’s argument that its liability under
the Proposal Bond ceased the moment the Repair Contract was entered into is
correct, then paragraph 5 of that Contract would be reduced to nonsense:  for it must be nonsensical to require a
proposal bond in an amount 300% more than the amount of the required
performance bond, if the proposal bond were to become functus oficio
the moment the contract was legally entered into.  Upon the other hand, the requirement of
posting of a performance bond of P10,000.00 is quite
understandable if it be understood as simply additional security for the
carrying out of the terms of the contract, that is, additional to the Proposal Bond.^[12]

Finally, we note that the Proposal Bond is set out in a printed
contract form of petitioner Eastern.  The
three (3) circumstances occurrence of which would trigger off the liability of
Eastern under the bond, appear to be standard
stipulations imposed by petitioner upon all persons seeking to secure proposal bonds from Eastern.  To this extent, the Proposal Bond is a contract of adhesion, having
been prepared solely by Eastern. 
Accordingly, any ambiguity or obscurity that may be found to infect the terms of the Proposal Bond, must be construed against Eastern.^[13]

In sum, we hold that petitioner Eastern’s
liability under the Proposal Bond accrued the moment the principal obligor,
Motor City, failed to post the P10,000.00
Performance Bond and incurred in delay and eventually defaulted in the
repair and delivery of the seventh jeep unit, part of the subject matter of the
Contract for Repair of Jeeps with respondent DAR.

WHEREFORE, the Petition for Review is DENIED for lack of merit.  The Decision dated 11 December 1984 of the
then Intermediate Appellate Court in A.C. – G.R. CV 67523 is hereby AFFIRMED
with the modification that the one percent (1%) indemnity charge per day of
delay in delivery provided for in
the Contract for Repair of Jeeps shall be computed from 13 March 1978 (not 3
March 1978), the date of last demand. 
Petitioner’s liability for such indemnity charge shall not exceed the face
amount of the Proposal Bond (P33,275.00).  Costs against petitioner.

Fernan, C.J., (Chairman), Gutierrez,
Jr., Bidin, and Cortes,
JJ., concur.

^[1]
Rollo, pp. 27-32.

^[2]
Folder of Exhibits,
Exhibits “C” and “BB”.

^[3]
Id., Exhibit “A”.

^[4]
CFI Record on Appeal, pp. 1-4.

^[5]
Id., pp. 15-19.

^[6]
Folder of Exhibits,
Exhibits “D” and “1.”

^[7]
CFI Record on Appeal, pp. 35-58.

^[8]
See Padilla v. Zaldivar, 12 SCRA 260 (1964).

^[9]
Section 176,
Insurance Code, as amended.

^[10]
Webster’s Third New
International Dictionary (1986 unabridged ed.), p. 794; underscoring
supplied.

^[11]
Ibid., underscoring supplied.

^[12]
Cf. Padilla v. Zaldivar,
12 SCRA 260 at 265 (1964).

^[13]
Article 1377, Civil
Code, Angeles v. Calasanz, 135 SCRA 323, (1985); and De Borja v.
Santos, 79 SCRA 557 (1977).