This case clarifies that a surety bond guaranteeing a specific action, such as the assignment of leasehold rights, does not automatically extend to guaranteeing the payment of a monetary debt. The Supreme Court ruled that Stronghold Insurance Company, Inc. (SICI) was not liable for Project Movers Realty and Development Corporation’s (PMRDC) debt to Emerita Garon because the surety bond specifically guaranteed the assignment of leasehold rights, a condition PMRDC failed to fulfill, but the suit sought monetary payment instead of enforcing the assignment. This distinction is critical, as it underscores that a surety’s liability is strictly confined to the obligations outlined in the bond agreement.

Lease Rights vs. Loan Payments: When a Surety’s Guarantee Doesn’t Cover the Debt

The legal battle began when PMRDC defaulted on loans from Garon, which were secured by promissory notes and a surety bond from SICI. The surety bond was meant to guarantee PMRDC’s assignment of leasehold rights to Garon over properties covered by Original Certificates of Leasehold Title (OCLT) Nos. 0161 and 1108. However, PMRDC failed to assign these rights upon defaulting on the loan payments. In response, Garon demanded that SICI, as the surety, fulfill its obligations under the bond. When both PMRDC and SICI failed to comply, Garon filed a complaint for collection with the Regional Trial Court (RTC) of Makati City, seeking payment of the sums due under the promissory notes and declaring SICI solidarily liable for the amount guaranteed by the surety bond.

The RTC ruled in favor of Garon, ordering PMRDC to pay the sums due under the promissory notes, including interests and penalties. The court also held SICI jointly and solidarily liable for the amount of P12,755,139.85, representing the penal sum of the surety bond. The RTC reasoned that the assignment of PMRDC’s leasehold rights was merely an accessory obligation, and Garon’s demand on SICI’s obligation on the surety bond did not constitute a waiver of her right to collect from PMRDC. The Court of Appeals (CA), however, modified the RTC’s decision. The CA affirmed the propriety of the summary judgment rendered by the RTC but found that SICI could not be held liable because its liability had expired before the maturity dates of the loans. The appellate court emphasized that the surety bond’s expiration date preceded the loan maturity dates, thus releasing SICI from its obligations.

The Supreme Court (SC) addressed whether SICI was liable to Garon under the surety bond, given that PMRDC failed to assign its leasehold rights. The SC acknowledged that the surety bond guaranteed the assignment of leasehold rights, not the payment of a specific sum of money owed by PMRDC to Garon. The Court emphasized that SICI’s liability arose from the failure of PMRDC to assign the leasehold rights, not from the maturity of the loan itself. This means that Garon’s demand on November 3, 1998, which occurred before the expiration of the surety bond on November 7, 1998, was indeed timely.

The SC explained that suretyship arises from the solidary binding of a person (the surety) with the principal debtor to fulfill an obligation. A surety is considered by law to be the same party as the debtor concerning whatever is adjudged as touching the debtor’s obligation, and their liabilities are interwoven and inseparable. While a surety contract is secondary to the principal obligation, the surety’s liability is direct, primary, and absolute, equivalent to that of a regular party to the undertaking. However, the Court stressed that the extent of a surety’s liability is determined by the language of the suretyship contract itself. It cannot be extended by implication beyond the contract’s terms. Contracts have the force of law between the parties, who are free to stipulate any matter not contrary to law, morals, good customs, public order, or public policy.

The Supreme Court pointed out that in Garon’s complaint in Civil Case No. 99-1051, she prayed for the payment of the principal debt, not the assignment of PMRDC’s leasehold rights. This action was inconsistent with the surety bond’s specific guarantee, which was limited to ensuring the assignment of rights. Because Garon sought to enforce a right to collect the debt rather than enforce the security (the assignment of leasehold rights), SICI could not be held liable. SICI was a stranger to the loan contract between Garon and PMRDC; it could not be held liable for an obligation it did not undertake to perform or guarantee. The obligation undertaken was merely to ensure the assignment of rights which would have in turn helped to assure debt recovery. As such, to order SICI to make payments for the loan would exceed the bounds of the contract, to which the SC found it could not agree.

“WHEREAS, this bond is conditioned to guarantee the assignment of Leasehold Rights of the Principal at Monumento Plaza Building in favor of the Obligee over the Certain Original Certificate of Leasehold Title No. 0161 and 0108 (sic).”

FAQs

What was the key issue in this case?	The key issue was whether Stronghold Insurance Company, Inc. (SICI) was liable under its surety bond for the payment of a debt owed by Project Movers Realty and Development Corporation (PMRDC) to Emerita Garon, where the bond guaranteed the assignment of leasehold rights, not the payment of the debt.
What is a surety bond?	A surety bond is a contract where one party (the surety) guarantees the performance of an obligation by another party (the principal) to a third party (the obligee). The surety is liable to the obligee if the principal fails to fulfill the obligation.
What did the surety bond in this case guarantee?	The surety bond in this case guaranteed the assignment of leasehold rights by PMRDC to Garon over properties covered by Original Certificates of Leasehold Title Nos. 0161 and 1108.
Why was SICI not held liable for PMRDC’s debt?	SICI was not held liable because the surety bond guaranteed the assignment of leasehold rights, not the payment of the debt itself. Garon’s complaint sought payment of the debt, which was beyond the scope of SICI’s obligation under the bond.
What is the extent of a surety’s liability?	The extent of a surety’s liability is determined by the language of the surety contract or bond itself. It cannot be extended by implication beyond the terms of the contract.
What was the significance of the demand letter in this case?	The demand letter was significant because it was sent by Garon to PMRDC and SICI before the expiration of the surety bond, requesting the assignment of leasehold rights. This timely demand triggered SICI’s potential liability under the bond, but only to the extent of the guaranteed obligation.
How did the Court of Appeals rule on this case?	The Court of Appeals affirmed the trial court’s summary judgment but modified it by holding that SICI was not liable to Garon because the surety bond had expired before the maturity dates of the loans. The Supreme Court affirmed that decision.
What is the key takeaway from this case regarding surety bonds?	The key takeaway is that a surety bond guarantees only the specific action or obligation outlined in the contract, and its terms should not be extended by implication. A surety guaranteeing specific performance is not automatically liable for monetary debts if the guaranteed action is not related to debt payment.

The Supreme Court’s decision reinforces the principle that surety agreements are strictly construed and cannot be expanded beyond their explicit terms. This ruling serves as a crucial reminder for obligees to ensure that the relief they seek aligns precisely with the obligations guaranteed by the surety bond.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: EMERITA GARON v. PROJECT MOVERS REALTY, G.R. NO. 166058, April 03, 2007