Stronghold Insurance Co., Inc. v. Pegasus Realty Corp.

 

Stronghold Insurance Co., Inc. v. Pegasus Realty Corp.

G.R. No. 243923 (Notice)

January 30, 2023

 

FACTS:

Stronghold acted as a surety and issued a Performance Bond based on the First Contract in the amount of PHP1,400,000.00 between Jaime C. Alferez and Pegasus Realty Corporation; in which, subsequently, a Modified Contract (Second Contract) was executed. There were no additional obligations imposed on Stronghold. Instead, the Second Contract made it more onerous for Pegasus Realty Corporation, who had to pay a higher amount of downpayment compared to the downpayment imposed in the First Contract. Stronghold contends that it would be extremely unjust and contrary to law to make Stronghold shoulder a more onerous obligation, considering that the onerous obligation arose from a material alteration of the principal contract upon which Stronghold's Performance Bond was based; thus, averred that the material alteration should have been held to have discharged Stronghold from liability under the Performance Bond.

ISSUE:

Whether Stronghold's liability was extinguished by the execution of the Second Contract between Alferez and Pegasus.

HELD:

No. A surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. However, a surety is not released by a change in the contract, which does not have the effect of making its obligation more onerous. Despite the execution of the Second Contract, the liability of Stronghold remained subsisting because there was no material alteration affecting Stronghold's obligation as surety. The Second Contract did not impose a more onerous obligation on the part of Stronghold; thus, the latter is still liable under the Performance Bond issued based on the First Contract in the amount of PHP1,400,000.00. Novation is one of the modes of extinguishing an obligation, done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. In this case, the execution of the Second Contract did not novate the First Contract so as to extinguish the latter as there was no incompatibility between the two contracts. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause, or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation.