Case Digest on Obligations and Contracts: Accessory Contract - Stronghold Insurance Company Inc. v. Spouses Rune and Lea Stroem G.R. No. 204869

Stronghold Insurance Company Inc. v. Spouses Rune and Lea Stroem

G.R. No. 204869, [January 21, 2015]

Facts:

Spouses Stroem entered an Owners-Contractor Agreement with Asis-Leif & Company, Inc. (ALCI) represented by Cynthia Asis-Leif for the construction of a two-storey house on their lot. ALCI secured a performance bond in the amount of P4.5M from Stronghold Insurance Company (SIC) whereby the latter and ALCI bound themselves solidarily to pay the Stroem spouses the agreed amount in the event the construction is not completed.

ALCI failed to finish the project on time despite repeated demands and the Spouses Stroem rescinded the agreement and hired an independent appraiser to evaluate the progress of the construction project. They later filed a complaint for breach of contract with damages against ALCI and SIC. Only SIC was served with summons. The RTC ruled in favor of the Spouses Stroem and ordered SIC to pay damages.

SIC argued that the RTC should have dismissed the case in view of the arbitration clause in the agreement and that the stipulations in the Owners-Contractor Agreement are part and parcel of the conditions in the bond issued by it. On the other hand, Spouses Stroem argued that the Owners-Contractor Agreement is ―separate and distinct from the Bond. The parties to the Agreement are ALCI/Ms. Asis-Leif and Spouses Stroem, while the parties to the Bond are Spouses Stroem and Stronghold. The considerations for the two contracts are likewise distinct. Thus, the arbitration clause in the Agreement is binding only on the parties thereto, specifically ALCI/Ms. Asis-Leif and Spouses Stroem.

Issue: Whether SIC as surety can invoke the CIAC has jurisdiction over the case based on the principal contract.

Ruling:

The SC ruled that SIC cannot invoke the stipulation in the principal contract providing for arbitration. What is at issue in this case is the parties‘ agreement, or lack thereof, to submit the case to arbitration. Spouses Stroem argue that SIC is not a party to the arbitration agreement. SIC did not consent to arbitration. Only Spouses Stroem and Asis-Leif may invoke the arbitration clause in the contract.

This court has previously held that a performance bond, which is meant "to guarantee the supply of labor, materials, tools, equipment, and necessary supervision to complete the project is significantly and substantially connected to the construction contract and, therefore, falls under the jurisdiction of the CIAC.

The Owners-Contractor Agreement and the performance bond referred to each other; the performance bond was issued pursuant to the construction agreement. In enforcing a surety contract, the complementary-contracts-construed-together‘ doctrine finds application. According to this principle, an accessory contract must be read in its entirety and together with the principal agreement.

The ruling in Prudential Guarantee and Assurance Inc. v. Anscor Land, Inc., (G.R. No. 177240, September 8, 2010) to the effect that the Prudential willingly acceded to the terms of the principal contract providing for arbitration despite the absence of a similar stipulation in the performance bond because the construction contract breathes life into the performance bond will not apply to the present case. In Prudential, the construction contract (principal contract) expressly incorporated the performance bond into the principal contract. In the present case, the Owners-Contractor Agreement between ALCI and Spouses Stroem merely stated that a performance bond shall be issued in favor of the latter. The performance bond merely referenced (not incorporated) the contract entered into by Spouses Stroem and ALCI, which pertained to ALCI‘s duty to construct a two-storey residence building. To be clear, it is in the Owners-Contractor Agreement that the arbitration clause is found. The construction agreement was signed only by Spouses Stroem and the contractor, ALCI, as represented by Ms. Ma. Cynthia Asis-Leif. It is basic that “contracts take effect only between the parties, their assigns and heirs”. Not being a party to the construction agreement, SIC cannot invoke the arbitration clause and cannot thus invoke the jurisdiction of the CIAC.