Philippine Export v. V.P. Eusebio Construction

Summary

Philguarantee, a government financial institution, issued performance and advance payment guarantees for Filipino contractors V.P. Eusebio Construction and 3-Plex International's joint venture construction project in Iraq during the Iran-Iraq war. When the Iraqi project owner (SOB) failed to pay 75% of billings in US dollars as contractually required, the project stalled at 51% completion. Despite the contractors' protests and valid defenses, Al Ahli Bank called on the guarantees and Philguarantee paid US$876,564 plus interest. The Supreme Court affirmed lower courts' decisions denying Philguarantee's claim for reimbursement, ruling that as a guarantor (not surety), Philguarantee could not recover from contractors who had valid defenses against the project owner. The Court held that the contractors did not default since SOB's contractual violations made performance impossible, and a guarantor who pays against the debtor's will without benefiting the debtor cannot seek reimbursement when the debtor has valid defenses.