Asset Builders Corporation v. Stronghold Insurance Company

Summary

Asset Builders Corporation contracted Lucky Star Drilling for construction work worth P1,150,000.00, with Stronghold Insurance providing surety and performance bonds. After Lucky Star completed only 10% of work by deadline, ABC rescinded the contract and demanded payment from both parties. The RTC held Lucky Star liable but absolved Stronghold, reasoning that bonds were automatically cancelled upon rescission. The Supreme Court reversed, holding that under Civil Code Article 2047, a surety's liability is direct, primary and absolute. Once the principal obligor defaults, the surety becomes solidarily liable regardless of contract rescission. The Court emphasized that suretyship creates solidary obligations, and the surety's liability arises upon the principal's default, not upon contract completion. This decision clarifies that rescission of the principal contract does not automatically release the surety from obligations already incurred due to the principal's breach.