In a construction contract dispute, the Supreme Court affirmed that a party who breaches the agreement is liable for damages, but also clarified the rights of a contractor who has substantially performed their obligations in good faith, even if the project was not fully completed due to the other party’s actions. This means that homeowners who unjustifiably prevent a contractor from finishing a project may still be required to pay for the work completed, while contractors are entitled to compensation for the work they substantially performed, despite not completing the project, less any damages suffered by the homeowner. This ensures fairness and prevents unjust enrichment in construction disputes.

When Home Improvement Turns Sour: Determining Liability for Construction Contract Breach

The case of Mr. & Mrs. George R. Tan vs. G.V.T. Engineering Services arose from a construction agreement where the spouses Tan contracted G.V.T. Engineering Services, managed by Gerino Tactaquin, to build their house. Disputes emerged during construction due to changes in plans and delays in material delivery, leading Tactaquin to halt the work. G.V.T. filed a complaint for specific performance and damages, arguing that the Tans’ actions caused financial losses. The Tans countered that G.V.T.’s work was defective and that G.V.T., as a sole proprietorship, lacked legal standing to sue. The central legal question was whether the Tans breached their contract with G.V.T. and, if so, what damages were owed, considering the incomplete nature of the project and the changes made to the original agreement.

The Regional Trial Court (RTC) found in favor of G.V.T., concluding that the Tans’ actions, such as delaying material delivery and deleting major portions of the project, were unjustified and constituted a breach of contract. The RTC awarded G.V.T. the balance of the contract price, retention fees, moral damages, attorney’s fees, and litigation expenses. The Court of Appeals (CA) affirmed the RTC’s decision with modifications, removing the awards for moral damages, attorney’s fees, and litigation expenses, and dismissing the case against the supervising engineer, Rodovaldo Cadag. The spouses Tan then appealed to the Supreme Court, raising issues of breach of contract, liability, and the legal standing of G.V.T. to sue.

The Supreme Court addressed the issue of G.V.T.’s legal personality first. While acknowledging that G.V.T. Engineering Services, as a sole proprietorship, does not have a separate legal personality to sue, the Court emphasized that procedural rules should be liberally construed to promote substantial justice. The Court referenced the case of Alonso v. Villamor, stating:

No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error send this case back for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same defense, the same interests, the same witnesses, and the same evidence. The name of the plaintiff would constitute the only difference between the old trial and the new. In our judgment there is not enough in a name to justify such action.

The Court held that the defect in the caption of the complaint was merely technical and did not prejudice the petitioners. This aligns with the principle that courts should prioritize resolving disputes on their merits rather than dismissing them on technicalities.

Turning to the merits of the case, the Court upheld the factual findings of the lower courts that the Tans were indeed guilty of breaching their contract with G.V.T. The evidence, including letters and meeting minutes, demonstrated that the Tans unjustifiably deleted items from G.V.T.’s scope of work and delayed the delivery of construction materials. The Court noted that factual findings of the trial court, especially when affirmed by the Court of Appeals, are generally binding on the Supreme Court.

Article 1170 of the Civil Code states: “Those who in the performance of their obligations are guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof are liable for damages.” The Supreme Court agreed with the lower courts that the Tans’ actions fell under this provision, making them liable for damages.

The Court also considered Article 1234 of the Civil Code, which provides that if an obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. In this case, G.V.T. had completed approximately 74% of the work before the Tans’ breach forced them to withdraw from the project. The Court thus ruled that G.V.T. was entitled to recover the balance of the contract price, less any damages suffered by the Tans.

Regarding the 5% retention fee, the Court agreed with the lower courts that G.V.T. was entitled to recover it, as their failure to complete the project was due to the Tans’ breach. However, the Court reduced the amount of the retention fee awarded, as G.V.T. only presented evidence to support a smaller amount. The Court reiterated the principle that actual or compensatory damages cannot be presumed but must be proved with a reasonable degree of certainty, referencing Saguid v. Security Finance, Inc.

Finally, the Court addressed the Tans’ argument that since the supervising engineer, Cadag, was absolved of liability, they should also be absolved. The Court rejected this argument, citing the principle of relativity of contracts under Article 1311 of the Civil Code. This provision states that contracts only bind the parties who entered into them and their successors in interest.

Civil Code, Article 1311. Contracts take effect only between the parties, their successors in interest, heirs and assigns.

The Court clarified that Cadag was not a party to the construction contract between the Tans and G.V.T., and thus, could not be held liable for its breach. Furthermore, as an agent of the Tans, Cadag’s actions were attributed to them, making them responsible for his conduct within the scope of his authority.

FAQs

What was the main issue in the case?	The main issue was whether the spouses Tan breached their construction contract with G.V.T. Engineering Services and, if so, what damages were owed.
Did G.V.T. Engineering Services have the legal capacity to sue?	While G.V.T. Engineering Services, as a sole proprietorship, does not have a separate legal personality to sue, the Court held that the defect in the caption of the complaint was merely technical and did not prejudice the other party.
What is the significance of Article 1170 of the Civil Code in this case?	Article 1170 holds parties liable for damages if they are guilty of fraud, negligence, delay, or in any manner contravene the tenor of their obligations. The Court found the Tans liable under this article.
What is the relevance of Article 1234 of the Civil Code?	Article 1234 allows a party who has substantially performed their obligations in good faith to recover as though there had been a strict and complete fulfillment, less damages suffered by the other party.
Why was the supervising engineer, Rodovaldo Cadag, absolved of liability?	Cadag was not a party to the construction contract, and therefore, the principle of relativity of contracts under Article 1311 of the Civil Code applied.
What is a retention fee in construction contracts?	A retention fee is a percentage of the contract price that is withheld by the client until the project is completed and any defects are rectified.
What evidence did the Court rely on to determine that the Tans breached the contract?	The Court relied on letters and meeting minutes that demonstrated the Tans unjustifiably deleted items from G.V.T.’s scope of work and delayed the delivery of construction materials.
Can moral damages be awarded to a sole proprietorship?	Generally, no. Juridical persons are not entitled to moral damages because they cannot experience physical suffering or sentiments like wounded feelings, anxiety, or moral shock.

This case underscores the importance of clearly defining the scope of work and responsibilities in construction contracts, as well as the need for parties to act in good faith. While upholding the principle that those who breach contracts are liable for damages, the Court also recognized the rights of contractors who have substantially performed their obligations. Understanding these rights and obligations can help parties avoid disputes and ensure fair compensation for work performed.

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: MR. & MRS. GEORGE R. TAN VS. G.V.T. ENGINEERING SERVICES, G.R. NO. 153057, August 07, 2006