Heirs of Ramon Gaite, et al vs. the Plaza, Inc.

and FGU Insurance

Corporation
G.R. No. 177685
January 26, 2011
Facts:
The Plaza, Inc. (The Plaza), a corporation engaged in the restaurant business, through its President,
Jose C. Reyes, entered into a contract with Rhogen Builders (Rhogen), represented by Ramon C. Gaite,
for the construction of a restaurant building in Greenbelt, Makati, Metro Manila for the price of
P7,600,000.00.
To secure Rhogen’s compliance with its obligation under the contract, Gaite and FGU Insurance
Corporation (FGU) executed a surety bond in the amount of P1,155,000.00 in favor of The Plaza. The
Plaza paid P1,155,000.00 less withholding taxes as down payment to Gaite. Thereafter, Rhogen
commenced construction of the restaurant building.
Engineer Angelito Z. Gonzales, the Acting Building Official of the Municipality of Makati, ordered Gaite
to cease and desist from continuing with the construction of the building for violation of Sections 301
and 302 of the National Building Code (P.D. 1096) and its implementing rules and regulations.
Engr. Gonzales informed Gaite that the building permit for the construction of the restaurant was
revoked for non-compliance with the provisions of the National Building Code and for the additional
temporary construction without permit.
Gaite notified Reyes that he is suspending all construction works until Reyes and the Project Manager
cooperate to resolve the issue he had raised to address the problem. This was followed by another
letter in which Gaite expressed his sentiments on their aborted project and reiterated that they can
still resolve the matter with cooperation from the side of The Plaza.
However, Gaite informed The Plaza that he is terminating their contract based on the Contractor’s
Right to Stop Work or Terminate Contracts as provided for in the General Conditions of the Contract.
In his letter, Gaite accused Reyes of not cooperating with Rhogen in solving the problem concerning
the revocation of the building permits, which he described as a minor problem. Additionally, Gaite
demanded the payment of P63,058.50 from The Plaza representing the work that has already been
completed by Rhogen.
The Plaza, through Reyes, countered that it will hold Gaite and Rhogen fully responsible for failure
to comply with the terms of the contract and to deliver the finished structure
on the stipulated date. Reyes argued that the down payment made by The Plaza was more than
enough to cover Rhogen’s expenses.
The Plaza notified Gaite that it could no longer credit any payment to Rhogen for the work it had
completed because the evaluation of the extent, condition, and cost of work done revealed that in
addition to the violations committed during the construction of the building, the structure was not in
accordance with plans approved by the government and accepted by Ayala. Hence, The Plaza
demanded the reimbursement of the down payment, the cost of uprooting or removal of the
defective structures, the value of owner-furnished materials, and payment of liquidated damages.
Branch 63 of the RTC Makati rendered its decision granting the claims of The Plaza against Rhogen,
the Gaites and FGU, and the cross-claim of FGU against Rhogen and the Gaites.
The CA affirmed the Decision of the trial court but modified the award of damages. The motion for
reconsideration of the decision was denied. Hence, this appeal.

Issue:
Whether or not petitioners are liable for breach of contract.
Held:
Rhogen committed a serious breach of its contract with The Plaza, which justified the latter in
terminating the contract. Petitioners are thus liable for damages for having breached their contract
with respondent The Plaza. Article 1170 of the Civil Code provides that 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.
Under the principle of quantum meruit, a contractor is allowed to recover the reasonable value of
the thing or services rendered despite the lack of a written contract, in order to avoid unjust
enrichment. Quantum meruit means that in an action for work and labor, payment shall be made in
such amount as the plaintiff reasonably deserves.
To deny payment for a building almost completed and already occupied would be to permit unjust
enrichment at the expense of the contractor.
Rhogen failed to finish even a substantial portion of the works due to the stoppage order issued just
two months from the start of construction. Despite the down payment received from The Plaza,
Rhogen, upon evaluation of the Project Manager, was able to complete a meager percentage much
lower than that claimed by it under the first progress billing. Moreover, after it relinquished the
project, the site inspection appraisal jointly conducted by the Project Manager, Building Inspector
Engr. Gregory and representatives from FGU and Rhogen, Rhogen was found to have executed the
works not in accordance with the approved plans or failed to seek prior approval of the Municipal
Engineer. Article 1167 of the Civil Code is explicit on this point that if a person obliged to do something
fails to do it, the same shall be executed at his cost.
Solar Harvest, Inc. vs. Davao Corrugated Carton Corporation
G.R. No. 176868
July 26, 2010
Facts:
Petitioner, Solar Harvest, Inc., entered into an agreement with respondent, Davao Corrugated Carton
Corporation, for the purchase of corrugated carton boxes, specifically designed for petitioner’s
business of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing.
To get the production underway, petitioner deposited, US$40,150.00 in respondent’s US Dollar
Savings Account with Westmont Bank, as full payment for the ordered boxes.
Despite such payment, petitioner did not receive any boxes from respondent. Petitioner wrote a
demand letter for reimbursement of the amount paid. Respondent replied that the boxes had been
completed and that petitioner failed to pick them up from the former’s warehouse 30 days from
completion, as agreed upon. Respondent mentioned that petitioner even placed an additional order
of 24,000 boxes, out of which, 14,000 had been manufactured without any advanced payment from
petitioner. Respondent then demanded petitioner to remove the boxes from the factory and to pay
the balance of US$15,400.00 for the additional boxes and P132,000.00 as storage fee.
Petitioner filed a Complaint for sum of money and damages against respondent. The Complaint
averred that the parties agreed that the boxes will be delivered within 30 days from payment but
respondent failed to manufacture and deliver the boxes within such time.
The Regional Trial Court (RTC) ruled that respondent did not commit any breach of faith that would
justify rescission of the contract and the consequent reimbursement of the amount paid by
petitioner. The RTC said that respondent was able to produce the ordered boxes but petitioner failed
to obtain possession thereof because its ship did not arrive.
On appeal, the appellate court affirmed the decision of the trial court.
Petitioner moved for reconsideration, but the motion was denied by the CA. Hence, this petition.

Issue:
Whether or not respondent has breached its obligation and whether rescission of the obligation is
the proper remedy.
Held:
In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties’
respective obligations should be simultaneous. Hence, no demand is generally necessary because,
once a party fulfills his obligation and the other party does not fulfill his, the latter automatically
incurs in delay. But when different dates for performance of the obligations are fixed, the default for
each obligation must be determined by the rules given in the first paragraph of the present article,
that is, the other party would incur in delay only from the moment the other party demands
fulfillment of the former’s obligation. Thus, even in reciprocal obligations, if the period for the
fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can
be considered in default and before a cause of action for rescission will accrue.
Evident from the records and even from the allegations in the complaint was the lack of demand by
petitioner upon respondent to fulfill its obligation to manufacture and deliver the boxes. The
Complaint only alleged that petitioner made a follow-up upon respondent, which, however, would
not qualify as a demand for the fulfillment of the obligation. Petitioner’s witness also testified that
they made a follow-up of the boxes, but not a demand. Note is taken of the fact that, with respect to
their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter
was sent to respondent. Without a previous demand for the fulfillment of the obligation, petitioner
would not have a cause of action for rescission against respondent as the latter would not yet be
considered in breach of its contractual obligation.
In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the evidence
having shown that respondent did not commit any breach of its contractual obligation.
Universal Food Corporation vs Court of Appeals
GR No. L-29155 May 13, 1970

Facts: That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula
for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as
MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and in
the same year plaintiff registered his trademark in his name as owner and inventor with the Bureau
of Patents; that due to lack of sufficient capital to finance the expansion of the business, in 1960, said
plaintiff secured the financial assistance of Tirso T. Reyes who, after a series of negotiations, formed
with others defendant Universal Food Corporation eventually leading to the execution on May 11,
1960 of the aforequoted “Bill of Assignment.”
On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of
First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract
entitled “Bill of Assignment.” The plaintiffs prayed the court to adjudge the defendant as without any
right to the use of the Mafran trademark and formula, and order the latter to restore to them the
said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from
December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit.

On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3
thereof “admits the allegations contained in paragraph 3 of plaintiffs’ complaint.” The answer further
alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment
and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V.
Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as
he is still its chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped
from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts
of the petitioner, particularly the resolution adopted by its board of directors at the special meeting
held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices
of raw materials, since the same plaintiff was present when that resolution was adopted and even
took part in the consideration thereof, 3) the actuations of its president and general manager in
enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in
the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said
plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The
defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney’s
fees and P5,000 in exemplary or corrective damages.

Issue: Whether or not the admissions made in the answer binds the defendant.

Held: Yes. It is alleged in paragraph 3 of the respondents’ complaint that what was ceded and
transferred by virtue of the Bill of Assignment is the “use of the formula” (and not the formula itself).
This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner’s answer.
Hence, it does “not require proof and cannot be contradicted.” The last part of paragraph 3 of the
complaint and paragraph 3 of the answer are reproduced below for ready reference:
3. — … and due to these privileges, the plaintiff in return assigned to said corporation his interest and
rights over the said trademark and formula so that the defendant corporation could use the formula
in the preparation and manufacture of the mafran sauce, and the trade name for the marketing of
said project, as appearing in said contract ….
3. — Defendant admits the allegations contained in paragraph 3 of plaintiff’s complaint.
The facts narrated were the prevailing milieu on February 14, 1961 when the complaint for rescission
of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate
officers, schemed and maneuvered to ease out, separate and dismiss the said respondent from the
service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of
Assignment. The fact that a month after the institution of the action for rescission, the petitioner
corporation, thru its president and general manager, requested the respondent patentee to report
for duty, is of no consequence. As the Court of Appeals correctly observed, such request was a “recall
to placate said plaintiff.”
Visayan Sawmill Company, Inc. vs Court of Appeals
GR No. 83851
March 3, 1993
Facts:
Ang Tay (Visayan Sawmill) and Ramon Hibionada (RJH Trading) entered into a sale involving scrap iron
located at the stockyard of defendant-appellant corporation (RJH Trading) subject to the condition
that plaintiff-appellee will open a letter of credit in the amount of P250,000.00 in favor of defendant-
appellant corporation on or before May 15, 1983
Ang Tay, through his men, started to gather scrap iron at the defendant-appellant's premises,
proceeding with such endeavor until May 30 when defendants-appellants allegedly directed Ang
Tay’s men to desist from pursuing the work in view of an alleged case filed against the latter by a
certain Alberto Pursuelo.
On July 19, 1983, Ang Tay sent a series of telegrams stating that the case filed against him by Pursuelo
had been dismissed and demanding that RJH Trading comply with the deed of sale, otherwise a case
will be filed against them.
In reply to those telegrams, Hibionada's lawyer informed Ang Tay’s lawyer that RJH Trading is
unwilling to continue with the sale due to Ang Tay’s failure to comply with essential pre-conditions
of the contract.

Issue:
Whether or not the contract executed by the parties cancelled and terminated before the Complaint
was filed by anyone of the parties
Held:
In the agreement in question the seller bound and promised itself to sell the scrap iron upon the
fulfillment by the private respondent of his obligation to make or indorse an irrevocable and
unconditional letter of credit in payment of the purchase price.
The petitioner corporation's obligation to sell is unequivocally subject to a positive suspensive
condition, i.e., the private respondent's opening, making or indorsing of an irrevocable and
unconditional letter of credit. The former agreed to deliver the scrap iron only upon payment of the
purchase price by means of an irrevocable and unconditional letter of credit. Otherwise stated, the
contract is not one of sale where the buyer acquired ownership over the property subject to the
resolutory condition that the purchase price would be paid after delivery. Thus, there was to be no
actual sale until the opening, making or indorsing of the irrevocable and unconditional letter of credit.
Since what obtains in the case at bar is a mere promise to sell, the failure of the private respondent
to comply with the positive suspensive condition cannot even be considered a breach — casual or
serious — but simply an event that prevented the obligation of petitioner corporation to convey title
from acquiring binding force.
HERMINIO TAYAG vs. AMANCIA LACSON, ROSENDO LACSON, ANTONIO LACSON, JUAN LACSON,
TEODISIA LACSON-ESPINOSA and THE COURT OF APPEALS
G.R. No. 134971
March 25, 2004
Facts:
Respondents were the original owners of three parcels of land located in Mabalacat, Pampanga.
A group of original farmers or direct tillers of landholdings over the lands owned by the Lacsons
individually executed in favor of the petitioner separate Deeds of Assignment, assigning to petitioner
their respective rights as tenants/tillers of the landholdings possessed and tilled by them for and in
consideration of P50.00 per square meter; further granting petitioner the exclusive right to buy the
property if and when the respondents, with the concurrence of the defendants-tenants, agreed to
sell the property.
Convinced that they were deceived by petitioner into signing the Deeds of Assignment, the
defendants-tenants decided to sell their rights and interests over the landholdings to the
respondents.
Petitioner was prompted to file a complaint for the court to fix a period within which to pay the
agreed purchase price of P50.00 per square meter.
The trial court held that petitioner was entitled to injunctive relief; but the CA ruled otherwise,
enjoining the trial court from proceeding with the case.
Petitioner avers, among others, that respondents induced the defendants-tenants to violate the
deeds of assignment, contrary to Article 1314 of the New Civil Code.

Issue:
Whether or not the respondents are liable to pay petitioner damages based on Article 1314 of the
New Civil Code/ Whether or not there is tort interference in this case
Held:
No. In So Ping Bun v. Court of Appeals, we held that for the said law to apply, the pleader is burdened
to prove the following: (1) the existence of a valid contract; (2) knowledge by the third person of the
existence of the contract; and (3) interference by the third person in the contractual relation without
legal justification. Where there was no malice in the interference of a contract, and the impulse
behind one’s conduct lies in a proper business interest rather than in wrongful motives, a party
cannot be a malicious interferer. Where the alleged interferer is financially interested, and such
interest motivates his conduct, it cannot be said that he is an officious or malicious intermeddler.
In fine, one who is not a party to a contract and who interferes thereon is not necessarily an officious
or malicious intermeddler. Also, the defendants-tenants did not allege therein that the respondents
induced them to breach their contracts with the petitioner. The petitioner himself admitted when he
testified that his claim that the respondents induced the defendants-assignees to violate contracts
with him was based merely on what “he heard”.
Even if the respondents received an offer from the defendants-tenants to assign and transfer their
rights and interests on the landholding, the respondents cannot be enjoined from entertaining the
said offer, or even negotiating with the defendants-tenants. The respondents could not even be
expected to warn the defendants-tenants for executing the said deeds in violation of P.D. No. 27 and
Rep. Act No. 6657. Under Section 22 of the latter law, beneficiaries under P.D. No. 27 who have
culpably sold, disposed of, or abandoned their land, are disqualified from becoming beneficiaries.
BINALBAGAN VS. CA
G.R. No. 100594
March 10, 1993
Facts:
On May 11, 1967, private respondents, through Angelina P. Echaus, in her capacity as Judicial
Administrator of the intestate estate of Luis B. Puentevella, executed a Contract to Sell and a Deed of
Sale of forty-two subdivision lots within the Phib-Khik Subdivision of the Puentevella family,
conveying and transferring said lots to petitioner Binalbagan Tech., Inc.
* In turn Binalbagan, through its president, petitioner Hermilo J. Nava, executed an
Acknowledgment of Debt with Mortgage Agreement, mortgaging said lots in favor of the
estate of Puentevella.

Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said petitioner took possession
of the lots and the building and improvements thereon. Binalbagan started operating a school on the
property from 1967 when the titles and possession of the lots were transferred to it.
It appears that there was a pending case in RTC.
* In this pending case the intestate estate of the late Luis B. Puentevella, thru Judicial
Administratrix, Angelina L. Puentevella sold said aforementioned lots to Raul Javellana with
the condition that the vendee-promisee would not transfer his rights to said lots without the
express consent of Puentevella and that in case of the cancellation of the contract by reason
of the violation of any of the terms thereof, all payments therefor made and all improvements
introduced on the property shall pertain to the promissor and shall be considered as rentals
for the use and occupation thereof.

Javellana having failed to pay the installments for a period of five years, Civil Case No. 7435 was filed
by defendant Puentevella against Raul Javellana and the Southern Negros Colleges which was
impleaded as a party defendant it being in actual possession thereof, for the rescission of their
contract to sell and the recovery of possession of the lots and buildings with damages.
Issue:
Whether or not the petition is with merit.
Held:
In a contract of sale, the vendor is bound to transfer the ownership of and deliver, as well as warrant,
the thing which is the object of the sale (Art. 1495, Civil Code); he warrants that the buyer shall, from
the time ownership is passed, have and enjoy the legal and peaceful possession of the thing. As afore-
stated, petitioner was evicted from the subject subdivision lots in 1974 by virtue of a court order in
Civil Case No. 293 and reinstated to the possession thereof only in 1982.

During the period, therefore, from 1974 to 1982, seller private respondent Angelina Echaus' warranty
against eviction given to buyer petitioner was breached though, admittedly, through no fault of her
own. It follows that during that period, 1974 to 1982, private respondent Echaus was not in a legal
position to demand compliance of the prestation of petitioner to pay the price of said subdivision
lots. In short, her right to demand payment was suspended during that period, 1974-1982.
Deiparine vs. CA and Trinidad
GR. No. 96643, April 23, 1993
FACTS:
Spouses Carungay entered into a contract with Deiparine for the construction of a 3-story dormitory
in Cebu. Carungay agreed to pay Php970,000 inclusive of contractor’s fee, and Deiparine bound
himself to erect the building “in strict accordance to plans and specifications.” Trinidad, a civil
engineer, was designated as Carungays’ representative, with powers of inspection and coordination
with the contractor.
Trinidad reported to Carungay that Deiparine had been deviating from the plans and specifications,
thus impairing the strength and safety of the building. Carungay ordered Deiparine to first secure
approval from him before pouring cement. This order was not heeded, prompting Carungay to send
Deiparine another memorandum complaining that the construction works are faulty and done
haphazardly mainky due to lax supervision coupled with inexperienced and unqualified staff.
Carungay then filed a complaint for the rescission of the construction contract for damages.
ISSUE:
Whether or not the rescission of contract is valid due to breach.
RULING:
Yes. Article 1385 states that rescission creates the obligation to return the things which were the
object of the contract, together with the fruits, and the price with its interest; consequently, it can
be carried out only when he who demands rescission can return whatever he may be obliged to
restore.
The construction contract falls squarely under Article 1191 because it imposes upon Deiparine the
obligation to build the structure and upon the Carungays the obligation to pay for the project upon
its completion. Article 1191 is not predicated on economic prejudice to one of the parties but on
breach of faith by one of them that violated the reciprocity between them. The violation of
reciprocity between Deiparine and Carungay spouses, to wit, the breach caused by Deiparine’s
failure to follow the stipulated plans and specifications, has given the Carungay spouses the right to
rescind or cancel the contract.
Prudence Realty v. CA
231 SCRA 279
Genaro Reyes Construction Inc. v. CA
234 SCRA 116
Areola V. CA (1994)

G.R. No. 95641 September 22, 1994

 December 17, 1984: Prudential Guarantee And Assurance, Inc. issued collector's
provisional receipt amounting to P1,609.65
 June 29, 1985: 7 months after the issuance of petitioner Santos Areola's Personal
Accident Insurance Policy, Prudential Guarantee And Assurance, Inc. unilaterally
cancelled it for failing to pay his premiums through its manager Teofilo M. Malapit
 Shocked by the cancellation of the policy, Santos approached Carlito Ang, agent
of Prudential and demanded the issuance of an official receipt. Ang told Santos
that it was a mistake and assured its rectification.
 July 15, 1985: Santos demanded the same terms and same rate increase as when
he paid the provincial receipt but Malapit insisted that the partial payment he made
was exhausted and that he should pay the balance or his policy will cease to
operate
 July 25, 1985 : Assistant Vice-President Mariano M. Ampil III apologized
 August 6, 1985 had filed a complaint for breach of contract with damages before
the lower court
 August 13, 1985: Santos received through Carlito Ang the leeter of Assistant Vice-
President Mariano M. Ampil III finding error on their part since premiums were not
remitted Malapit, proposed to extend its lifetime to December 17, 1985
 RTC: favored Santos - Prudential in Bad Faith
 CA: Reversed - not motivated by negligence, malice or bad faith in cancelling
subject policy
ISSUE: W/N the Areolas can file against damages despite the effort to rectify the
cancellation

HELD: YES. RTC reinstated

 Malapit's fraudulent act of misappropriating the premiums paid is beyond doubt
directly imputable to Prudential
 Art. 1910. The principal must comply with all the obligations which the agent may
have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
 Subsequent reinstatement could not possibly absolve Prudential there being an
obvious breach of contract
 a contract of insurance creates reciprocal obligations for both insurer and insured
 Article 1191
 choice between fulfillment or rescission of the obligation in case one of the
obligors fails to comply with what is incumbent upon him
  entitles the injured party to payment of damages, regardless of whether he
demands fulfillment or rescission of the obligation
 Nominal damages are "recoverable where a legal right is technically violated and
must be vindicated against an invasion that has produced no actual present loss
of any kind, or where there has been a breach of contract and no substantial injury
or actual damages whatsoever have been or can be shown.
Diesel Construction vs. UPSI Holdings
GR No. 154885
Date: March 24, 2008

FACTS:

Diesel Construction and UPSI Property Holdings entered into a Construction

Agreement amounting to P12,739,099, payable by progress billing. Diesel Construction,
as a contractor, undertook the interior architectural construction project for the 14th to
16th floors of the building owned by UPSI Property Holdings.

Under the Agreement, in case of unjustifiable delay, Diesel binds himself to pay
UPSI liquidated damages in the amount equivalent to one-fifth (1/5) of one (1) percent of
the total Project cost for each calendar day of delay.

Records show that while the original target date for the completion was
November 19, 1999, there is a total of 85 days of extension which were justifiable and
sanctioned by UPSI. Hence the project should have been finished by February 12, 2000.
It was only on March 16, 2000, Diesel sent a letter notice to UPSI stating that the
Project has been completed. UPSI, however, disregarded the notice and refused to
accept delivery of the contracted premises, claiming that Diesel had abandoned the
Project unfinished. UPSI also withheld Diesel’s 10% “retention money” and refused to pay
the unpaid balance of the contract price.

Diesel filed a complaint before the Construction Industry Arbitration Commission

(CIAC) to compel UPSI to pay the remaining unpaid balance plus damages and attorney’s
fees. UPSI denied liability and prayed for repayment of expenses it allegedly incurred for
completing the Project on its own, for a declaration that the deductions it made for
liquidated damages were proper and for attorney’s fees.

CIAC ordered UPSI to pay Diesel (amount less than the original demand) the
total amount of P4,027,861.60 (P3,661,692.60, representing the unpaid balance of the
contract price and P366,169 as attorney’s fees). CIAC also dismissed UPSI’s
counterclaim and assessed it for arbitration costs in the amount of P298,406.03.

UPSI elevated the case to the Court of Appeals. CA ruled that Diesel is entitled
to 100% payment of the contract price but to be deducted by the liquidated damages
sustained by UPSI. CA found Diesel to have been in delay for 45 days (the project was
said to be 97.56% complete as of March 22, 2000 and an additional 4 days were added
for its completion). UPSI is now liable to Diesel for the amount of P2,515,173.64 only.

Hence, this appeal. Diesel contends to have not incurred delay and is entitled to
the full payment of the contract price. UPSI, on the other hand, contends that they are
entitled to liquidated damages and be awarded also for their expenses in completing the
project.
ISSUE:
WON Diesel incurred delay and is entitled to full payment of the contract price.

HELD:
NO. Diesel did not incur delay and is entitled to full payment of the contract price!
CA completely failed to factor in several Change Orders of UPSI to Diesel regarding the
construction project. These Change Orders comprised of several changes or extra work on the
part of Diesel as required by UPSI which would entitle a new schedule of completion date. As
correctly held by CIAC, no less than UPSI effectively moved the completion date, through various
Change Orders to April 7, 2000.

Moreover, as evidenced by UPSI’s Progress Report No. 19 for the period ending March 22, 2000,
Diesel’s scope of work, as of that date, was already 97.56% complete. Such level of work
accomplishment would, by any rational norm, be considered as substantial to warrant full payment
of the contract amount, less actual damages suffered by UPSI pursuant to Article 1234 of the
New Civil Code.

Thus, when Diesel attempted to turn over the premises to UPSI, claiming it had completed the
Project on March 15, 2000; Diesel could no longer be considered to be in delay and is not
amenable under the Agreement for liquidated damages.

Also, the UPSI’s theory of Diesel’s abandonment was untenable considering that 97.56% was
completed. However, UPSI is entitled to the remaining 2.44% of the total contract price amounting
to P310, 834.01.

NOTES:

1. It should be noted that CIAC found Diesel not to have incurred any delay while CA found
Diesel to have been in delay for 45 days.
2. Article 1234 of the Civil Code says as much, "If the obligation had 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."
SPOUSES JOSE T. VALENZUELA and GLORIA VALENZUELA, Petitioners,
vs.
KALAYAAN DEVELOPMENT & INDUSTRIAL CORPORATION, Respondent.

G.R. No. 163244 June 22, 2009

Ponente: Peralta, J.

Facts: Kalayaan Development & Industrial Corporation discovered that Spouses Jose and
Gloria Valenzuela had occupied and built a house on a parcel of land it owned, and
demanded that they vacate said property. Upon negotiation, however, petitioners and
Kalayaan entered a Contract to Sell wherein the petitioners would purchase 236 square
meters of the subject property for P1,416,000 in twelve equal monthly installments. The
contract further stated that upon failure to pay any of said installments, petitioners would
be liable for liquidated penalty at 3% a month compounded monthly until fully paid.
Kalayaan would also execute the deed of absolute sale only upon full payment.
Petitioners were only able to pay monthly installments amounting to a total of P208,
000.00. They then requested Kalayaan to issue a deed of sale for 118 square meters of
the lot where their house stood, arguing that since they had paid half the purchase price,
or a total of P708,000.00 representing 118 square meters of the property. Kalayaan, on
the other hand, sent two demand letters asking petitioners to pay their outstanding
obligation including agreed penalties.
Gloria Valenzuela’s sister, Juliet Giron, assumed the remaining balance for the 118
square meters of the subject property at P10,000.00 per month to Kalayaan, which the
latter accepted for and in behalf of Gloria. Thereafter, Kalayaan demanded that petitioners
pay their outstanding obligation, but were unheeded. Kalyaan then filed a Complaint fot
the Rescission of Contract and Damages against petitioners. The RTC of Caloocan
rendered a Decision in favor of Kalayaan, rescinding the contract between the parties and
ordering petitioners to vacate the premises.
Petitioners sought recourse from the CA. They aver that the CA failed to see that the
original contract between petitioners and Kalayaan was altered, changed, modified and
restricted as a consequence of the change in the person of the principal debtor (Sps.
Valenzuela to Juliet). When Kalayaan agreed to a monthly amortization of P10,000.00
per month the original contract was changed, and that the same recognized Juliet’s
capacity to pay and her designation as the new debtor. Nevertheless, the CA affirmed the
RTC ruling.

Issue:
If the original contract was novated and the principal obligation to pay for the remaining
half of the subject property was transferred from petitioners to Juliet.

Held:
No. Novation is never presumed. Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or by substituting
another in place of the debtor, or by subrogating a third person in the rights of the creditor.
Parties to a contract must expressly agree that they are abrogating their old contract in
favor of a new one. In absence of an express agreement, novation takes place only when
the old and new obligations are incompatible on every point.
These are the indispensable requisites of novation:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

In the instant case, none of the aforementioned requisites are present, as Kalayaan never
agreed to the creation of a new contract between them or Juliet. Kalayaan’s acceptance
of the late payments made by Juliet is, at best, an act of tolerance on part of Kalayaan
that could not have modified the contract.
The non-fulfillment by petitioners of their obligation to pay, which is a suspensive condition
for the obligation of Kalayaan to sell and deliver the title to the property, rendered the
Contract to Sell ineffective and without force and effect. The parties stand as if the
conditional obligation had never existed; Kalayaan cannot be compelled to transfer
ownership of the property to petitioners.