G.R. No. 177685, January 26, 2011

Topics:

Contracts; reciprocal obligations

Doctrines:

Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. 

Summary:

 The Plaza, Inc. entered into a contract with Rhogen Builders, which was represented by Ramon Gaite. Rhogens received 1,155,000 PHP from the Plaza as payment for its surety bond before the project started. Gaite was ordered by the Makati Municipality to stop and desist from continuing the building while it was barely halfway complete due to a breach of the National Building Code. Gaite was compelled by this, among other reasons, to end the agreement with the Plaza, who then sued him along with Rhogens and FGU (the insurance provider who executed the surety bond) for breach of contract. Ramon Gaite passed away while the case was underway, therefore the CA let his heirs fill in for him. The Plaza won its appeal to the SC, and the court determined that since it was the damaged party, it had the power to revoke the reciprocal obligation rather than Rhogens (as provided by Article 1191 of the NCC). The court determined that since Plaza had already made the down payment, Rhogens had a contractual obligation to facilitate the lifting of the stopping order. Additionally, Rhogens did not adhere to the building’s permitted design, therefore his obligation is governed by NCC Article 1167. (if a person obliged to do something fails to do it, the same shall be executed at his cost).

Facts:

The Plaza, represented by its president Jose C. Reyes, signed a contract for the PhP7,600,00.00 construction of a restaurant building with Rhogen Builders, represented by Ramon C. Gaite. Gaite and FGU Insurance Corporation signed a surety bond in favor of the Plaza to guarantee Rhogen’s performance of its duty.  Gaite was then told by Engineer Gonzales to stop building since it was against the National Building Code. Tayzon, the project manager for the Plaza, was informed of this.  Due to a violation of the National Building Code, the permission for the restaurant’s construction was canceled. Gaiter suggested that they resolve the issue with assistance from the Plaza, but Reyes responded on behalf of the Plaza that it was not their duty to assist Rhogen because it had failed to meet the construction criteria. Gaite informed the Plaza that he would be terminating their contract in accordance with the Contractor’s Right to Stop Work or Terminate Contracts as stipulated in their agreement because Reyes refused to help Rhogen fix the issue or pay Rhogen for the percentage of work completed. Gaite and FGU were sued by the Plaza for breach of contract, money damages, and other costs. A second lawsuit was also brought to invalidate the project development contract. The RTC upheld the Plaza’s claim that Rhogen had increased the damage by continuing with the construction work rather than correcting the faults. The trial court emphasized that in addition to being expected to be aware of standard requirements and relevant regulations on construction work, Rhogen expressly agreed under the General Construction Contract to comply with all laws, city and municipal ordinances, and all government regulations. Rhogen was therefore found guilty of violating the Construction Contract after failing to complete the project within the allotted time frame and fulfill its obligations. The CA upheld the RTC’s ruling, stating that since Rhogen had broken its own contract, the Plaza could not now be required to uphold its contractual obligations. The Plaza was justified in refusing to pay the progress billing since Rhogens was unable to fulfill its contractual commitments. The halt and revocation orders were given as a result of Rhogens’ own construction-related infractions, as determined by the regional building official. The Plaza’s breach of its contractual commitments is not Rhogen’s fault. CA emphasized that Rhogen agreed to abide by “all laws, city and municipal ordinances, and all government regulations insofar as they are binding upon or impact the parties to the contract, the work, or those employed thereon.

Issue:

Whether it was correct for the Court of Appeals to rule that Rhogen did not have sufficient justification to cancel the contract in accordance with Article 1191 of the Civil Code and its agreement with the Plaza.

Ruling:

The Plaza based its action on Article 1191 of the Civil Code, which allows for “rescission” or, more accurately, “resolution,” a principal action based on breach of faith by the other party who violates the reciprocity between them. The obligor’s failure to adhere to an existing obligation constitutes the breach envisioned by the provision. Therefore, only the party who has been harmed has the authority to revoke. The party that has faithfully performed its obligation or is ready and willing to perform its obligation is the harmed party.  In accordance with the reciprocal obligations set forth in the construction contract between Rhogen and The Plaza, The Plaza’s obligation to pay the contract price or progress billing is dependent upon Rhogen’s performance of its obligation to complete the work within the allotted time frame and in accordance with the owner’s approved plans and other specifications. The Plaza supplied the necessary items and made the agreed-upon down payment. In accordance with Article III of the Construction Contract, it also made use of the option to supply and deliver building supplies to the workplace. Construction work was ordered to cease two months after the project started by the local building authority, and the building permit was subsequently canceled due to multiple violations of the National Building Code and other municipal rules.

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