Camp John Development Corporation vs. Charter Chemical and Coating Corporation

Rescission under Article 1191 is the proper remedy for breach of reciprocal obligations where the obligor cannot comply with what is incumbent upon it, and the power to fix a period under Article 1197 should not be exercised when the obligor's delay has been unreasonable and prolonged, constituting a lack of just cause.

Camp John Hay Development Corporation, the investment arm of a consortium constructing the Camp John Hay Manor in Baguio City, engaged Charter Chemical and Coating Corporation in January 2001 to perform interior and exterior painting works. The contract price of ₱15,500,000.00 (later reduced to ₱13,239,734.16) was to be paid partly in cash and partly through the offset of two studio-type units at Camp John Hay Suites. Charter Chemical completed the work in 2003, but the units, selected in 2001, were never delivered because the construction of Camp John Hay Suites remained incomplete due to repeated delays, with completion dates pushed from 2006 to 2012 through various amendments to the underlying lease agreement with the Bases Conversion and Development Authority.

• The Contractor's Agreement: In January 2001, Camp John Hay Development and Charter Chemical executed a Contractor's Agreement for painting works at the Camp John Hay Manor. The contract price of ₱15,500,000.00 included offset against two studio-type units at Camp John Hay Suites, with the total amount based on units to be chosen by Charter Chemical. The agreement contained no specific turnover date for the units. Charter Chemical selected Units 102 and 104 in the second phase of the Suites.
• Performance and Partial Payment: Charter Chemical completed the painting works in 2003. Camp John Hay Development issued a Final Inspection and Acceptance Certificate on May 30, 2005. The contract price was reduced to ₱13,239,734.16, of which ₱7,339,734.16 was paid in cash, leaving a balance of ₱5,900,000.00 to be settled through the offset scheme.
• Contracts to Sell: In June 2005, the parties executed uniform pro-forma contracts to sell for the two units, stating that possession would be delivered "within a reasonable period of time from the date of completion of the Unit." In August 2005, Camp John Hay Development issued certifications confirming the units were fully paid under the offsetting scheme, but actual delivery was withheld because the Suites' construction remained incomplete.
• Construction Delays: The construction of Camp John Hay Suites, which began in 1996 under a Lease Agreement with the Bases Conversion and Development Authority (BCDA), faced repeated delays. Target completion dates were revised from 2006 (per July 18, 2003 Memorandum of Agreement) to 2012 (per July 1, 2008 Memorandum of Agreement) due to alleged mutual delays and force majeure.
• Demand and Arbitration: Charter Chemical demanded execution of deeds of sale and delivery of titles in September 2004 and April 2005, and formally demanded payment or transfer of the units on August 3, 2007. When Camp John Hay Development refused, Charter Chemical filed a Request for Arbitration with the CIAC on June 12, 2008.

• Nature of the Action: Petitioner argued that the action should have been for the fixing of a period under Article 1197 of the Civil Code, not for rescission under Article 1191, because the contracts contained no specific completion date for the units.
• Relativity of Contracts: Relying on Article 1311, petitioner maintained that the Memorandum of Agreement with BCDA (which contained completion timelines) could not bind Charter Chemical, as the latter was not a party to it and had never seen the Master Development Plan.
• Jurisdiction of CIAC: Petitioner contended that the contracts to sell executed in 2005 superseded the Contractor's Agreement and contained a dispute resolution clause designating the courts of Pasig City as the exclusive venue, thereby removing the dispute from CIAC jurisdiction and the construction contract context.
• Attorney's Fees: Petitioner argued that the award of attorney's fees was unjustified because neither the CIAC nor the Court of Appeals specified a factual basis, no bad faith was found, and no official receipts were presented to substantiate the claim.

• Rescission Proper: Respondent countered that rescission under Article 1191 was correct because petitioner was already in delay by 2007, having failed to deliver the units despite the completion of the painting works in 2003, and the CIAC correctly applied the law regarding reciprocal obligations.
• CIAC Jurisdiction: Respondent argued that the arbitration clause in the Contractor's Agreement remained valid and was not superseded by the contracts to sell, which were merely preparatory contracts for processing titles; the dispute concerned payment/default under the construction contract, falling squarely within CIAC jurisdiction under Executive Order No. 1008.
• Attorney's Fees: Respondent maintained that attorney's fees were justified under Article 2208 of the Civil Code because petitioner's unwarranted delay and unjustified refusal to settle compelled respondent to file the arbitration case to protect its interests.

• Jurisdiction of the Construction Industry Arbitration Commission: Whether the CIAC had jurisdiction over the dispute despite the venue clause in the subsequent contracts to sell.
• Rescission versus Fixing of Period: Whether rescission under Article 1191 was the proper remedy, or whether the Court should have fixed a period under Article 1197.
• Award of Attorney's Fees: Whether the award of attorney's fees to Charter Chemical was proper.

• Jurisdiction of the Construction Industry Arbitration Commission: The CIAC had original and exclusive jurisdiction. The arbitration clause in the Contractor's Agreement was not superseded by the contracts to sell, which were merely incidental devices to facilitate the transfer of ownership as part of the offsetting scheme. Under Section 4 of Executive Order No. 1008 and Section 35 of Republic Act No. 9285, the CIAC has jurisdiction over disputes involving "payment [and] default of employer or contractor" arising from construction contracts. The State policy favors arbitration, and any doubt should be resolved in favor of the arbitration clause.
• Rescission versus Fixing of Period: Rescission under Article 1191 was the proper remedy. The obligation was reciprocal: Charter Chemical performed its obligation (painting works) in 2003, while Camp John Hay Development failed to deliver the units for over a decade. No just cause existed to fix a period under Article 1197 because the power to fix a period is discretionary and should be exercised only to prevent injustice; here, the delay had been unreasonable and prolonged since 1996, and fixing a period would only serve as a technicality to further delay payment.
• Award of Attorney's Fees: The award was proper. Under Article 2208(2) and (11) of the Civil Code, attorney's fees may be recovered when the defendant's act or omission has compelled the plaintiff to litigate to protect its interest, or when the court deems it just and equitable. Petitioner's unjustified refusal to pay and breach of faith forced Charter Chemical to incur litigation expenses over a valid claim.

• Rescission under Article 1191 — Rescission is a remedy available to the injured party in reciprocal obligations when the other obligor cannot comply with what is incumbent upon it. It has the effect of unmaking the contract from the beginning (ab initio) and requires mutual restitution, restoring the parties to their original positions as far as practicable.
• Fixing of Period under Article 1197 — The court's power to fix the duration of an obligation is discretionary and should be exercised only if there is just cause, taking into account equitable considerations. It is not proper when the delay has been unreasonable and fixing a period would merely be a technicality causing further delay.
• CIAC Jurisdiction and Arbitration Clauses — Under Executive Order No. 1008 and Republic Act No. 9285, the CIAC has original and exclusive jurisdiction over construction disputes. An arbitration clause in a construction contract is deemed an agreement to submit to CIAC jurisdiction and cannot be waived or superseded by subsequent agreements that merely facilitate the execution of the principal contract.
• Attorney's Fees under Article 2208 — Attorney's fees may be awarded when a party is compelled to litigate due to the unjustified refusal of the other party to satisfy a valid claim, even in the absence of a stipulation, provided the court finds it just and equitable.

• "Rescission under Article 1191 of the Civil Code is the proper remedy when a party breaches a reciprocal obligation. Because each case has its own distinct circumstances, this Court's power to fix a period of an obligation under Article 1197 is discretionary and should be exercised only if there is just cause."
• "Rescission has the effect of 'unmaking a contract, or its undoing from the beginning, and not merely its termination.' Hence, rescission creates the obligation to return the object of the contract."
• "The power of this Court to fix a period is discretionary. The surrounding facts of each case must be taken into consideration in deciding whether the fixing of a period is sanctioned. The discretion to fix an obligation's period is addressed to this Court's judgment and is tempered by equitable considerations."
• "Arbitration, '[b]eing an inexpensive, speedy[,] and amicable method of settling disputes . . . is encouraged by the Supreme Court.' If any doubt will arise, it 'should be resolved in favor of arbitration.'"

• Hutama-RSEA Joint Operations, Inc. v. Citra Metro Manila Tollways Corporation, 604 Phil. 631 (2009) — Cited for the principle that an arbitration clause in a construction contract automatically vests CIAC with jurisdiction and cannot be subjected to conditions or waived by the parties.
• Central Philippine University v. Court of Appeals, 316 Phil. 616 (1995) — Followed for the doctrine that courts may refuse to fix a period when doing so would be a mere technicality and formality that would only cause further delay.
• Spouses Velarde v. Court of Appeals, 413 Phil. 360 (2001) — Applied for the rule that rescission under Article 1191 is predicated on breach of faith and failure to comply with an existing obligation.
• Fang v. Dueñas, 759 Phil. 373 (2015) — Cited for the definition of rescission as declaring a contract void at its inception and restoring parties to their original positions.
• Nacar v. Gallery Frames, 716 Phil. 267 (2013) — Applied for the computation of interest rates (12% per annum from demand until June 30, 2013; 6% per annum thereafter until full satisfaction).

• Article 1191, Civil Code — Governs the power to rescind reciprocal obligations when one obligor fails to comply.
• Article 1197, Civil Code — Allows courts to fix the duration of an obligation when no period is fixed but one was intended; provides that such power is discretionary.
• Article 2208, Civil Code — Enumerates instances when attorney's fees may be recovered in the absence of stipulation.
• Section 4, Executive Order No. 1008 (Construction Industry Arbitration Law) — Defines the original and exclusive jurisdiction of the CIAC over construction disputes.
• Section 35, Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004) — Affirms CIAC jurisdiction over construction disputes even if the arbitration is "commercial."

Caguioa, A. Reyes, Jr., Hernando, and Inting, JJ.