Deiparine vs. Court of Appeals

A breach of a reciprocal obligation, such as a construction contract where the contractor fails to comply with stipulated plans and specifications in bad faith, gives the injured party the right to seek judicial rescission under Article 1191 of the Civil Code. The applicable rules are those governing obligations and contracts, not the provisions on rescissible contracts under Article 1381 or the owner's voluntary withdrawal under Article 1725.

Spouses Cesario and Teresita Carungay entered into a contract with Ernesto Deiparine, Jr. for the construction of a three-story dormitory in Cebu City for P970,000.00. The agreement required construction "in strict accordance to plans and specifications." Nicanor Trinidad, Jr. was designated as the owners' representative. During construction, Trinidad reported that Deiparine was deviating from the plans, compromising the building's safety. Despite directives to secure approval before pouring cement and complaints about faulty workmanship, Deiparine continued his course of action. The parties later agreed to conduct core testing, which revealed the structure's compressive strength was far below the required 3,000 psi, confirming it was structurally defective.

• Nature of the Agreement: The Carungay spouses contracted with Ernesto Deiparine, Jr. for the construction of a dormitory. The contract obligated Deiparine to build according to plans and specifications, and the Carungays to pay upon completion.
• Deviations and Breach: During construction, the owners' representative, Engr. Nicanor Trinidad, reported that Deiparine was deviating from the plans and specifications, using substandard methods and materials, and ignoring safety directives. Deiparine's own project engineer testified that Deiparine instructed workers to disregard the owners' orders to avoid additional expenses.
• Structural Deficiencies: Core testing conducted by Geo-Testing International on 24 samples showed that, based on the required 3,000 psi compressive strength, all samples failed. The building was found to be structurally defective.
• Contractor's Lack of Qualification: Deiparine was a master mariner, not an engineer or architect. The construction was supervised by a third-year civil engineering student, not a licensed professional.
• Agreement on Testing: The parties agreed in writing to conduct core testing, with Deiparine promising to shoulder expenses if the tests showed failure exceeding 10%. The tests confirmed failure.
• Lower Court Findings: Both the RTC and CA found that Deiparine acted in bad faith and substantially breached the contract.

• Jurisdiction: Petitioner argued that the Philippine Domestic Construction Board (PDCB), pursuant to P.D. 1746, had exclusive jurisdiction over disputes arising from domestic construction contracts, not the regular courts.
• No Contractual Breach: Petitioner maintained that the construction agreement did not specify a compressive strength of 3,000 psi nor require stress tests. He contended that following the initial general specifications (1:2:4 mixture) would yield an acceptable 2,500 psi strength.
• Wrong Legal Basis for Rescission: Petitioner asserted that the applicable provisions were Articles 1385 and 1725 of the Civil Code (on rescissible contracts and the owner's voluntary withdrawal), not Article 1191.

• Jurisdiction of Regular Courts: Respondents countered that P.D. 1746 grants the PDCB adjudicatory power only over public construction contracts. For private contracts, its role is limited to formulating and recommending rules; thus, regular courts retain jurisdiction.
• Substantial Breach and Bad Faith: Respondents argued that Deiparine's failure to follow the detailed "General Conditions and Specifications" (which required 3,000 psi) and his disregard for safety instructions constituted a substantial breach of the reciprocal obligation, justifying rescission under Article 1191.
• Agreement to Testing: Respondents noted that both parties agreed to the core test, the results of which conclusively proved the structural defect.

• Jurisdiction: Whether the regular courts or the Philippine Domestic Construction Board have jurisdiction over a dispute involving the rescission of a private construction contract.
• Proper Grounds for Rescission: Whether the contractor's breach of a construction contract due to failure to follow stipulated plans and specifications is a ground for judicial rescission under Article 1191 of the Civil Code.
• Applicable Legal Provisions: Whether Articles 1385 and 1725 of the Civil Code, as invoked by the petitioner, are the proper legal bases for rescission in this case.

• Jurisdiction: The regular courts have jurisdiction. P.D. 1746 clearly limits the PDCB's adjudicatory power to public construction contracts. Its function concerning private contracts is merely to "formulate and recommend" rules and procedures for dispute settlement. Therefore, the RTC correctly took cognizance of the case.
• Proper Grounds for Rescission: The contractor's breach justified rescission under Article 1191. The construction contract created reciprocal obligations. Deiparine's failure to build according to the stipulated plans and specifications, done in bad faith to cut costs, violated the reciprocity of the contract. This substantial breach entitled the owners to seek judicial rescission.
• Applicable Legal Provisions: Articles 1385 and 1725 are inapplicable. Article 1385 pertains to specifically enumerated "rescissible contracts" under Article 1381, which do not include construction contracts. Article 1725 contemplates a voluntary withdrawal by the owner without fault on the contractor's part, which was not the case here. The correct provisions are Article 1191 (rescission for breach of reciprocal obligations) and related articles on contracts for a piece of work (Arts. 1714, 1715, 1727), along with the principles of good faith (Arts. 19, 1159).

• Rescission under Article 1191 (Reciprocal Obligations) — This article grants the injured party in a reciprocal obligation the power to choose between fulfillment or rescission, with damages, in case the other party fails to comply with what is incumbent upon him. The Court applied this to a construction contract where the contractor's bad faith deviation from plans constituted a substantial breach that violated the contract's reciprocal nature.
• Jurisdiction of the Philippine Domestic Construction Board (PDCB) — Under P.D. 1746, the PDCB's power to adjudicate and settle claims applies only to public construction contracts. Its authority over private construction contracts is limited to formulating and recommending rules and procedures for dispute settlement. Regular courts retain jurisdiction over private construction disputes.

• "Article 1191, unlike Article 1385, is not predicated on economic prejudice to one of the parties but on breach of faith by one of them that violates the reciprocity between them." — This passage distinguishes the basis for rescission under the law on obligations from that under the law on rescissible contracts, emphasizing good faith and reciprocity.
• "The wording of P.D. 1746 is clear. The adjudicatory powers of the Philippine Domestic Construction Board are meant to apply only to public construction contracts." — This definitively interprets the jurisdictional limits of the administrative body, settling that private disputes remain with the courts.

• Universal Food Corporation v. Court of Appeals, L-29155, May 13, 1970 — Cited for the principle that Article 1191 is predicated on breach of faith that violates the reciprocity between parties, not merely on economic prejudice.

• Article 1191, Civil Code — Provides the power to rescind reciprocal obligations in case of breach. Applied as the correct legal basis for rescinding the construction contract.
• Article 1381 & 1385, Civil Code — Define rescissible contracts and the effects of rescission. The Court held these were inapplicable to the construction contract in question.
• Article 1725, Civil Code — Allows an owner to withdraw from a work contract by indemnifying the contractor. Held inapplicable as the rescission was due to fault, not voluntary withdrawal.
• Articles 19 & 1159, Civil Code — Establish the principles of acting with justice, giving each his due, observing good faith, and the binding force of contracts. Used to underscore the petitioner's bad faith.
• Articles 1714, 1715, 1727, Civil Code — Govern contracts for a piece of work, imposing duties on the contractor regarding quality, defect correction, and responsibility for employees. Cited as applicable provisions.
• Section 6(b), paragraphs 3 & 5, P.D. 1746 — Defines the functions of the Philippine Domestic Construction Board. Interpreted to limit adjudicatory power to public contracts.

• Justice Carolina C. Griño-Aquino
• Justice Jose C. Bellosillo
• Justice Ricardo J. Quiason