Engineering & Machinery Corporation vs. Court of Appeals

An action for breach of a written contract for a piece of work prescribes in ten years under Article 1144 of the Civil Code, not in six months under Article 1571 on implied warranty against hidden defects, where the complaint alleges failure to comply with agreed plans and specifications rather than mere enforcement of implied warranty.

Petitioner Engineering & Machinery Corporation is engaged in the fabrication and installation of air-conditioning systems as ordered by customers and in accordance with particular plans and specifications provided by them, not in manufacturing such systems for sale off-the-shelf. Private respondent Ponciano L. Almeda was the owner of a building along Buendia Avenue, Makati, for which he commissioned such a system. The Civil Code distinguishes contracts of sale from contracts for a piece of work and provides separate rules on warranty, contractor obligations, and prescription.

Pursuant to a contract dated September 10, 1962, petitioner undertook to fabricate, furnish and install the air-conditioning system in private respondent's building along Buendia Avenue, Makati, for P210,000.00, furnishing the materials, labor, tools and all services required therefor. The system was completed in 1963 and accepted by private respondent, who paid the contract price in full, albeit after a one-year period during which final payment was withheld while the system was subjected to rigid inspection, testing, and corrections or modifications by petitioner.

On September 2, 1965, private respondent sold the building to the National Investment and Development Corporation (NIDC), which took possession. On account of NIDC's noncompliance with the deed of sale, private respondent secured judicial rescission and, ownership having been decreed back to him, re-acquired possession sometime in 1971. He then learned from some NIDC employees of defects in the building's air-conditioning system.

Acting on that information, private respondent commissioned Engineer David R. Sapico to render a technical evaluation of the system in relation to the contract. Sapico enumerated defects and concluded the system was not capable of maintaining the desired room temperature of 76ºF - 2ºF. On the basis of that report, private respondent filed on May 8, 1971 an action for damages alleging the system as installed did not comply with the agreed plans and specifications, praying for P210,000.00 as rectification cost, P100,000.00 as damages and P15,000.00 as attorney's fees.

Petitioner moved to dismiss on prescription under Articles 1566 and 1567 in relation to Article 1571, and in its answer reiterated prescription, attributing possible defects to wear and tear and lack of maintenance, and interposed a compulsory counterclaim referencing Civil Case No. 71494 of the Court of First Instance of Manila wherein private respondent had been adjudged to pay petitioner P138,482.25 as unpaid balance for another building's system. Private respondent obtained a writ of preliminary attachment upon alleging petitioner had sold its business. After trial, the lower courts factually found that petitioner had failed to install items called for by the specifications, such as face and by-pass dampers and modulating thermostat, and had substituted items not in accordance therewith, reducing operational effectiveness so that 35 window-type units had to be installed to achieve a fairly desirable room temperature.

• Extinguishment by Acceptance: Petitioner contended that private respondent's acceptance of the work and payment of the contract price extinguished any liability with respect to defects in the air-conditioning system.
• Apparent Nature of Defects: Petitioner claimed that the Court of Appeals erred in holding that defects in the installation were not apparent at the time of delivery and acceptance, considering private respondent was not an expert who could recognize such defects.
• Prescription and Nature of Contract: Petitioner insisted that, assuming arguendo hidden defects existed, the complaint was barred by the six-month prescriptive period under Article 1571 of the Civil Code, arguing that Article 1571 applies to a contract for a piece of work by virtue of Article 1714 governing warranty of title and against hidden defects and payment of price in a contract of sale.

• Nature of Contract and Prescription: Private respondent countered that the contract dated September 10, 1962 was not a contract of sale but a contract for a piece of work under Article 1713 of the Civil Code, and thus the complaint was timely brought within the ten-year prescriptive period under Article 1144(1) of the same Code.
• Questions of Fact: Private respondent averred that the issues raised by petitioner, like whether there was acceptance of the work and whether hidden defects could have been discovered by simple inspection, involve questions of fact already passed upon by the appellate court.

• Acceptance of Work: Whether acceptance of the work and payment of the contract price extinguished petitioner's liability for defects in the air-conditioning system.
• Apparent vs. Hidden Defects: Whether the defects and deviations from plans and specifications were apparent at the time of delivery and acceptance.
• Nature of Contract and Prescription: Whether the contract was one of sale or for a piece of work and whether the action was barred by prescription under Article 1571 or governed by the ten-year period under Article 1144.

• Acceptance of Work: No resolution on the merits was made, the issue raising a question of fact conclusively settled by the coincident findings of the trial and appellate courts and not reviewable under Rule 45.
• Apparent vs. Hidden Defects: No resolution on the merits was made, the issue raising a question of fact on discoverability by simple inspection already passed upon below with no exceptional ground for re-evaluation shown.
• Nature of Contract and Prescription: No, the action was not barred. The contract was for a piece of work, and the suit for breach of written contract prescribes in ten years under Article 1144, the May 8, 1971 complaint being filed within ten years from September 10, 1962.

• Acceptance of Work: Review under Rule 45 is confined to errors of law, and factual findings of the trial court as affirmed by the Court of Appeals are final and conclusive absent speculation, manifest mistake, grave abuse of discretion, misapprehension of facts, or findings beyond the issues. None of those exceptional circumstances having been shown, and the findings of both courts below coinciding, re-examination of evidence on acceptance and liability was not undertaken.
• Apparent vs. Hidden Defects: For the same procedural reason, the appellate finding that the breach consisted in omissions and deviations not apparent upon delivery and acceptance, especially as private respondent was not an expert, was left undisturbed. From the nature of an air-conditioning system installed in an 8-floor building, compliance with specifications could not be determined by simple inspection.
• Nature of Contract and Prescription: A contract is for a piece of work where the thing transferred would never have existed but for the order of the person desiring it, particularly where goods are manufactured specially upon special order and not for the general market; intention is tested by whether delivery alone without regard to work was contemplated or undertaking was accepted on the basis of a plan and work to be employed. Here petitioner did not sell off-the-shelf systems but fabricated and installed a system per customer plans and specifications, with price depending thereon, making Article 1713 applicable. Although Article 1714 refers to sale provisions on warranty against hidden defects under Articles 1561 and 1566, with remedies of redhibition or proportionate reduction under Article 1567, scrutiny of the complaint showed it alleged non-compliance with specifications and omissions/substitutions adversely affecting effectiveness, hence breach of contract itself under Article 1715 rather than enforcement of implied warranty. Article 1715 containing no specific period, Article 1144 governing actions upon a written contract supplied the ten-year period, satisfied by filing on May 8, 1971 upon a September 10, 1962 contract. Acceptance did not ipso facto relieve liability for contractual deviations within that period.

• Contract for a piece of work vs. contract of sale — A contract for delivery at a price of an article which the vendor in the ordinary course of business manufactures or procures for the general market, whether on hand or not, is a sale; if the goods are to be manufactured specially for the customer upon his special order and not for the general market, it is a contract for a piece of work under Article 1467. The inquiry is whether the thing transferred is one not in existence and which would never have existed but for the order; intention is also tested by whether the parties contemplated mere future delivery without regard to work or labor, or an undertaking based on a plan taking into account work to be employed personally or through another. Applied here, fabrication and installation of a central system per customer plans was held a piece of work, not a sale.
• Obligations of contractor for a piece of work — Under Article 1714, a contractor producing work from his own materials must deliver the thing and transfer dominion, governed by provisions on warranty of title and against hidden defects and payment of price in sale. Under Article 1715, the contractor must execute work with agreed qualities and without defects destroying or lessening value or fitness for ordinary or stipulated use; otherwise the employer may require removal of defect or execution of another work, or have it done at contractor's cost upon failure or refusal. The trial finding of omitted and non-conforming parts reducing effectiveness triggered liability for rectification cost.
• Warranty against hidden defects; redhibitory and quanti minoris actions — Under Articles 1561 and 1566, the vendor is responsible for hidden defects rendering the thing unfit or diminishing fitness so that the vendee would not have acquired it or would have paid less, excluding patent or visible defects and non-visible defects an expert vendee should have known. The remedy is withdrawal from contract or proportionate price reduction, with damages in either case under Article 1567. The decision distinguished this implied-warranty regime, with its six-month redhibitory period under Article 1571 and the four-year rescission rule for express warranty discussed in Villostas vs. Court of Appeals, from a direct breach-of-contract action.
• Prescription of action for breach of written contract for a piece of work — Where the action alleges violation of agreed specifications constituting breach under Article 1715, and that provision states no period, the general rule under Article 1144 that actions upon a written contract prescribe in ten years applies. Thus filed within ten years from execution, the complaint for failure to install required components and deviation from specifications was held not prescribed.
• Effect of acceptance; hidden breach discoverable only by experts — Acceptance of work does not ipso facto relieve the contractor from liability for deviations from and violations of the written contract where the defect was not apparent at delivery and acceptance and the employer is not an expert capable of recognition by simple inspection. The ten-year period for breach remains available.
• Review of factual findings under Rule 45 — Only errors of law are reviewed; coincident factual findings of trial and appellate courts are final and conclusive and will not be re-evaluated absent findings grounded on speculation, manifestly absurd or impossible inferences, grave abuse of discretion, misapprehension of facts, or findings beyond the issues contrary to admissions. No such ground having been shown, the first two issues raising factual questions were no longer resolved.

• "By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the material." — States the statutory definition in Article 1713 used as starting point for classifying the fabrication-installation agreement.
• "From the very nature of things, it is impossible to determine by the simple inspection of air conditioning system installed in an 8-floor building whether it has been furnished and installed as per agreed specifications." — Supports the conclusion that omissions and deviations were not apparent upon acceptance, particularly to a non-expert owner.
• "Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the petitioner from liability for deviations from and violations of the written contract, as the law gives him ten (10) years within which to file an action based on breach thereof." — Articulates the ratio that acceptance does not extinguish liability for contractual breach within the prescriptive period.

• Villostas vs. Court of Appeals, 210 SCRA 490 — Cited for the rule that Article 1571's six-month redhibitory period applies only to implied warranties, while express warranty periods or, absent such, the four-year rescission period under Article 1389 applies; used to frame but ultimately distinguish the present breach-of-contract suit.
• Commissioner of Internal Revenue vs. Engineering Equipment and Supply Co., 64 SCRA 590 — Cited with Inchausti & Co. vs. Ellis Cromwell as authority for distinguishing sale from piece of work by whether the thing would have existed absent the order.
• Navarro vs. Court of Appeals, 209 SCRA 612 — Cited for limiting Rule 45 review to errors of law and not re-examination of facts absent lack of evidentiary support or misapprehension.
• Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and Development Corp., G.R. No. 112130 — Cited for exceptional circumstances allowing reassessment of lower-court factual findings, none of which were found present.
• South Sea Surety and Insurance Company, Inc. vs. Hon. Court of Appeals, et al., G.R. No. 102253 — Cited for deference where trial and appellate findings coincide, declining renewed evaluation of testimonial and documentary evidence.
• Moles vs. Intermediate Appellate Court, 169 SCRA 777 — Cited through Villostas vs. Court of Appeals on prescriptive period where express warranty exists.

• Article 1713, Civil Code — Defines contract for a piece of work; applied to classify the fabrication-installation agreement as such because the system was made to order per customer plans.
• Article 1714, Civil Code — Provides contractor delivering work from his materials transfers dominion and is governed by sale provisions on warranty of title and hidden defects and payment of price; invoked by petitioner to urge Article 1571, but held not to convert a breach action into a warranty action.
• Article 1715, Civil Code — Requires work of agreed quality and fitness and authorizes employer to demand cure or have cure effected at contractor's cost; held the governing law for the alleged specification violations.
• Articles 1561, 1566 and 1567, Civil Code — State warranty against hidden defects and remedies of redhibition or price reduction with damages; discussed to distinguish implied-warranty suits from the present breach suit.
• Article 1571, Civil Code — Provides six-month prescriptive period for redhibitory action; held inapplicable because the complaint was for breach of written contract, not enforcement of implied warranty.
• Article 1144(1), Civil Code — Provides ten-year prescription for actions upon a written contract; applied to sustain timeliness of the May 8, 1971 filing on the September 10, 1962 contract.
• Article 1467, Civil Code — Distinguishes sale of articles manufactured for general market from manufacture upon special order as piece of work; cited through Justice Vitug's explanation.

Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.