EPG Construction Company, Inc. vs. Court of Appeals

A certificate of acceptance does not relieve a contractor of liability for hidden defects discovered within the guarantee period, where the defects were not recognizable upon acceptance and the employer expressly reserved its rights; and a corporate officer is not personally liable for corporate obligations absent proof that he acted maliciously or in bad faith.

EPG Construction Co., Inc. and the University of the Philippines entered into a construction contract for the UP Law Library Building for the stipulated price of ₱7,545,000.00. The contract included Article XI (Guarantee), under which the contractor warranted the work against defects for one year from substantial completion and acceptance, and assumed liability under Article 1723 of the Civil Code for building collapse within fifteen years due to defects or inferior materials. Emmanuel P. de Guzman was EPG's president and controlling stockholder.

EPG Construction Co., Inc. contracted with the University of the Philippines for the construction of the UP Law Library Building in Diliman, Quezon City, for ₱7,545,000.00. The contract's Article XI (Guarantee) provided that EPG would repair, at its own cost and for a period of one year from substantial completion and acceptance, all work that proved defective, and that EPG would be liable under Article 1723 of the Civil Code if the building collapsed within fifteen years due to defects or inferior materials.

Upon completion, the building was formally turned over by EPG to UP. UP issued a certification of acceptance dated January 13, 1983, stating that the general construction work had been satisfactorily completed as per plans and specifications as of January 11, 1983, without any defects whatsoever, and recommending release of the 10% retention in favor of EPG.

Sometime in July 1983, within the one-year guarantee period, UP complained to EPG that six air-conditioning units on the third floor were not cooling properly. After inspecting the equipment, EPG agreed to shoulder the expenses for their repair, including labor and materials, in the amount of ₱38,000.00. For reasons not explained in the record, the repair was never undertaken. UP repeated its complaints, prompting EPG to send representatives again to assess the defects. EPG ultimately made UP a written offer to repair the system for ₱194,000.00.

UP insisted that EPG was obligated to repair the defects at its own expense under the guarantee provision. EPG demurred. UP then engaged another company, which repaired the defects for ₱190,000.00. UP subsequently demanded from EPG reimbursement of that amount plus an equal sum as liquidated damages. When the demand was rejected, UP sued EPG and its president, Emmanuel P. de Guzman, in the Regional Trial Court of Quezon City. De Guzman moved to dismiss the complaint as to him for lack of a cause of action, but the motion was denied. After trial, the RTC found both defendants jointly and severally liable. The Court of Appeals sustained that ruling, and the case reached the Supreme Court on petition for review.

The defects in the cooling system, as discovered upon inspection by EPG's own subcontractor, included improper interlocking of the entire electrical system in all six units; wrong specification of the time delay relay in all six units; incorrect wiring connections on the oil pressure switches; improper setting of the Hi and Lo pressure switches; and many missing parts such as bolts, screws, compressor terminal insulation, and terminal screws of a circuit breaker.

• Estoppel by Certificate of Acceptance: Petitioners argued that by issuing the certificate of acceptance, UP waived the guarantee provision and was estopped from invoking it, citing Article 1719 of the Civil Code which states that "acceptance of the work by the employer relieves the contractor of liability."
• Force Majeure: Petitioners contended that the defects in the air-conditioning units were caused by force majeure or fortuitous event, specifically the frequent brown-outs in Metro Manila, and alternatively by UP's failure to perform maintenance work on the cooling system.
• Separate Corporate Personality: Petitioner De Guzman maintained that he has a separate legal personality from EPG Construction Co., Inc. and should not be held solidarily liable with it, stressing that the acts of the company are its own responsibility and that no liability arising from such acts should be ascribed to him personally.

• Guarantee Obligation: Respondent UP insisted that EPG was obligated to repair the defects at its own expense under the guarantee provision in their contract, and that the certificate of acceptance did not extinguish that obligation.
• De Guzman's Liability: In its opposition to De Guzman's motion to dismiss, UP stated it was suing him "in his official capacity and not in his personal capacity," though in its Comment on the petition, UP did not substantively refute De Guzman's argument on separate corporate personality and passed upon it sub silentio.

• Estoppel by Acceptance: Whether UP was estopped by its certificate of acceptance from imputing liability to EPG for the defects in the air-conditioning system.
• Force Majeure: Whether the defects in the cooling system were caused by force majeure or fortuitous event, specifically the frequent brown-outs in Metro Manila.
• Corporate Personality: Whether Emmanuel P. de Guzman has a separate legal personality from EPG Construction Co., Inc. and should not be held solidarily liable with it.

• Estoppel by Acceptance: No. The certificate of acceptance merely certified that the building was in good condition at the time of turn-over; it did not relieve EPG of liability for hidden defects discovered within the one-year guarantee period, as the defects were not recognizable upon acceptance and UP expressly reserved its rights under the guarantee.
• Force Majeure: No. The defects were caused by poor workmanship, not by the recurrent power cut-offs, which cannot be classified as force majeure sufficient to excuse contractual irregularities.
• Corporate Personality: Yes. De Guzman has a separate legal personality from EPG and should not be held solidarily liable, absent proof that he acted maliciously or in bad faith.

• Estoppel by Acceptance: The certificate of acceptance dated January 13, 1983 certified only that the building was in good condition at the time it was turned over. It did not relieve EPG of liability for any defect that might arise or be discovered later during the one-year guarantee period. Any other interpretation would render the guarantee provision functus officio upon turn-over, defeating its purpose. Petitioners relied on Article 1719 of the Civil Code, quoting only the opening clause — "Acceptance of the work by the employer relieves the contractor of liability" — while omitting the two exceptions: (1) where the defect is hidden and the employer is not, by his special knowledge, expected to recognize the same; or (2) where the employer expressly reserves his rights against the contractor by reason of the defect. Both exceptions applied: the defects were hidden and not recognizable at the time of acceptance, and UP expressly reserved its rights through the guarantee provision covering a one-year period.

• Force Majeure: The recurrent power cut-offs in Metro Manila could not be classified as force majeure or a fortuitous event sufficient to excuse EPG's contractual obligations. The real cause of the problem, according to EPG's own subcontractor, was poor workmanship: improper interlocking of electrical systems, wrong time delay relay specifications, incorrect wiring connections, improper pressure switch settings, and numerous missing parts. It was also not shown that cooling systems in buildings within the same area had been similarly damaged by the power cut-offs, undermining the causal link between brown-outs and the defects. The contention that UP's failure to perform maintenance work caused the breakdown was rejected, as mere maintenance could not have corrected the enumerated construction defects. Whether the repairs constituted mere maintenance was a factual issue resolved by the lower courts, and no exception to the rule binding this Court to such factual findings was demonstrated.

• Corporate Personality: The trial court did not explain why De Guzman was held solidarily liable, and the Court of Appeals likewise failed to address the point when it affirmed. UP itself did not refute the argument in its Comment. When De Guzman moved to dismiss, UP stated it was suing him in his official capacity as president, not personally — rendering his inclusion superfluous, since his acts as president were corporate acts imputable to EPG itself. The settled doctrine is that a corporation has a personality separate and distinct from its stockholders and officers, and mere ownership of all or nearly all capital stock is not sufficient ground for disregarding that separate personality. A corporate officer may be held personally liable only when he has acted maliciously or in bad faith. No such malice or bad faith was proved: De Guzman acted within the scope of his authority to protect EPG's interests and resist UP's claims. Whatever damage UP suffered was the sole responsibility of EPG, even though De Guzman was its principal officer and controlling stockholder.

• Separate Corporate Personality — A corporation is invested by law with a personality separate and distinct from those of the persons composing it and from any other entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock is not of itself sufficient ground for disregarding the separate corporate personality. A corporate officer is not personally answerable for corporate obligations unless he acted maliciously or in bad faith. In this case, De Guzman was absolved from solidary liability because he acted on behalf of EPG within the scope of his authority and without demonstrated malice or bad faith.

• Hidden Defect Exception to Acceptance (Article 1719, Civil Code) — Acceptance of the work by the employer relieves the contractor of liability for defects, except where (1) the defect is hidden and the employer is not, by his special knowledge, expected to recognize the same, or (2) the employer expressly reserves his rights against the contractor by reason of the defect. Both exceptions applied here: the air-conditioning defects were hidden and not recognizable upon acceptance, and UP expressly reserved its rights through the one-year guarantee provision.

• "All UP certified to was that the building was in good condition at the time it was turned over to it on January 13, 1983. It did not thereby relieve the petitioners of liability for any defect that might arise or be discovered later during the one-year period of the guarantee. Any other interpretation would make the guarantee provision useless to begin with as it would have automatically become functus officio with the turn-over of the construction." — This passage articulates the ratio decidendi on the estoppel issue, explaining why a certificate of acceptance cannot nullify a guarantee provision that expressly extends liability beyond the date of turn-over.

• "The brown-outs have become an intolerable annoyance, but they cannot excuse all contractual irregularities, including the petitioners' shortcomings." — This statement defines the limits of force majeure as a defense in construction contract disputes, establishing that recurrent power interruptions do not excuse a contractor's own defective workmanship.

• "The exception noted is where the official 'had acted maliciously or in bad faith,' in which event he may be made personally liable for his own act. That exception is not applicable in the case at bar, because it has not been proved that De Guzman acted maliciously or in bad faith when, as President of EPG, he sought to protect its interests and resisted UP's claims." — This passage states the controlling rule on personal liability of corporate officers and its application to the facts, establishing that good-faith defense of corporate interests shields the officer from personal liability.

• Sulo ng Bayan, Inc. vs. Araneta, 72 SCRA 347, 353 — Cited for the doctrine that a corporation is a distinct legal entity separate from its stockholders or members, and is not affected by the personal rights, obligations, and transactions of its stockholders or members. Applied to support De Guzman's separate personality from EPG.

• Lim vs. NLRC, 171 SCRA 328 — Cited for the rule that a corporation has a personality separate and distinct from those composing it, and that a corporate officer (there, a general manager) should not be made personally answerable for corporate obligations unless he acted maliciously or in bad faith. Applied to absolve De Guzman from solidary liability.

• Article 1719, Civil Code — Provides that acceptance of the work by the employer relieves the contractor of liability for defects, unless (1) the defect is hidden and the employer is not expected to recognize it, or (2) the employer expressly reserves his rights. Both exceptions were found applicable: the defects were hidden and not recognizable upon acceptance, and UP expressly reserved its rights through the guarantee clause.

• Article 1723, Civil Code — Referenced in the contract's guarantee provision, making the contractor liable if, within fifteen years from completion, the building collapses on account of defects in construction, use of inferior materials, or violation of contract terms. This provision was part of the contractual framework but was not directly at issue in the dispute, which concerned defects in the air-conditioning system rather than structural collapse.

Griño-Aquino, Medialdea, and Bellosillo, JJ., concurred.