Federal Builders, Inc. vs. Foundation Specialists, Inc.

In the absence of stipulation, the legal interest rate on monetary obligations arising from breach of construction contracts—which are contracts for services, not loans or forbearances of money—is six percent (6%) per annum computed from the time the claim is made judicially or extrajudicially until full satisfaction, pursuant to the guidelines established in Eastern Shipping Lines, Inc. v. Court of Appeals as modified by Nacar v. Gallery Frames.

Federal Builders, Inc. (FBI), the main contractor for the Trafalgar Plaza project in Salcedo Village, Makati City, engaged Foundation Specialists, Inc. (FSI) as subcontractor for the construction of diaphragm walls, capping beams, and guide walls. Under their August 20, 1990 agreement, FBI undertook to pay a 20% downpayment and the balance through progress billings every fifteen days, payable within one week from presentation. During execution, disputes arose regarding FSI's completion percentage and the quality of work, culminating in FBI's refusal to pay Billings Nos. 3 and 4 and FSI's subsequent filing of a collection suit.

• The Construction Agreement: On August 20, 1990, FBI and FSI entered into a subcontract agreement whereby FSI undertook to construct the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza in Makati City for a total contract price of ₱7,400,000.00. FBI agreed to pay a 20% downpayment and the balance through progress billings every fifteen days, payable not later than one week from billing presentation.
• Performance and Disputes: FSI alleged it completed 97% of the contracted works, while FBI contended that only 85% was completed and that the work was defective and out of specifications, requiring remedial work at a cost of ₱8,582,756.29. FBI claimed FSI abandoned the jobsite, causing project delays and the owner's deferment of progress billings.
• Failure to Deliver Cement: Records showed that from September 14, 1990 to May 30, 1991, FSI repeatedly requested FBI to deliver cement necessary for constructing the capping beam. On April 22, 1991, FSI notified FBI that it could not construct the capping beam due to FBI's failure to deliver the agreed cement. The trial court found that the non-completion of the remaining 3% of work and alleged defects were attributable to FBI's failure to supply materials, not FSI's negligence.
• Payment History and Default: FBI paid FSI an aggregate amount of ₱5,814,000.00 based on its evaluation of FSI's accomplishments, without objection to the quality of work. However, as of May 30, 1991, Billings Nos. 3 and 4 remained unpaid, prompting FSI to send a demand letter dated August 30, 1991, and subsequently file the collection suit on January 9, 1992.
• Trial Court Findings on Defects: The RTC found that alleged defects—such as misaligned diaphragm wall panels and wrong location of rebar dowels—were anticipated by the parties and provided for in the contract (Provision 6.4), or were attributable to the non-homogenous soil characteristics during excavation. The trial court noted that FBI paid approximately ₱6 million for work on the diaphragm wall without objection, indicating that the alleged defects discovered after January 1992 were mere afterthoughts to justify non-payment.

• Substantial Performance: FBI argued that the CA erred in affirming the trial court's judgment holding it liable for the balance of ₱1,024,600.00 (less ₱33,354.40) notwithstanding that the diaphragm wall constructed by FSI was concededly defective and out-of-specifications, requiring FBI to redo the work at its own expense.
• Interest Rate: FBI maintained that the CA committed serious error in imposing 12% legal interest from August 30, 1991 despite the absence of any stipulation regarding interest in the parties' agreement and despite the fact that their agreement was not a "loan or forbearance of money" but a construction contract.
• Counterclaim for Damages: FBI asserted that the CA gravely erred in dismissing its counterclaim for ₱8,582,756.29 as actual damages for remedial works, arguing that overwhelming evidence supported the claim for defects in FSI's workmanship.

• Completion of Work: FSI countered that it had completed 97% of the contracted works, and that the non-completion of the remaining 3% and alleged defects were due to FBI's failure to deliver the required cement and other materials as agreed upon.
• Attribution of Defects: FSI argued that the misalignment of diaphragm wall panels was anticipated in the contract and caused by soil characteristics during excavation, while the wrong location of rebar dowels was covered by an approved remedial plan ("Detail of Sheer Connectors"), making these defects attributable to FBI's own actions or accepted risks rather than FSI's negligence.
• Payment Without Objection: FSI maintained that FBI's prior payments totaling approximately ₱6 million without objection to the quality of work estopped it from raising defects as a defense to non-payment of the final billings.

• Liability for Unpaid Billings: Whether the Court of Appeals erred in affirming FBI's liability for unpaid construction billings despite allegations of defective and incomplete work.
• Applicable Interest Rate: Whether the 12% per annum legal interest rate applies to monetary obligations arising from breach of a construction contract where no interest rate was stipulated.
• Dismissal of Counterclaim: Whether the Court of Appeals erred in dismissing FBI's counterclaim for actual damages representing the cost of remedial works.

• Liability for Unpaid Billings: The liability was affirmed. Factual findings of the trial court, affirmed by the CA, are conclusive absent the recognized exceptions (contradictory findings, speculation, manifestly mistaken inferences, grave abuse of discretion, going beyond issues, misappreciation of facts, conflicting findings, or conclusions without specific evidence). None of the exceptions obtained. The evidence established that FSI completed 97% of its contracted works, and the non-completion of the remainder plus alleged defects were attributable to FBI's failure to deliver cement and other materials as agreed, not to FSI's fault. FBI's payment of approximately ₱6 million without prior objection to work quality estopped it from claiming defects as a defense.
• Applicable Interest Rate: The 12% rate was reduced to 6% per annum. Pursuant to Eastern Shipping Lines as modified by Nacar v. Gallery Frames, the 12% rate applies only to loans or forbearances of money. Construction contracts are contracts for services, not loans or forbearances. Forbearance requires a contractual obligation to refrain from requiring repayment of money temporarily used; construction contracts involve performance of services, not temporary use of money. Thus, the breach of a construction contract warrants interest at 6% per annum from the time of extrajudicial demand (August 30, 1991) until full satisfaction.
• Dismissal of Counterclaim: The dismissal was affirmed. Because the alleged defects were proven to be caused by FBI's own failure to supply materials or were anticipated and accepted risks under the contract, FBI's claim for ₱8,582,756.29 in actual damages for remedial works lacked factual and legal basis.

• Conclusiveness of Factual Findings — Factual findings of the trial court, when affirmed by the Court of Appeals, are accorded the highest degree of respect and are considered conclusive between the parties, absent eight recognized exceptions: (1) when the findings of the CA and trial court are contradictory; (2) when the findings are grounded entirely on speculation, surmises or conjectures; (3) when the inference from factual findings is manifestly mistaken, absurd or impossible; (4) when there is grave abuse of discretion in appreciating facts; (5) when the findings go beyond the issues or fail to notice relevant facts that would justify a different conclusion; (6) when there is misappreciation of facts; (7) when findings of fact are conflicting; and (8) when findings are conclusions without mention of specific evidence, are premised on absence of evidence, or are contradicted by evidence on record.
• Interest Rate Guidelines (Eastern Shipping-Nacar Rules) — The rate of interest on monetary obligations depends on the nature of the obligation:
  1. Loan or Forbearance: When the obligation breached consists in the payment of a sum of money (i.e., a loan or forbearance), the interest due shall be that stipulated in writing; in the absence of stipulation, the rate is 6% per annum (formerly 12% prior to July 1, 2013) computed from default (judicial or extrajudicial demand).
  2. Non-Loan Obligations: When the obligation does not constitute a loan or forbearance of money, interest on the amount of damages may be imposed at the court's discretion at the rate of 6% per annum. No interest is adjudged on unliquidated claims until the demand is established with reasonable certainty. Interest runs from judicial or extrajudicial demand if the amount is liquidated, or from the date of judgment if unliquidated.
  3. Finality of Judgment: When the judgment awarding a sum of money becomes final and executory, the rate of legal interest is 6% per annum (formerly 12%) from finality until satisfaction, this interim period being deemed a forbearance of credit.
  4. Definition of Forbearance — Forbearance of money, goods, or credits refers to arrangements other than loan agreements where a person acquiesces to the temporary use of his money, goods, or credits pending the happening of certain events or fulfillment of certain conditions. Construction contracts, being contracts for the performance of services, do not partake of loans or forbearances.

• "Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of respect and considered conclusive between the parties, save for the following exceptional and meritorious circumstances..." (followed by the eight exceptions).
• "Forbearance of money, goods or credits, therefore, refers to arrangements other than loan agreements, where a person acquiesces to the temporary use of his money, goods or credits pending the happening of certain events or fulfilment of certain conditions."
• "This case, however, does not involve an acquiescence to the temporary use of a party's money but a performance of a particular service, specifically the construction of the diaphragm wall, capping beam, and guide walls of the Trafalgar Plaza."
• "Thus, in the absence of any stipulation as to interest in the agreement between the parties herein, the matter of interest award arising from the dispute in this case would actually fall under the second paragraph of the above-quoted guidelines in the landmark case of Eastern Shipping Lines, which necessitates the imposition of interest at the rate of 6%, instead of the 12% imposed by the courts below."

• Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994 — Established the guidelines for computing legal interest on monetary obligations, distinguishing between loans/forbearances and other obligations.
• Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013 — Modified the Eastern Shipping guidelines to reflect the reduction of the legal interest rate from 12% to 6% per annum pursuant to BSP-MB Circular No. 799, effective July 1, 2013.
• S.C. Megaworld Construction and Development Corporation v. Engr. Parada, G.R. No. 183804, September 11, 2013 — Clarified that forbearance describes a contractual obligation whereby a lender refrains from requiring repayment during a given period, and that construction contracts are not forbearances but contracts for services.
• Reformina v. Tomol, Jr. — Cited in Megaworld for the proposition that 12% interest applies only to loans or forbearances.
• Estores v. Spouses Supangan, G.R. No. 175139, April 18, 2012 — Defined forbearance as acquiescence to temporary use of money pending certain events.
• Hanjin Heavy Industries and Construction Co., Ltd. v. Dynamic Planners and Construction Corp., G.R. Nos. 169408 & 170144, April 30, 2008 — Applied 6% interest to construction contract breaches.

• Article 2209, New Civil Code — Prescribes that if the obligation consists in the payment of a sum of money and the debtor incurs delay, the indemnity for damages shall be the payment of interest agreed upon, or in the absence of stipulation, the legal interest of six percent (6%) per annum.
• Article 1169, New Civil Code — Provides that in reciprocal obligations, the debtor incurs delay from the time the creditor demands fulfillment by extrajudicial or judicial action.
• BSP-MB Circular No. 799 — Reduced the legal rate of interest from 12% to 6% per annum, effective July 1, 2013.
• Rule 45, Rules of Court — Governs petitions for review on certiorari to the Supreme Court.

• Martin S. Villarama, Jr.
• Bienvenido L. Reyes
• Marvic Mario Victor F. Leonen
• Francis H. Jardeleza