Geromo vs. La Paz Housing and Development Corporation

A developer-vendor is liable for breach of the implied warranty against hidden defects under Articles 1561 and 1566 of the Civil Code where the housing units it delivered become unfit for habitation because of unstable soil beneath them, and it may be held liable independently under the doctrine of res ipsa loquitur where the excavation, filling, and leveling of the subdivision grounds were exclusively under its supervision and control. The warranty covers defects that are important or serious, hidden, existing at the time of sale, and brought to the seller's notice within a reasonable time; a financing institution that merely lent the purchase price and was never a party to the contracts of sale incurs no liability.

Petitioners Atty. Reyes G. Geromo, Florencio Buentipo, Jr., Ernaldo Yambot, and Lydia Bustamante acquired individual housing units in Adelina 1-A Subdivision, San Pedro, Laguna from La Paz Housing and Development Corporation, with the Government Service Insurance System extending housing loans to finance the purchases as evidenced by deeds of conditional sale. The subdivision units were situated along the old Litlit Creek, and the relationship between the parties was that of vendor-developer and vendees, with GSIS participating only as lender. The dispute is governed by Presidential Decree No. 957, the Subdivision and Condominium Buyers' Protective Decree, one purpose of which is to discourage and prevent unscrupulous owners, developers, agents, and sellers from reneging on their obligations and representations to the detriment of innocent purchasers.

Petitioners Atty. Reyes G. Geromo, Florencio Buentipo, Jr., Ernaldo Yambot, and Lydia Bustamante acquired individual housing units of Adelina 1-A Subdivision in San Pedro, Laguna from La Paz Housing and Development Corporation through GSIS financing, as evidenced by their deeds of conditional sale. The properties were all situated along the old Litlit Creek.

In 1987, Geromo, Bustamante, and Yambot began occupying their respective residential dwellings, all located along Block 2 (Pearl Street) of the subdivision, while Buentipo opted to demolish the turned-over unit and build a new structure thereon. After more than two years of occupation, cracks started to appear on the floor and walls of their houses. Through the President of the Adelina 1-A Homeowners Association, the petitioners requested La Paz, as owner and developer, to take remedial action. They collectively decided to construct a riprap or retaining wall along the old creek, believing that water could be seeping underneath the soil and weakening the foundation of their houses. Although La Paz was of the view that it was not required to build a retaining wall, it gave the petitioners ₱3,000.00 each for expenses incurred in the construction of the riprap.

The petitioners claimed that despite the retaining wall, the condition of their housing units worsened as the years passed. When they asked La Paz to shoulder the repairs, it denied their request, explaining that the structural defects could have been caused by the 1990 earthquake and by the renovations and improvements introduced to the units, which overloaded the foundation of the original structures. In 1998, the petitioners decided to leave their housing units in Adelina.

In May 2002, upon the request of the petitioners, the Municipal Engineer of San Pedro and the Mines and Geosciences Bureau of the Department of Environment and Natural Resources conducted an ocular inspection of the subject properties and found that there was "differential settlement of the area where the affected units were constructed." On June 11, 2002, HLURB Director Belen G. Ceniza, after confirming the cracks on the walls and floors of the houses, requested the MGB-DENR and the Office of the Municipal Mayor to conduct a geological and geohazard assessment and a thorough investigation of the entire Adelina subdivision. In its August 8, 2002 Letter-Report, the MGB reported evident ground settlement in the area of the Litlit Creek where the petitioners' houses were located, probably caused by hydrocompaction of the backfill and/or alluvial deposits. The Engineering Department of the Municipality of San Pedro confirmed the settlement affecting at least six houses along Block 2, Pearl Street, including that of Geromo, resulting in various structural damage; a portion of Pearl Street itself had sunk, cracking the concrete pavement of the road.

Geromo thereafter filed a complaint for breach of contract with damages against La Paz and GSIS before the HLURB, and on May 3, 2003, Buentipo, Yambot, and Bustamante filed a similar complaint. They asserted that La Paz was liable for implied warranty against hidden defects and that it was negligent in building their houses on unstable land. The complaints were later consolidated. La Paz answered that it had secured the necessary permits and licenses for the subdivision project, that the houses were built in accordance with the plans and specifications of the National Building Code and were properly delivered, that it had not violated P.D. No. 957 as it held compliance documents such as development permits, an approved alteration plan, a license to sell, and a certificate of completion from the HLURB, that PHILVOLCS had reported in 1996 that a portion of the subdivision's topography developed an active fault line, and that there were unauthorized and irregular renovations, alterations, and additional constructions in the units. GSIS, for its part, moved to dismiss for lack of cause of action, asserting that the deeds of conditional sale were executed between La Paz and the petitioners only and that its sole participation was to grant loans for the purchase of the properties. The Office of the President found that the petitioners merely relied on the ocular inspection report, that no investigation had been conducted to determine the real cause of the damage, and that the petitioners did not even show that the plans, specifications, and designs of their houses were deficient and defective.

• Protective Mantle of P.D. No. 957: Petitioners argued that the conclusive findings of the MGB-DENR, the Engineer's Office of San Pedro, Laguna, and the HLURB Director that their housing units were unfit for human habitation entitled them to the protective mantle of P.D. No. 957, which was enacted to protect subdivision lot buyers against the commission of fraud or negligence by the developer or contractor.
• Governing Law and Theory of Liability: Petitioners maintained that the contractual relationship between the parties was not governed by Articles 1477 or 1478 of the New Civil Code, the correct issue being La Paz's liability as contractor and developer for housing units declared by government agencies to be unfit for human habitation; what governed were Article 2176 in relation to Articles 1170 and 1173, and Article 19 in relation to Articles 20 and 21, of the Civil Code.
• Warranty Against Hidden Defects: Petitioners asserted that La Paz was liable for warranty against hidden defects when it sold them housing units declared unfit for human habitation, and that La Paz's defense of force majeure would not lie.
• GSIS Liability: Petitioners argued that GSIS's privity to the deed of conditional sale executed between them and La Paz for the housing loans it financed made GSIS jointly and severally liable for the defective housing units.

• Compliance with Law and Specifications: La Paz averred that it had secured the necessary permits and licenses for the subdivision project, that the houses were built in accordance with the plans and specifications of the National Building Code and were properly delivered to the petitioners, and that it did not violate P.D. No. 957 because it had been issued compliance documents such as development permits, an approved alteration plan, a license to sell, and a certificate of completion by the HLURB.
• Alternative Causes of Damage: La Paz contended that PHILVOLCS, based on serial photo interpretation by its field surveyors in 1996, had reported that a portion of the subdivision's topography developed an active fault line, and that there were unauthorized, irregular renovations, alterations, and additional constructions in the units; it therefore argued that it should not be held liable for any damage incurred, which should be for the sole account of the petitioners.
• Absence of Cause of Action Against GSIS: GSIS moved for dismissal of the complaint for lack of cause of action, asserting that the deeds of conditional sale were executed between La Paz and the petitioners only and that its only participation in the transactions was to grant loans to the petitioners for the purchase of their respective properties.

• Warranty Against Hidden Defects: Whether La Paz should be held liable for the structural defects in the petitioners' housing units under its implied warranty against hidden defects.
• Negligence and Res Ipsa Loquitur: Whether La Paz was negligent in constructing houses over a portion of the old Litlit Creek without properly compacting the backfilled soil, such that liability attaches under the doctrine of res ipsa loquitur.
• GSIS Liability: Whether GSIS, by reason of its privity to the deeds of conditional sale it financed, may be held jointly and severally liable with La Paz for the defective housing units.

• Warranty Against Hidden Defects: Yes. The requisites of the implied warranty against hidden defects under Articles 1561 and 1566 of the Civil Code were satisfied, the structural damage being serious, hidden, existing at the time of sale, and seasonably reported to La Paz.
• Negligence and Res Ipsa Loquitur: Yes. Even without the findings of the local government agency and the MGB-DENR, La Paz is liable under the doctrine of res ipsa loquitur, the excavation, filling, and leveling of the subdivision grounds having been exclusively under its supervision and control.
• GSIS Liability: No. GSIS was never a party to the contracts between La Paz and the petitioners, and the housing loan agreements it entered into were separate and distinct from the purchase contracts; it was merely the lender, not the developer.

• Warranty Against Hidden Defects: Under Article 1561 of the Civil Code, the vendor is responsible for warranty against hidden defects which render the thing sold unfit for the use for which it is intended, or which diminish its fitness to such an extent that had the vendee been aware thereof he would not have acquired it or would have given a lower price; Article 1566 makes the vendor responsible for hidden faults or defects even though he was not aware thereof. The requisites are: (a) the defect is important or serious, in that the thing sold is unfit for its intended use or its fitness is diminished to the stated extent; (b) the defect is hidden; (c) the defect exists at the time of the sale; and (d) the buyer gives notice of the defect to the seller within a reasonable time. All were met. The petitioners observed big cracks on the walls and floors of their dwellings within two years from purchase; the damage was substantial and serious; they reported the condition to La Paz, which failed to present a concrete plan of action; and they raised the issue of water seeping through their houses during heavy rainfall, which La Paz again failed to address. The structural cracks and water seepage were evident indications that the soil underneath the structures could be unstable, and the condition of the soil would not be in the checklist that a potential buyer would normally inquire about from the developer, it being the latter's prime obligation to ensure the suitability and stability of the ground. The MGB's August 8, 2002 Letter-Report confirmed evident ground settlement in the area of the Litlit Creek probably caused by hydrocompaction of the backfill and/or alluvial deposits, and the Engineering Department of San Pedro confirmed settlement affecting at least six houses along Block 2, Pearl Street, including Geromo's. Because a portion of Pearl Street itself had sunk and cracked, and because the petitioners had to endure these conditions for several years while La Paz remained silent on their constant follow-ups, the petitioners were justified in abandoning their dwellings as they were living therein under unsafe conditions; with the houses uncared for, it was no surprise that by the time the case was filed in 2004 they were in a worse condition. La Paz remained unconcerned even after receiving incident reports of structural issues from homeowners and despite constant follow-ups for many years, prompting the petitioners to build the riprap themselves. One purpose of P.D. No. 957 is to discourage and prevent unscrupulous owners, developers, agents, and sellers from reneging on their obligations and representations to the detriment of innocent purchasers.
• Negligence and Res Ipsa Loquitur: Even without the findings of the local government agency and the MGB-DENR, La Paz is liable under the doctrine of res ipsa loquitur. As expounded in D.M. Consunji, Inc. vs. CA, the doctrine rests on necessity — the defendant in charge of the instrumentality which causes the injury either knows the cause of the accident or has the best opportunity of ascertaining it, while the plaintiff has no such knowledge and is compelled to allege negligence in general terms and rely on proof of the happening of the accident. The inference permitted is grounded on the fact that the chief evidence of the true cause, whether culpable or innocent, is practically accessible to the defendant but inaccessible to the injured person; the doctrine furnishes a bridge by which a plaintiff without knowledge of the cause reaches over to the defendant who knows or should know the cause. Expert testimony may be dispensed with to sustain an allegation of negligence if the following requisites obtain: (a) the event is of a kind which does not ordinarily occur unless someone is negligent; (b) the cause of the injury was under the exclusive control of the person in charge; and (c) the injury suffered must not have been due to any voluntary action or contribution on the part of the person injured. Here, the subdivision plan and layout were prepared and approved by La Paz, and the actual excavation, filling, and leveling of the subdivision grounds were exclusively done under its supervision and control. There being no contributory fault on the part of the petitioners, no other conclusion follows except that it was the fault of La Paz for not properly compacting the soil, which used to be an old creek; it should have taken adequate measures to ensure the structural stability of the land before building the houses thereon. The uneven street pavements and visible cracks on the houses were readily apparent, yet La Paz did not undertake any corrective or rehabilitative work. Its argument that the damage could have been sustained because of the 1990 earthquake or through the various enhancements undertaken by the petitioners was not substantiated, records showing that the petitioners had raised their concerns as early as 1988, before the 1990 earthquake.
• GSIS Liability: There is no legal basis to juridically bind GSIS because it was never a party to the contracts between La Paz and the petitioners. The housing loan agreements that the petitioners entered into with GSIS were separate and distinct from the purchase contracts they executed with La Paz; GSIS merely agreed to pay the purchase price of the housing unit that each petitioner purchased from La Paz. It was merely the lender, not the developer.
• Damages: On actual damages, the standing rule is that there must be pleading and proof of actual damages suffered, which must not only be capable of proof but actually proved with a reasonable degree of certainty; courts cannot rely on speculation, conjecture, or guesswork, and credence can be given only to claims duly supported by receipts. The petitioners failed to prove with concrete evidence the amount of actual damages they suffered, leaving no basis for such an award. Temperate or moderate damages may nevertheless be recovered when some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty; the amount is usually left to the discretion of the courts but should be reasonable, more than nominal but less than compensatory. Because the petitioners suffered some form of pecuniary loss due to the impairment of the structural integrity of their dwellings, temperate damages of ₱200,000.00 were just and reasonable. Moral damages, which are not punitive but designed to compensate and alleviate physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar harm unjustly caused, require satisfactory proof that the claimant suffered damages and that the injury sprang from any of the cases listed in Articles 2219 and 2220 of the Civil Code, and that the damages were the proximate result of a wrongful act or omission; they may be awarded when the breach of contract was attended with bad faith or gross negligence amounting to bad faith. The uncaring attitude of La Paz amounted to bad faith, warranting moral damages of ₱150,000.00. Exemplary damages, awarded when a wrongful act is accompanied by bad faith or when the guilty party acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner under Article 2232 of the Civil Code, were also proper, the indifference of La Paz in addressing the petitioners' concerns and its subsequent failure to take remedial measures constituting bad faith. Because the award of moral and exemplary damages was proper, attorney's fees and costs of suit may also be recovered under Article 2208 of the Civil Code.

• Implied Warranty Against Hidden Defects — Under Article 1561 of the Civil Code, the vendor is responsible for warranty against hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; the vendor is not answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them. Article 1566 makes the vendor responsible for any hidden faults or defects in the thing sold even though he was not aware thereof, unless the contrary has been stipulated and the vendor was not aware of the hidden faults or defects. The requisites are: (a) the defect is important or serious — the thing sold is unfit for the use for which it is intended, or its fitness is diminished to such an extent that the buyer would not have acquired it had he been aware thereof; (b) the defect is hidden; (c) the defect exists at the time of the sale; and (d) the buyer gives notice of the defect to the seller within a reasonable time. The Court applied the warranty to a subdivision developer whose housing units developed structural cracks and water seepage due to the unstable, improperly compacted soil beneath them, holding that the condition of the soil was not a matter a buyer would normally inquire into, it being the developer's prime obligation to ensure the suitability and stability of the ground.
• Res Ipsa Loquitur — The doctrine means, literally, that the thing or transaction speaks for itself: where it is shown that the thing or instrumentality which caused the injury complained of was under the control or management of the defendant, and that the occurrence resulting in the injury was such as in the ordinary course of things would not happen if those who had its control or management used proper care, there is sufficient evidence, in the absence of explanation by the defendant, that the injury arose from or was caused by the defendant's want of care. Its theoretical basis is necessity: the defendant in charge of the instrumentality either knows the cause of the accident or has the best opportunity of ascertaining it, while the plaintiff has no such knowledge. It has been said that the doctrine furnishes a bridge by which a plaintiff, without knowledge of the cause, reaches over to defendant who knows or should know the cause. Expert testimony may be dispensed with to sustain an allegation of negligence if the following requisites obtain: (a) the event is of a kind which does not ordinarily occur unless someone is negligent; (b) the cause of the injury was under the exclusive control of the person in charge; and (c) the injury suffered must not have been due to any voluntary action or contribution on the part of the person injured. The Court applied the doctrine because the subdivision plan and layout were prepared and approved by La Paz and the excavation, filling, and leveling of the grounds were exclusively under its supervision and control, with no contributory fault on the part of the petitioners.
• Temperate or Moderate Damages — Under Article 2224 of the Civil Code, temperate or moderate damages, which are more than nominal but less than compensatory, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty. The amount is usually left to the discretion of the courts but should be reasonable. The Court awarded ₱200,000.00 in temperate damages after finding that the petitioners failed to prove actual damages with concrete evidence but had suffered some pecuniary loss from the impairment of the structural integrity of their dwellings.
• Moral Damages in Breach of Contract — Moral damages are not punitive but are designed to compensate and alleviate physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar harm unjustly caused to a person. To be entitled to the award, the claimant must satisfactorily prove that he suffered damages and that the injury causing the same sprang from any of the cases listed in Articles 2219 and 2220 of the Civil Code, and that the damages were the proximate result of a wrongful act or omission. Moral damages may be awarded when the breach of contract was attended with bad faith or is guilty of gross negligence amounting to bad faith. The Court found that the uncaring attitude of La Paz amounted to bad faith.
• Exemplary Damages — Under Article 2232 of the Civil Code, in contracts and quasi-contracts the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The indifference of La Paz in addressing the petitioners' concerns and its subsequent failure to take remedial measures constituted bad faith.
• Attorney's Fees and Costs — Under Article 2208 of the Civil Code, in the absence of stipulation, attorney's fees and expenses of litigation other than judicial costs cannot be recovered except in the enumerated cases, including when exemplary damages are awarded. Because the award of moral and exemplary damages was proper, attorney's fees and costs of suit were also recoverable.
• Liability of a Financing Institution — A financing institution that merely lends the purchase price of a housing unit and is never a party to the contract of sale between the buyer and the developer incurs no liability for the unit's defects; the housing loan agreement is separate and distinct from the purchase contract.

• "The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who, by reason of this trade or profession, should have known them." — This is the Court's quotation of Article 1561 of the Civil Code, the statutory basis of the implied warranty against hidden defects whose requisites the Court then enumerated and applied to the developer-vendor.
• "Verily, the condition of the soil would not be in the checklist that a potential buyer would normally inquire about from the developer considering that it is the latter's prime obligation to ensure suitability and stability of the ground." — This passage supplies the ratio for the "hidden" element of the warranty, explaining why the unstable subsoil beneath the housing units was not a patent defect chargeable to the buyers.
• "Under the said doctrine, expert testimony may be dispensed with to sustain an allegation of negligence if the following requisites obtain: a) the event is of a kind which does not ordinarily occur unless someone is negligent; b) the cause of the injury was under the exclusive control of the person in charge; and c) the injury suffered must not have been due to any voluntary action or contribution on the part of the person injured." — This is the Court's canonical formulation of the requisites of res ipsa loquitur, drawn from D.M. Consunji, Inc. vs. CA, and applied to hold the developer liable independently of the warranty.
• "One of the purposes of P.D. No. 957, also known as The Subdivision and Condominium Buyers' Protective Decree, is to discourage and prevent unscrupulous owners, developers, agents, and sellers from reneging on their obligations and representations to the detriment of innocent purchasers." — This passage states the statutory policy behind the protective decree invoked by the petitioners and frames the Court's disposition against the developer.

• D.M. Consunji, Inc. vs. CA, 409 Phil. 275 (2001) — The principal authority relied upon for the doctrine of res ipsa loquitur; the Court quoted its exposition of the doctrine's rationale and requisites at length and applied them to hold the developer liable.
• Co Chien vs. Sta. Lucia Realty and Development, Inc., 542 Phil. 558, 568 (2007) — Cited for the purpose of P.D. No. 957, namely, to discourage and prevent unscrupulous owners, developers, agents, and sellers from reneging on their obligations and representations to the detriment of innocent purchasers.
• Viron Transportation Co., Inc. vs. Delos Santos, 399 Phil. 243 (2000) — Cited for the rule that actual damages must be pleaded and proved with a reasonable degree of certainty and supported by receipts; applied to deny the petitioners' claim for actual damages.
• College Assurance Plan vs. Belfranlt Development, Inc., 563 Phil. 355, 367 (2007) — Cited for the rule that temperate damages should be more than nominal but less than compensatory; applied in fixing the ₱200,000.00 award.
• Frias vs. San Diego-Sison, 549 Phil. 49, 61 (2007) — Cited for the rule that moral damages may be awarded when the breach of contract was attended with bad faith.
• Bankcard, Inc. vs. Feliciano, 529 Phil. 53, 62-63 (2006) — Cited for the rule that moral damages may be awarded where the defendant is guilty of gross negligence amounting to bad faith.
• Amado vs. Salvador, 564 Phil. 728, 745 (2007) — Cited in connection with the award of exemplary damages where the wrongful act is accompanied by bad faith or the guilty party acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.
• Unlad Resources Development Corporation vs. Dragon, 582 Phil. 61, 86 (2008) — Cited in support of the award of attorney's fees and costs of suit.
• Nacar vs. Gallery Frames, 716 Phil. 267, 280-281 (2013) — Cited for the imposition of legal interest at six percent (6%) per annum on all awards from the finality of judgment until full payment.

• Article 1561, Civil Code of the Philippines — Establishes the vendor's liability for warranty against hidden defects that render the thing sold unfit for its intended use or diminish its fitness to the extent that the vendee would not have acquired it or would have paid a lower price; excludes liability for patent or visible defects and for defects known to an expert vendee. The Court quoted the provision in full and used it as the primary basis for holding La Paz liable.
• Article 1566, Civil Code of the Philippines — Makes the vendor responsible for any hidden faults or defects in the thing sold even though he was not aware thereof, unless the contrary has been stipulated and the vendor was unaware of the hidden faults or defects. Cited as part of the statutory framework of the implied warranty applied against La Paz.
• Article 2224, Civil Code of the Philippines — Provides for temperate or moderate damages, more than nominal but less than compensatory, when some pecuniary loss has been suffered but its amount cannot be proved with certainty. Basis for the ₱200,000.00 temperate damages award.
• Article 2219, Civil Code of the Philippines — Enumerates the cases in which moral damages may be recovered, including quasi-delicts causing physical injuries and the acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. Cited as part of the basis for the moral damages award.
• Article 2220, Civil Code of the Philippines — Provides that willful injury to property may be a legal ground for awarding moral damages if the court finds that under the circumstances such damages are justly due, and that the same rule applies to breaches of contract where the defendant acted fraudulently and in bad faith. Cited as part of the basis for the moral damages award.
• Article 2232, Civil Code of the Philippines — In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Basis for the ₱150,000.00 exemplary damages award.
• Article 2208, Civil Code of the Philippines — In the absence of stipulation, attorney's fees and expenses of litigation other than judicial costs cannot be recovered except in the enumerated cases, including when exemplary damages are awarded; in all cases, the attorney's fees and expenses of litigation must be reasonable. Basis for the award of ₱100,000.00 in attorney's fees and costs of suit.
• Presidential Decree No. 957 (The Subdivision and Condominium Buyers' Protective Decree) — Invoked by the petitioners and cited by the Court for its purpose of discouraging and preventing unscrupulous owners, developers, agents, and sellers from reneging on their obligations and representations to the detriment of innocent purchasers. La Paz claimed compliance with the decree through development permits, an approved alteration plan, a license to sell, and a certificate of completion issued by the HLURB.

• Antonio T. Carpio (Chairperson)
• Diosdado M. Peralta
• Marvic M.V.F. Leonen
• Francis H. Jardeleza