Heirs of Gaite vs. The Plaza, Inc.

A contractor who commits a substantial breach of a construction contract by persistently disregarding laws and local ordinances cannot validly terminate the contract based on the owner's non-payment of progress billings, the owner being justified in withholding payment; further, quantum meruit does not apply to entitle the contractor to payment for work done where the work is insubstantial and executed in contravention of approved plans.

On July 16, 1980, The Plaza, Inc. hired Rhogen Builders, represented by Ramon C. Gaite, to construct a restaurant in Makati for ₱7,600,000.00. A surety bond of ₱1,155,000.00 was executed by Gaite and FGU Insurance Corporation to secure Rhogen's compliance. After receiving a down payment of ₱1,155,000.00, Rhogen commenced construction. Within two months, the Makati Building Official issued a stoppage order and subsequently revoked the building permit due to multiple violations of the National Building Code, including lacking permits for temporary structures, failing to give notice of concrete pouring, and deviating from approved plans. Rhogen's project manager evaluated the first progress billing and found the work accomplished fell short of the claimed amount, recommending withholding of payment. Gaite suspended work, blaming The Plaza's uncooperative attitude for the failure to lift the stoppage order, and eventually terminated the contract. The Plaza rejected the termination, demanded the return of the down payment, and hired a new contractor.

• The Construction Contract: On July 16, 1980, The Plaza engaged Rhogen Builders to construct a restaurant for ₱7.6 million. A ₱1.155 million surety bond was posted by Gaite and FGU Insurance, and The Plaza paid the corresponding amount as a down payment.
• Stoppage and Revocation Orders: On September 10, 1980, the Makati Building Official ordered Rhogen to cease construction for violating the National Building Code. The violations included lacking a permit for temporary structures, failing to provide notice of concrete pouring, lacking safety devices, refusing to receive the stoppage order, and deviating from approved plans. The building permit was revoked on September 15, 1980.
• Withholding of Progress Billing: On September 19, 1980, The Plaza's Project Manager evaluated Rhogen's first progress billing and found that the actual work accomplished was significantly less than claimed. Payment was withheld pending compliance with construction memos, resolution of the stoppage order, and investigation of missing owner-furnished materials.
• Suspension and Termination by Rhogen: Gaite suspended work on October 7, 1980, claiming The Plaza was uncooperative in resolving the stoppage order. On January 9, 1981, Gaite formally terminated the contract, invoking Article 123 of the General Conditions and Article 1191 of the Civil Code, and demanded payment for work completed.
• Counter-Demands by The Plaza: The Plaza rejected the termination, holding Rhogen responsible for the delay and violations. A joint site inspection in February 1981 confirmed that the structure was not built according to approved plans. The Plaza demanded the return of the down payment, reimbursement for uprooting defective structures, and payment for owner-furnished materials.

• Valid Termination of Contract: Petitioners argued that Rhogen validly terminated the contract under Article 1191 of the Civil Code and Article 123 of the General Conditions because The Plaza failed to pay Progress Billing No. 1 within seven days.
• Unlawful Stoppage Order: Petitioners maintained that the stoppage order was unlawful, citing political harassment by the Makati Mayor, and claimed The Plaza was uncooperative in rectifying the violations.
• Impropriety of Returning Down Payment: Petitioners contended that the principle of quantum meruit dictates that Rhogen should be paid for the work already accomplished, precluding the return of the down payment.
• Impropriety of Temperate Damages: Petitioners asserted that temperate damages were improper because The Plaza could have presented receipts to substantiate actual damages.
• Entitlement to Damages: Petitioners claimed they were entitled to actual, moral, and exemplary damages and attorney's fees.

• Breach by Contractor: Respondent countered that Rhogen committed a substantial breach of contract by violating the National Building Code and failing to complete the project.
• Justified Withholding of Payment: Respondent argued that The Plaza was justified in withholding the progress billing because the work accomplished was less than claimed, the stoppage order was in effect, and owner-furnished materials had disappeared.
• No Obligation to Assist Contractor: Respondent maintained that The Plaza had no obligation to help Rhogen resolve the stoppage order, which arose from Rhogen's own violations.

• Validity of Contract Termination: Whether Rhogen Builders had valid grounds to terminate the construction contract based on non-payment of progress billing and the owner's alleged uncooperativeness.
• Return of Down Payment: Whether the return of the down payment was proper despite the principle of quantum meruit.
• Award of Temperate Damages: Whether the Court of Appeals erred in awarding temperate damages in lieu of actual damages for the owner-furnished materials.
• Petitioners' Claim for Damages: Whether petitioners are entitled to actual, moral, and exemplary damages and attorney's fees.

• Validity of Contract Termination: The termination was invalid. Rhogen committed a substantial breach of the construction contract by persistently disregarding laws and municipal ordinances, which caused the stoppage and revocation orders. Because Rhogen was at fault, The Plaza was justified in withholding payment on the progress billing. Article 123 of the General Conditions requires that the stoppage be "through no act or fault of Contractor," a condition not met here. The power to rescind under Article 1191 of the Civil Code is given only to the injured party who faithfully fulfilled their obligation.
• Return of Down Payment: The return of the down payment was proper, and quantum meruit does not apply. Quantum meruit allows recovery to avoid unjust enrichment when a building is almost completed and occupied, which is not the case here. Rhogen failed to finish a substantial portion of the works, and the completed works were executed in contravention of approved plans. Under Article 1167 of the Civil Code and Article 122 of the General Conditions, a contractor who fails to perform or performs in contravention of the tenor of the obligation is not entitled to further payment until the work is finished.
• Award of Temperate Damages: The award of temperate damages was proper. The exact quantity and cost of the owner-furnished materials that disappeared or were damaged under Rhogen's custody could not be determined with certainty, satisfying the requirement for temperate damages under Article 2224 of the Civil Code.
• Petitioners' Claim for Damages: The claim for damages by the petitioners lacks legal basis, as Rhogen was the party in breach.

• Reciprocal Obligations (Art. 1191, Civil Code) — The power to rescind obligations is implied in reciprocal ones, but is given only to the injured party who has faithfully fulfilled or is ready and willing to perform their obligation. A party in breach cannot invoke rescission based on the other party's non-performance when that non-performance is justified by the breach.
• Quantum Meruit — A contractor is allowed to recover the reasonable value of services rendered despite the lack of a written contract to avoid unjust enrichment. However, this principle does not apply where the contractor fails to finish a substantial portion of the work and the work done is in contravention of the obligation (e.g., not according to approved plans), pursuant to Article 1167 of the Civil Code.
• Temperate Damages (Art. 2224, Civil Code) — Temperate or moderate damages may be recovered when the court is convinced that some pecuniary loss has been suffered but its amount cannot be proved with certainty from the nature of the case. This applies when the exact quantity and cost of lost or damaged materials under a contractor's custody cannot be determined due to the contractor's failure to account for them.

• "The breach contemplated in the provision is the obligor’s failure to comply with an existing obligation. Thus, the power to rescind is given only to the injured party. The injured party is the party who has faithfully fulfilled his obligation or is ready and willing to perform his obligation."
• "If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone."
• "Temperate or moderate damages, which are more than nominal but less than compensatory damages, 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."

• Heirs of Antonio F. Bernabe v. Court of Appeals, G.R. No. 154402, July 21, 2008 — Cited as controlling precedent for the principle that the power to rescind under Article 1191 of the Civil Code is given only to the injured party who has faithfully fulfilled or is ready and willing to perform their obligation.
• H. L. Carlos Construction, Inc. v. Marina Properties Corporation, G.R. No. 147614, January 29, 2004 — Cited to define the principle of quantum meruit, noting that it allows a contractor to recover the reasonable value of services to avoid unjust enrichment, particularly when a building is almost completed and occupied.
• Government Service Insurance System v. Labung-Deang, G.R. No. 135644, September 17, 2001 — Cited as authority for the award of temperate damages under Article 2224 of the Civil Code when pecuniary loss is certain but the amount cannot be proved.

• Article 1191, Civil Code — Governs the power to rescind reciprocal obligations. Applied to determine that Rhogen, as the party in breach, could not invoke the right to rescind the contract.
• Article 1170, Civil Code — Provides that those who in the performance of their obligations are guilty of fraud, negligence, or delay, or who contravene the tenor thereof, are liable for damages. Applied to hold petitioners liable for breach of contract.
• Article 1167, Civil Code — Stipulates that if a person obliged to do something fails to do it, it shall be executed at his cost, and the same rule applies if done in contravention of the tenor of the obligation. Applied to deny quantum meruit and justify the return of the down payment, as Rhogen's work was not according to approved plans.
• Article 2224, Civil Code — Defines temperate or moderate damages. Applied to justify the award of ₱300,000.00 for owner-furnished materials that could not be quantified with certainty.
• Article 122, Articles of General Conditions — Grants the owner the right to terminate the contract if the contractor persistently disregards laws or is guilty of a substantial violation of the contract, and states the contractor is not entitled to further payment until the work is finished. Applied to justify The Plaza's termination and withholding of payment.
• Article 123, Articles of General Conditions — Grants the contractor the right to stop work or terminate if work is stopped for three months through no act or fault of the contractor. Interpreted to exclude Rhogen's right to terminate, as the stoppage was caused by its own faults.
• P.D. 1096 (National Building Code) — The violation of which by Rhogen formed the basis of the stoppage order and constituted a substantial breach of the construction contract.

Conchita Carpio Morales, Antonio Eduardo B. Nachura, Arturo D. Brion, Maria Lourdes P. A. Sereno.