Tan vs. G.V.T. Engineering Services

A sole proprietorship's improper designation as the named plaintiff in a complaint does not nullify the proceedings or divest the court of jurisdiction where the complaint's allegations and prayers clearly show that the proprietor is the real party in interest, the defect being merely formal and causing no prejudice to the defendant. Additionally, a contractor who has substantially performed its obligation in good faith and was forced to withdraw due to the other party's breach is entitled to recover as though there had been strict and complete fulfillment, less damages suffered by the obligee.

Spouses George and Susan Tan engaged G.V.T. Engineering Services, a sole proprietorship owned and managed by Gerino Tactaquin, to construct their residential house at Ifugao St., La Vista, Quezon City, for a contract price of ₱1,700,000.00. Because the spouses Tan lacked knowledge about building construction, they hired Engineer Rudy Cadag to supervise the project. The construction arrangement was such that the spouses Tan would supply materials while G.V.T. provided labor. During the course of construction, disagreements arose over changes to plans and specifications and the deletion of items from G.V.T.'s scope of work, ultimately leading Tactaquin to stop construction and file suit.

On October 18, 1989, spouses George and Susan Tan entered into a construction contract with G.V.T. Engineering Services, acting through its owner/manager Gerino Tactaquin, for the construction of their residential house at Ifugao St., La Vista, Quezon City. The contract price was ₱1,700,000.00. Because the spouses Tan had no knowledge about building construction, they hired Engineer Rudy Cadag to supervise the project. During the course of construction, the spouses Tan caused several changes in the plans and specifications and ordered the deletion of certain items from G.V.T.'s scope of work. This gave rise to differences between the spouses Tan and Cadag on one hand and Tactaquin on the other, ultimately prompting Tactaquin to stop construction.

On December 4, 1990, G.V.T., through Tactaquin, filed a Complaint for specific performance and damages against the spouses Tan and Cadag with the RTC of Quezon City. G.V.T. contended that the changes in plans and specifications ordered by Cadag and the spouses Tan forced it to borrow money from third persons at exorbitant interest; that several portions of its contract were deleted only to be awarded to other contractors; and that it suffered tremendous delay in project completion brought about by the spouses Tan's delay in delivering construction materials to the jobsite. In their Answer with Counterclaims, the spouses Tan and Cadag alleged that G.V.T. performed defective work; that to avert further losses, the spouses Tan deleted portions of the project and awarded them to another contractor; that the changes were agreed upon by the parties; and that G.V.T., being a mere single proprietorship, had no legal personality to be a party in a civil action.

After trial, the RTC found that there was undisputed delay in the delivery of construction materials, which caused tremendous delay in project completion. Documentary evidence showed that Tactaquin complained throughout the construction period about the non-delivery of materials, but his requests went unheeded. The RTC also found that the spouses Tan cancelled major portions of the project — including skylight roofing, installation of cement tiles, soil poisoning, and finishing — all of which were included in the construction agreement but were assigned to other contractors. Cadag testified that thirteen items were deleted due to Tactaquin's alleged lack of technical know-how, and that he became aware of imperfections as early as the plastering of the walls. The evidence showed, however, that Tactaquin's attention was first called regarding alleged faulty work only on November 16, 1990, when he was furnished with the spouses Tan's letter dated November 10, 1990. The RTC noted that Cadag was at the jobsite every day, assisted by other supervising representatives, indicating close monitoring of the construction. The trial court concluded that the defendants' conclusions as to Tactaquin's workmanship and competence were unsupported and without basis, and that their act of deleting several major items was uncalled for, if not done in bad faith, forcing Tactaquin to withdraw from the project.

The RTC ordered the spouses Tan and Cadag to pay, jointly and severally, ₱366,340.00 as the balance of the contract price, ₱49,578.56 as the 5% retention fee, ₱45,000.00 as moral damages, ₱100,000.00 as attorney's fees, and ₱17,000.00 as litigation expenses, and dismissed the counterclaims. The spouses Tan appealed to the CA, which affirmed with modification by deleting the awards for moral damages, attorney's fees, and litigation expenses and dismissing the case against Cadag. Both parties' motions for partial reconsideration were denied, prompting the spouses Tan to file the present petition.

• Consent to Changes: Petitioners contended that since Tactaquin consented and acquiesced to the changes and alterations made in the plan of the subject house, he could not complain and discontinue the construction.
• Unjust Enrichment: Petitioners asserted that requiring them to pay the cost of the remaining unfinished portion after Tactaquin abandoned the house would enable the latter to unjustly enrich himself at their expense.
• Retention Fee: Petitioners argued that the 5% retention fee is payable only after the house is completed and turned over; since respondent never completed construction, the retention fee should not be paid.
• Actual Damages: Petitioners contended that respondent failed to prove entitlement to actual damages.
• Derivative Liability from Cadag's Absolution: Petitioners argued that since the CA dismissed the complaint against Cadag, they should also be absolved because they merely relied upon and followed Cadag's advice and instructions as their supervising engineer.
• Jurisdiction over the Person of the Plaintiff: Petitioners argued that G.V.T., being a sole proprietorship, is not a juridical person and has no legal personality to institute the complaint; consequently, the trial court did not acquire jurisdiction and all proceedings are null and void.
• Deleted Items and Labor-Only Contract: In their Supplemental Petition, petitioners contended that under the contract, G.V.T. agreed to employ only labor while petitioners supplied materials; that it was error to award the remaining balance despite deletion of items with respondent's consent; and that the value of deleted items should be deducted from the original contract price. They also claimed the delay was attributable to respondent's failure to pay workers' wages, which forced petitioners to pay the workers themselves.

• Factual Findings Conclusive: Respondent contended that the CA and the trial court were unanimous in finding petitioners responsible for breach of contract by unjustifiably deleting agreed-upon items and delaying delivery of construction materials, and that these findings were never rebutted by contrary evidence. Respondent asserted that factual findings of the trial court, especially when affirmed by the CA, are conclusive on the Supreme Court, and that the Court's jurisdiction under Rule 45 is limited to reviewing errors of law.
• Distinction from Cadag's Absolution: Respondent argued that petitioners' reasoning was fallacious because the court's ruling absolving Cadag was based on the absence of privity of contract between Cadag and respondent, which cannot be said with respect to petitioners and respondent.
• Legal Personality to Sue: Respondent cited Yao Ka Sin Trading vs. Court of Appeals, as relied upon by the CA, arguing that no one was misled by the error in the name of the party plaintiff and that remanding the case for amendment would serve no purpose, as the same complaint, answer, defense, interests, witnesses, and evidence would be presented.

• Legal Personality of Sole Proprietorship: Whether G.V.T. Engineering Services, a sole proprietorship, has legal personality to sue, and whether the trial court acquired jurisdiction over the case despite the defect in the complaint's caption.
• Breach of Contract: Whether petitioners violated their construction agreement with respondent by unjustifiably deleting items from respondent's scope of work and delaying delivery of construction materials.
• Entitlement to Contract Balance and Retention Fee: Whether petitioners are liable to pay ₱366,340.00 representing the balance of the contract price and ₱49,578.56 representing the 5% retention fee.
• Derivative Liability: Whether petitioners should be absolved from liability on the ground that Cadag, their supervising engineer, was absolved by the CA.

• Legal Personality of Sole Proprietorship: No jurisdictional defect. The improper caption naming the sole proprietorship rather than its proprietor was a mere technicality; the complaint's allegations and prayers revealed the real party was Tactaquin, and no prejudice resulted to petitioners.
• Breach of Contract: Yes. Petitioners were guilty of breach of contract by unjustifiably deleting major items from respondent's scope of work and delaying delivery of construction materials, as found by both the trial court and the CA.
• Entitlement to Contract Balance and Retention Fee: Yes, with modification. Respondent was entitled to the contract balance of ₱366,340.00 under the doctrine of substantial performance in good faith; the retention fee was reduced from ₱49,578.56 to ₱20,772.05, the amount actually proven by documentary evidence.
• Derivative Liability: No. Petitioners' liability arises from their own contractual breach; Cadag's absolution was based on lack of privity of contract, and his acts as agent bound the principals — the spouses Tan.

• Legal Personality of Sole Proprietorship: While it is true that a sole proprietorship is not vested with legal personality to bring suit, a perusal of the records showed that the complaint, the Appellee's Brief, and the Comment before the Supreme Court were all captioned "G.V.T. Engineering Services acting through its owner/manager Gerino V. Tactaquin." Although the first paragraph referred to G.V.T. as the plaintiff, subsequent allegations referred to the plaintiff as a natural person, including a prayer for moral damages based on "his sufferings, mental anguish, moral shock, sleepless nights, serious anxiety and besmirched reputation as an Engineer and Contractor" — reliefs unavailable to juridical persons. From these, it was inferred that Tactaquin was the actual complainant. The proper caption should have been "Gerino Tactaquin doing business under the name and style of G.V.T. Engineering Services." The Court treated the defect as merely technical, not affecting jurisdiction, citing the principle that rules of procedure are mere tools designed to aid in the speedy, just, and inexpensive determination of cases. No prejudice to petitioners was shown. The Court relied on Alonso vs. Villamor for the proposition that no one was misled by the error in the party plaintiff's name and that remand would result in the same complaint, answer, defense, interests, witnesses, and evidence.

• Breach of Contract: Respondent did not refute that he consented to changes in the construction plan, but he denied agreeing to the deletions of items from his scope of work. Both the trial and appellate courts credited respondent's position, finding that petitioners were guilty of deleting several major items and delaying delivery of materials, thereby forcing respondent to withdraw. The Court upheld these factual findings, noting that questions of fact are beyond the scope of Rule 45 and that factual findings of the trial court, when affirmed by the CA, are generally binding. Petitioners failed to show that the lower courts overlooked or disregarded facts of such import as would alter the outcome. Documentary evidence — including respondent's letters dated November 10 and 23, 1990, meeting minutes from May 5, 1990, and a letter dated June 15, 1990 — confirmed respondent's refusal to consent to the deletions and petitioners' delay in material delivery.

• Entitlement to Contract Balance and Retention Fee: Under Article 1170 of the Civil Code, those who contravene the tenor of their obligation are liable for damages. Under Article 1234, if the obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. At the time of withdrawal on November 23, 1990, respondent had submitted his 22nd Billing dated October 29, 1990, showing 74% completion and ₱1,265,660.60 paid. Because the deleted items, if performed by respondent, would have brought completion to 96%, respondent was entitled to 96% of ₱1,700,000.00, or ₱1,632,000.00. Deducting the ₱1,265,660.00 already paid left a balance of ₱366,340.00. As to the retention fee, although the contract stipulated payment upon completion and turnover, respondent's failure to complete was not his fault but was caused by petitioners' breach. Since he substantially performed in good faith and was not at fault, he was entitled to recover as though there had been complete fulfillment. However, the documentary evidence presented by respondent to prove the retention fees totaled only ₱20,772.05, less than the ₱49,578.56 awarded by the trial court. Because actual or compensatory damages cannot be presumed but must be proved with reasonable certainty, the award was reduced to the amount actually supported by evidence.

• Derivative Liability: The CA correctly ruled that under the principle of relativity of contracts (Article 1311, Civil Code), contracts bind only the parties who entered into them. Respondent's cause of action was the spouses Tan's breach of contract; Cadag was not a party to that contract and had no privity with respondent. Cadag was employed by the spouses Tan as their supervising engineer, acting as their agent. Under agency principles, obligations contracted by the agent within the scope of authority are for and on behalf of the principal, making the principal liable. Since there was no allegation or evidence that Cadag exceeded his authority, his acts were considered those of the spouses Tan, who must answer for them. The absolution of Cadag thus did not absolve the spouses Tan.

• Substantial Performance in Good Faith (Article 1234, Civil Code) — If an obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. Applied where respondent withdrew from the project due to petitioners' breach but had already performed 74% of the work; with deleted items included, completion would have reached 96%. Respondent was entitled to recover the contract balance and retention fee as though fulfillment had been complete.
• Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their successors in interest, heirs, and assigns; they cannot favor or prejudice third persons. Applied to absolve Cadag, who was not a party to the construction contract between respondent and the spouses Tan, and to confirm the spouses Tan's liability as principals for their agent's acts.
• Legal Personality of Sole Proprietorships — A sole proprietorship is not vested with legal personality to bring suit or defend an action in court; the proper party is the proprietor doing business under a trade name. However, where the complaint's allegations and prayers clearly reveal the proprietor as the real party in interest, the defect in caption is merely technical and does not divest the court of jurisdiction, provided no prejudice results to the defendant.
• Conclusiveness of Factual Findings under Rule 45 — Factual findings of the trial court, particularly when affirmed by the Court of Appeals, are generally binding on the Supreme Court. Questions of fact are beyond the scope of a Rule 45 petition, which is limited to reviewing errors of law. The Court will not disturb such findings absent a showing that the lower courts overlooked or disregarded facts of such import as would alter the outcome.
• Proof of Actual or Compensatory Damages — Actual or compensatory damages cannot be presumed but must be proved with reasonable degree of certainty. A court cannot rely on speculation, conjectures, or guesswork but must depend on competent proof of both the fact and the amount of damage suffered. Applied to reduce the retention fee award to the amount actually established by documentary evidence.

• "The law abhors technicalities that impede the cause of justice. The court's primary duty is to render or dispense justice. 'A litigation is not a game of technicalities.'" — This passage, quoting Barnes vs. Quijano, articulates the Court's rationale for treating the defective caption as a mere technicality, reinforcing the principle that procedural rules must yield to substantial justice.
• "No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error send this case back for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same defense, the same interests, the same witnesses, and the same evidence." — Quoted from Alonso vs. Villamor (1910), this passage establishes the enduring doctrine that a misnomer in the party plaintiff's designation does not warrant remand where no prejudice results, and is frequently cited in subsequent jurisprudence on technical defects in party designation.
• "if the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment less damages suffered by the obligee." — This is the Court's application of Article 1234 of the Civil Code, the canonical formulation of the substantial performance doctrine as applied to a contractor forced to withdraw by the obligee's own breach.

• Alonso vs. Villamor, 16 Phil. 315 (1910) — Controlling precedent on the issue of misnomer in the party plaintiff's name; the Court adopted its rationale that remand for correction of a party name is unjustified where no one was misled and the same evidence would be presented on retrial.
• Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15, 1992, 209 SCRA 763 — Cited by the CA and quoted by respondent on the same principle regarding error in the name of the party plaintiff; the Court found its holding applicable to the present case.
• Barnes vs. Quijano, G.R. No. 160753, June 28, 2005, 461 SCRA 533 — Cited for the proposition that rules of procedure must yield to substantial justice and that litigations should be decided on their merits, not on technicality.
• Aguam vs. Court of Appeals, 388 Phil. 587 (2000) — Cited within Barnes vs. Quijano for the principle that technicalities should not impede the cause of justice.
• National Power Corporation vs. Court of Appeals, G.R. No. 106804, August 12, 2004, 436 SCRA 195 — Cited for the rule that questions of fact are beyond the scope of Rule 45 and that factual findings of the trial court affirmed by the CA are binding on the Supreme Court.
• Metro Manila Transit Corporation vs. Court of Appeals, 435 Phil. 129 (2002) — Cited for the exception that factual findings may be disturbed when the lower courts overlooked or disregarded facts of such import as would alter the outcome.
• Filipinas Broadcasting Network, Inc. vs. AMEC-BCCM, G.R. No. 141994, January 17, 2005, 448 SCRA 413 — Cited for the principle that juridical persons are not entitled to moral damages, supporting the inference that the complaint was actually brought by Tactaquin as a natural person.
• Saguid vs. Security Finance, Inc., G.R. 159467, December 9, 2005, 477 SCRA 256 — Cited for the rule that actual or compensatory damages cannot be presumed but must be proved with reasonable certainty.
• Smith Bell and Company vs. Court of Appeals, 335 Phil. 194 (1997) — Cited for the principle that every cause of action ex contractu must be founded upon a contract.
• Siredy Enterprises Inc. vs. Court of Appeals, 437 Phil. 580 (2002) — Cited for the agency principle that obligations contracted by an agent within the scope of authority are for and on behalf of the principal, who is liable therefor.

• Article 1170, Civil Code — Provides that those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. Applied to establish petitioners' liability for breach of contract.
• Article 1234, Civil Code — Provides that if the obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the obligee. Applied to entitle respondent to recover the contract balance and retention fee despite non-completion, since his withdrawal was caused by petitioners' breach and he had substantially performed in good faith.
• Article 1311, Civil Code — Embodies the principle of relativity of contracts: contracts take effect only between the parties, their successors in interest, heirs, and assigns, and cannot favor or prejudice third persons. Applied to absolve Cadag, who was not a party to the construction contract, and to confirm the spouses Tan's liability as principals.

Chief Justice Artemio V. Panganiban (Chairperson), Associate Justice Consuelo Ynares-Santiago, Associate Justice Romeo J. Callejo, Sr., and Associate Justice Minita V. Chico-Nazario concurred.