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Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171312             February 4, 2008

SPS. LINO FRANCISCO & GUIA FRANCISCO, petitioners,
vs.
DEAC CONSTRUCTION, INC. and GEOMAR A. DADULA, respondents.

D E C I S I O N

TINGA, J.:

The Spouses Lino and Guia Francisco (Spouses Francisco) assail the Decision¹ of the Court of Appeals dated 28 July 2005, rendered in favor of respondents DEAC Construction, Inc. (DEAC) and Geomar Dadula (Dadula), upholding the latter's monetary claims against the Spouses Francisco. The appellate court's decision reversed and set aside the Decision² of the Regional Trial Court of Manila, Branch 28, dated 2 February 1998 which ordered the partial rescission of the 13 September 1994 Construction Contract between the parties and awarded moral and exemplary damages and attorney's fees to the Spouses Francisco.

The findings of fact of the trial court and the Court of Appeals are in conflict on the question of whether the Spouses Francisco authorized the deviations on the building plan, particularly with regard to the closing of the open space and the reduction of the setback from the property line. They are, however, in agreement as to the following antecedents quoted from the appellate court's decision:

Plaintiffs-appellees Lino Francisco and Guia Francisco obtained the services of defendant-appellant DEAC Construction, Inc. (DEAC) to construct a 3-storey residential building with mezzanine and roof deck on their lot located at 118 Pampanga Street, Gagalangin, Tondo, Manila for a contract price of P3,500,000.00. As agreed upon, a downpayment of P2,000,000.00 should be paid upon signing of the contract of construction, and the remaining balance of P1,500,000.00 was to be paid in two equal installments: the first installment of P750,000.00 should be paid upon completion of the foundation structure and the ground floor, which amount would be used primarily for the construction of the second floor to the roof deck while the final amount of P750,000.00 should be paid upon completion of the second floor up to the roof deck structure to defray the expenses necessary for finishing and completion of the building. To undertake the said project, DEAC engaged the services of a sub-contractor, Vigor Construction and Development Corporation, but allegedly without the plaintiffs-appellees' knowledge and consent.

On September 12, 1994, even prior to the execution of the contract, the plaintiffs-appellees had paid the downpayment of P2,000,000.00. The amount of P200,000.00 was again paid to DEAC on February 27, 1995 followed by the payment of P550,000.00 on April 2, 1995. Plaintiff-appellant Guia Francisco likewise paid the amount of P80,000.00 on June 5, 1995 for the requested "additional works" on the project.

The construction of the residential building commenced in October 1994 although DEAC, upon which the obligation pertained, had not yet obtained the necessary building permit for the proposed construction. It was on this basis that the owner Lino Francisco was charged with violation of Section 301, Chapter 3 (Illegal Construction) of [P.D. No.] 1096 otherwise known as the National Building Code of the Philippines with the Metropolitan Trial Court of Manila, Branch 12.

On March 7, 1995, the Office of the Building Official of the City of Manila finally issued the requisite Building Permit. Thus, the complaint against owner Lino Francisco was accordingly dismissed. As admitted by DEAC, the release of the said permit was withheld because of the erroneous designation of the location of the lot in one of the building plans. Thus, DEAC had to make the necessary adjustment. However, before the Office of the Building Official finally approved the amended building plan, it made some necessary corrections therein. And to facilitate the said approval and the subsequent release of the building permit, the signatures of plaintiff-appellee Guia Francisco in the said amended and corrected building plans were forged by DEAC's representative.

But aside from [the] lack of building permit, the building inspector also observed, after periodic inspections of the construction site, that the contractor deviated, on some specifications, from the approved plans. Thus, on April 7, 1995, the Office of the Building Official of Manila issued another Notice of Violation against owner Lino Francisco, while at the same time calling the attention of the contractor, on account of the following deviations and violations, to wit:

1. The 1.00 mt. setback from the property line instead of 1.45 mts. as per approved plan was not followed in violation [of] Sec. 306, Chapter 3 [PD 1096, otherwise known as the National Building Code (NBC)];

2. The [excessive] projection of 0.50 mt. from 3^rd floor level to [roof] deck in violation [of] Sec. 306, Chapter 3 of the NBC (PD 1096);

3. The required open patio was covered in pursuant (sic) to Sec. 306[,] Chapter 3 [of PD 1096];

4. Provision of window opening along the right-side firewall in pursuant (sic) to Sec. 1007 Chapter 10 of [PD 1096];

5. Stockpiling of [construction materials] along the street/sidewalk area in violation [of] Sec. 5[,] Rule VI of the IRR;

6. Please provide minimum safety and protection in pursuant (sic) 2.3, 2.4, and 2.5 of Rule XX of the IRR.

The said notice was received on April 11, 1995 by Engr. Mike Marquez of DEAC Construction, Inc. The plaintiffs-appellees, however, denied having received any notice from the Office of the Building Official of Manila regarding the on-going construction.

In a letter dated July 1, 1995, the plaintiffs-appellees, through their counsel, suddenly complained of several infractions emanating from the construction of the project allegedly committed by DEAC, to wit:

a. Implementation of the project was started immediately after signing of the contract on 15 September 1994 without any building permit and approved plans.

b. Building permit was released only on (sic) March 1995 together with the approved plans with necessary corrections made by the Office of the Building Official. You did not inform the owners about the corrections. The signatures of Mrs. Guia Francisco appearing on the building plans were forgeries.

c. [The] Approved [C]onstruction [P]lans were not strictly followed during the actual implementation of the project. Open space/patio which is 20% of lot area (based on National Building Code) for inside lot was deleted.

d. No written formal approval from the owners for the alteration of plans.

e. Poor workmanship.

i. Marble slabs installed were not approved by the owner.

ii. Beam below the 1^st landing at the ground floor is too low.

iii. Ground floor Finish floor line is below the ordinary flood level in the area. The contractor has been repeatedly instructed to raise the ground floor finish elevation but insisted on their decision.

f. Poor supervision of the construction works.

The plaintiffs-appellees demanded that DEAC must comply with the approved plan, construction contract, National Building Code, and the Revised Penal Code, otherwise, they would be compelled to invoke legal remedies. In the meantime that the necessary works and construction were demanded to be undertaken, the last and final installment was withheld. DEAC responded, also through a letter prepared by its counsel, that it had faithfully complied with its obligation under the contract, thus, to demand for further compliance would be improper. It said that if somebody had breached the contract, it was the plaintiffs-appellees, because the last installment of P750,000.00 which was supposed to have been paid after the second floor and the roof deck structure was completed, which allegedly had long been accomplished, was not yet paid. To settle their differences, DEAC had given the plaintiffs-appellees the option to either pay the full amount of P750,000.00, so that the finishing stage of the project would be completed, or just pay the worth of the work already done, which was assessed at P250,000.00.

On July 21, 1995, a Work Stoppage Order was issued against the plaintiff-appellee Lino Francisco pursuant to the previous April 7, 1995 Notice of Violations. Having learned of such order, the plaintiffs-appellees allegedly immediately proceeded to the Office of the Building Official of Manila to explain that DEAC was the one responsible for such violations, and that the deviations of the approved plan being imputed against Lino Francisco were unilateral acts of DEAC. They also filed a complaint for "Non-Compliance of the Building Plan, Illegal Construction, abandonment and other violations of the Building Code" against DEAC with the said Office. The said complaint was endorsed to the City Prosecutor of Manila which culminated in the filing of a criminal case against Geomar A. Dadula and DEAC project engineer Leoncio C. Alambra for deviation and violation of specification plan.

The plaintiffs-appellees also filed this civil case for Rescission of Contract and Damages on September 21, 1995 with the Regional Trial Court of Manila, Branch 28, against DEAC and its President Geomar A. Dadula.

After due proceedings, the defendants-appellants were found to have breached their contractual obligation with the plaintiffs-appellees. Among their violations were: (1) the construction of the building without the necessary building permit, which violated Section 3, Article IV of the Construction Contract; and (2) the deviation or revision of the approved building plan in the actual construction. On the other hand, the trial court said that the refusal of the plaintiffs-appellees to pay the final installment of P750,000.00 was only justified because of the defendants-appellants' violations of the contract. Thus, on account of such violations, rescission of the contract was warranted. However, since the subject building was already 70% to 75% completed, only partial rescission was ordered. Pursuant thereto, DEAC was ordered to refund the sum of P205,000.00 to the plaintiffs-appellees after considering the following computations:

Contract price	-	P3.5 Million
% of work completed	-	75%
Contract Price x % of work completed	-	P3.5 Million x 75%
	=	P2,625,000.[00]
Actual Payment	-	2,830,000.00
Less cost of work completed	-	2,625,000.00
Difference	-	205,000.00

In addition, damages was awarded based on par. 2, Article 1191 of the New Civil Code which provides for the award of damages in case of rescission of contract. Geomar Dadula, being the President of DEAC, was likewise held solidarily liable with the latter.³

Ruling that the Spouses Francisco were the ones who initiated and requested the deviations, the appellate court held that respondents fully complied with their obligation under the contract and ordered the Spouses Francisco to pay the balance of the contract price. It also ordered them to pay moral damages, attorney's fees and costs of suit.

Before this Court, the Spouses Francisco question the appellate court's finding that they were the ones who requested the deviations in the building plan, particularly with regard to the closing of the open space and the reduction of the setback from the property line. They maintain that they did not waive their right to demand rescission as a result of the disputed deviations and because of the fact that DEAC commenced construction without first securing a building permit as was incumbent upon it under their contract. In fact, apart from the present case, the Spouses Francisco filed a criminal suit against respondent Dadula taking him to task for these violations, of which the latter was found guilty.

Respondents, in their Comment⁴ dated 8 June 2006, assert that the deviations in the building plan were done upon the request of the Spouses Francisco. Respondent Dadula had even warned them that building the structure close to the property line could violate the required setback. They also claim that the belated issuance of the building permit was due to neglect in the supervision of a subordinate and does not indicate any bad faith on their part.⁵ At any rate, the fact that this issue was raised only after several months had passed from the time construction started allegedly suggests waiver on the part of the Spouses Francisco.

A Reply,⁶ dated 30 September 2006 was filed by the Spouses Francisco reiterating their argument that respondent Dadula's conviction in the criminal case should be taken into account in the present case.

As earlier adverted to, the trial court held that respondents deviated from the specifications and terms of the contract, particularly with regard to the open space closing and the setback reduction, without securing the approval of the Spouses Francisco. On the other hand, the appellate court held that the Spouses Francisco were the ones who initiated and requested the deviations. The conflict in these findings warrants a departure from the general rule that this Court shall not entertain petitions for review which substantially raisequestions of fact.⁷ The conflict accounts for the divergence of the decisions of the courts below.⁸

The records reveal that respondents admitted having failed to secure a building permit before construction of the residential building subject of this case commenced. This blunder exposed petitioner Lino Francisco to criminal prosecution as, in fact, an Information⁹ dated 5 December 1995 was filed against him with the Metropolitan Trial Court of Manila, Branch 12, for violation of Section 301, Chapter 3 (Illegal Construction) of the National Building Code of the Philippines.¹⁰ It appears that this Information was preceded by several Notices of Illegal Construction sent by the Office of the Building Official of Manila supposedly addressed to petitioner Lino Francisco, but which the latter would not have gotten wind of had he not inquired with the said office about certain documents relative to the construction.

Respondents DEAC and Dadula, to whom the obligation of securing the building permit pertained, should obviously have ensured compliance with the requirements set forth by law. At the very least, good faith and fair dealing ordain that they inform the Spouses Francisco that the building permit had not yet been issued especially that they had already received a substantial amount of money from the latter and had already started the construction of the building.¹¹

Parenthetically, the Spouses Francisco disclose that the Metropolitan Trial Court of Manila, Branch 23, found respondent Dadula guilty of violating the National Building Code for his failure to follow the required setback from the property line; the excessive projection of the roof deck of the structure; the deviation in the covering of the required patio; the illegal stockpiling of construction materials; the lack of safety standards in the construction; and his failure to secure a building permit for the construction.¹² This conviction was consistently affirmed by the Regional Trial Court,¹³ the Court of Appeals¹⁴ and ultimately this Court.¹⁵ The RTC even noted that "defendants admitted that there were deviations from the plans and that they forged the signature of Mrs. Guia Francisco to ensure early approval of the permit."¹⁶

The foregoing matters are essential to the propriety of the trial court's ruling that partial rescission is warranted in view of the failure of respondents to comply with what was incumbent upon them under the construction contract and the consequent prejudice and damage caused to petitioners by respondents' actions. Of equal importance, of course, is the correctness of its finding that the deviations from the building plan were not authorized by the Spouses Francisco.

Our own review of the records reveals that the open space was closed by respondents without the approval of the Spouses Francisco and in violation of the National Building Code. During the 27 May 1995 meeting between the parties in which they were called to thresh out their differences, respondents stated that the open space indicated on the plan was omitted in the actual construction "in order to give extra space for the building,"¹⁷ and not because the Spouses Francisco requested such closure, if such was really the case. Respondents also mentioned that the contractor forged petitioner Guia Francisco's signature "in the City Hall in order to process the early approval of plans. Also, alterations were done in the City Hall."¹⁸

Curiously, the Court of Appeals relied on the same exhibit in arriving at its conclusion that the Spouses Francisco authorized, even requested, the changes in the building plan. Apparently, the appellate court interpreted the agreement between the parties regarding the extension of the second floor balcony as the Spouses Francisco's approval of the closure of the open space and reduction in the required setback from the property line. As pointed out by petitioners, however, the extension of the second floor balcony was entirely distinct from the closure of the open space and reduction of the setback from the property line.

Respondents' mistake in identifying the exact location of the property which led to the delay in the issuance of a building permit and forgery of petitioner Guia Francisco's signature on the building plan exhibits a proclivity for error and taking the easy way out. This aspect does not sit well with the Court. The Spouses Francisco should be allowed to rescind the contract to the extent that this is possible under the circumstances.

Article 1191 of the Civil Code provides that the power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The rescission referred to in this article, more appropriately referred to as resolution, is not predicated on injury to economic interests on the part of the party plaintiff, but of breach of faith by the defendant which is violative of the reciprocity between the parties.¹⁹ The right to rescind may be waived, expressly or impliedly.

The Spouses Francisco, in their 1 July 1995 letter to respondents, complained, among others, about the belated release of the building permit, the unauthorized corrections in the building plan, the forgery of petitioner Guia Francisco's signature on the building plan, and the deletion of the open space/patio in the actual construction of the project. The filing of a criminal case against respondent Dadula and the subsequent filing of this civil case for rescission and damages within a reasonable time after the Spouses Francisco had learned that construction of their building commenced without the necessary building permit and discovered that there were deviations from the building plan demonstrate the vigilance with which they guarded their rights. The appellate court's conclusion that the Spouses Francisco should be deemed to have waived their right to seek rescission is clearly unfounded.

Finally, given the fact that the construction in this case is already 75% complete, the trial court was correct in ordering partial rescission only of the undelivered or unfinished portion of the construction.²⁰ Equitable considerations justify rescission of the portion of the obligation which had not been delivered.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals, dated 28 July 2005 and its Resolution, dated 31 January 2006 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 28 in Civil Case No. 95-75430 is hereby REINSTATED.

SO ORDERED.

Quisumbing,Chairperson Carpio, Carpio-Morales, Velasco, Jr., JJ., concur.

Footnotes

¹ Rollo, pp. 45-60. Penned by Associate Justice Amelita G. Tolentino and concurred in by Associate Justices Roberto A. Barrios and Vicente S.E. Veloso.

² Records, pp. 289-311.

³ Rollo, pp. 46-53.

⁴ Id. at 132-142.

⁵ According to respondents, instead of designating the subject property as an interior lot, its sub-contractor designated the property as a corner lot, resulting in the delay in the issuance of the building permit. See RTC Decision, id. at 81.

⁶ Id. at 158-160.

⁷ Gaw v. Court of Appeals, G.R. No. 147748, 19 April 2006, 487 SCRA 423, 428.

⁸ The RTC disposed of the case as follows:

In view of all the foregoing, judgment is hereby rendered for the plaintiffs, ordering partial rescission of the contract and for the defendants to jointly and severally pay the former the following: For the return or refund of the sum of P205,000.00 representing the excess payment to cover the unfinished work as per contract.

Moral Damages	-	P250,000.00
Exemplary Damages	-	P250,000.00
Attorney's fees	-	P100,000.00 and costs

Manila, Philippines, February 2, 1998. (Records, pp. 310-311)

while the Court of appeals decided the appeal with the following fallo:

WHEREFORE, premises considered, the decision appealed from is REVERSED and SET ASIDE, and a new one is entered ordering the plaintiffs-appellants the following:

(1) P670,000.00, the remaining balance of the contract price;

(2) P100,000.00 as moral damages;

(3) P50,000.00 as attorney's fees; and

(4) The costs of the suit. (Rollo, pp. 59-60)

⁹ Exhibit "K", Records.

¹⁰ Presidential Decree No. 1096.

¹¹ Rollo, p. 47. Respondents commenced construction in October 1994. By the time the building permit was issued on March 7, 1995, petitioners had already paid a total of P2,200,000.00.

¹² Id. at 98-102; MeTC Decision dated 14 October 1999.

¹³ Id. at 104-106; RTC Decision dated 16 July 2001.

¹⁴ Id. at 110-123; CA Decision dated 13 December 2002.

¹⁵ Id. at 128; Resolution dated 5 May 2004.

¹⁶ Id. at 106.

¹⁷ Records, p. 45; Minutes of the Meeting.

¹⁸ Id.

¹⁹ Pryce Corporation v. Philippine Amusement and Gaming Corporation, G.R. No. 157480, 6 May 2005, 458 SCRA 164, 177, citing the Concurring Opinion of Mr. Justice J.B.L. Reyes in Universal Food Corporation v. Court of Appeals, 144 Phil. 1 (1970).

²⁰ In Tan Guat v. Pamintuan, C.A. 37 O.G. 2494, the Court of Appeals, through then Associate Justice Sabino Padilla (who later became an Associate Justice of this Court), ordered partial rescission insofar as the undelivered portion of the contract was concerned, and specific performance of the portion of the obligation which had been delivered.

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