Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 177685               January 26, 2011

HEIRS OF RAMON C. GAITE, CYNTHIA GOROSTIZA GAITE and RHOGEN

BUILDERS, Petitioners,
vs.
THE PLAZA, INC. and FGU INSURANCE CORPORATION, Respondents.

DECISION

VILLARAMA, JR., J.:

This is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, which
seeks to reverse and set aside the Decision1 dated June 27, 2006 and Resolution2 dated April 20,
2007 of the Court of Appeals (CA) in CA-G.R. CV No. 58790. The CA affirmed with modification the
Decision3 dated July 3, 1997 of the Regional Trial Court (RTC) of Makati City, Branch 63, in Civil
Case Nos. 1328 (43083) and 40755.

The facts are as follows:

On July 16, 1980, The Plaza, Inc. (The Plaza), a corporation engaged in the restaurant business,
through its President, Jose C. Reyes, entered into a contract 4 with Rhogen Builders (Rhogen),
represented by Ramon C. Gaite, for the construction of a restaurant building in Greenbelt, Makati,
Metro Manila for the price of ₱7,600,000.00. On July 18, 1980, to secure Rhogen’s compliance with
its obligation under the contract, Gaite and FGU Insurance Corporation (FGU) executed a surety
bond in the amount of ₱1,155,000.00 in favor of The Plaza. On July 28, 1980, The Plaza paid
₱1,155,000.00 less withholding taxes as down payment to Gaite. Thereafter, Rhogen commenced
construction of the restaurant building.

In a letter dated September 10, 1980, Engineer Angelito Z. Gonzales, the Acting Building Official of
the Municipality of Makati, ordered Gaite to cease and desist from continuing with the construction of
the building for violation of Sections 301 and 302 of the National Building Code (P.D. 1096) and its
implementing rules and regulations.5 The letter was referred to The Plaza’s Project Manager,
Architect Roberto L. Tayzon.

On September 15, 1980, Engr. Gonzales informed Gaite that the building permit for the construction
of the restaurant was revoked for non-compliance with the provisions of the National Building
Code and for the additional temporary construction without permit. 6 The Memorandum Report of
Building Inspector Victor Gregory enumerated the following violations of Rhogen in the construction
of the building:

1) No permit for Temporary Structure.

2) No notice of concrete pouring.

3) Some workers have no safety devices.

 4) The Secretary and Construction Foreman refused to [receive] the Letter of Stoppage
dated September 10, 1980.

5) Mr. Ramon Gaite [is] questioning the authority of the Building Official’s Inspector.

6) Construction plans use[d] on the job site is not in accordance to the approved plan. 7

On September 19, 1980, the Project Manager (Tayzon) in his Construction Memo #23 reported on
his evaluation of Progress Billing #1 submitted by Rhogen. Tayzon stated that actual jobsite
assessment showed that the finished works fall short of Rhogen’s claimed percentage of
accomplishment and Rhogen was entitled to only ₱32,684.16 and not ₱260,649.91 being demanded
by Rhogen. Further, he recommended that said amount payable to Rhogen be withheld pending
compliance with Construction Memo #18, resolution of cases regarding unauthorized withdrawal of
materials from jobsite and stoppage of work by the Municipal Engineer’s Office of Makati. 8

On October 7, 1980, Gaite wrote Mr. Jose C. Reyes, President of The Plaza regarding his
actions/observations on the stoppage order issued. On the permit for temporary structure, Gaite said
the plans were being readied for submission to the Engineering Department of the Municipality of
Makati and the application was being resent to Reyes for his appropriate action. As to the notice for
concrete pouring, Gaite said that their construction set-up provides for a Project Manager to whom
the Pouring Request is first submitted and whose job is to clear to whoever parties are involved (this
could still be worked out with the Building Inspector). Regarding the safety devices for workers,
Gaite averred that he had given strict rules on this but in the course of construction some workers
have personal preferences. On the refusal of the secretary and construction foreman to receive the
stoppage order dated September 10, 1980, Gaite took responsibility but insisted it was not a
violation of the National Building Code. Likewise, questioning the authority of the Building Inspector
is not a violation of the Code although Gaite denied he ever did so. Lastly, on the construction plans
used in the jobsite not being in accordance with the approved plan, Gaite said he had sent Engr.
Cristino V. Laurel on October 3, 1980 to Reyes’ office and make a copy of the only approved plan
which was in the care of Reyes, but the latter did not give it to Engr. Laurel. Gaite thus thought that
Reyes would handle the matter by himself.9

On the same day, Gaite notified Reyes that he is suspending all construction works until Reyes and
the Project Manager cooperate to resolve the issue he had raised to address the problem. 10 This was
followed by another letter dated November 18, 1980 in which Gaite expressed his sentiments on
their aborted project and reiterated that they can still resolve the matter with cooperation from the
side of The Plaza.11 In his reply-letter dated November 24, 1980, Reyes asserted that The Plaza is
not the one to initiate a solution to the situation, especially after The Plaza already paid the agreed
down payment of ₱1,155,000.00, which compensation so far exceeds the work completed by
Rhogen before the municipal authorities stopped the construction for several violations. Reyes made
it clear they have no obligation to help Rhogen get out of the situation arising from non-performance
of its own contractual undertakings, and that The Plaza has its rights and remedies to protect its
interest.12

Subsequently, the correspondence between Gaite and Reyes involved the custody of remaining
bags of cement in the jobsite, in the course of which Gaite was charged with estafa for ordering the
removal of said items. Gaite complained that Reyes continued to be uncooperative in refusing to
meet with him to resolve the delay. Gaite further answered the estafa charge by saying that he only
acted to protect the interest of the owner (prevent spoilage/hardening of cement) and that Reyes did
not reply to his request for exchange.13
On January 9, 1981, Gaite informed The Plaza that he is terminating their contract based on the
Contractor’s Right to Stop Work or Terminate Contracts as provided for in the General Conditions of
the Contract. In his letter, Gaite accused Reyes of not cooperating with Rhogen in solving the
problem concerning the revocation of the building permits, which he described as a "minor problem."
Additionally, Gaite demanded the payment of ₱63,058.50 from The Plaza representing the work that
has already been completed by Rhogen.14

On January 13, 1981, The Plaza, through Reyes, countered that it will hold Gaite and Rhogen fully
responsible for failure to comply with the terms of the contract and to deliver the finished structure on
the stipulated date. Reyes argued that the down payment made by The Plaza was more than
enough to cover Rhogen’s expenses.15

In a subsequent letter dated January 20, 1981, Reyes adverted to Rhogen’s undertaking to complete
the construction within 180 calendar days from July 16, 1980 or up to January 12, 1981, and to pay
the agreed payment of liquidated damages for every month of delay, chargeable against the
performance bond posted by FGU. Reyes invoked Section 121 of the Articles of General Conditions
granting the owner the right to terminate the contract if the contractor fails to execute the work
properly and to make good such deficiencies and deducting the cost from the payment due to the
contractor. Reyes also informed Gaite that The Plaza will continue the completion of the structure
utilizing the services of a competent contractor but will charge Rhogen for liquidated damages as
stipulated in Article VIII of the Contract. After proper evaluation of the works completed by Rhogen,
The Plaza shall then resume the construction and charge Rhogen for all the costs and expenses
incurred in excess of the contract price. In the meantime that The Plaza is still evaluating the extent
and condition of the works performed by Rhogen to determine whether these are done in
accordance with the approved plans, Reyes demanded from Gaite the reimbursement of the balance
of their initial payment of ₱1,155,000.00 from the value of the works correctly completed by Rhogen,
or if none, to reimburse the entire down payment plus expenses of removal and replacement.
Rhogen was also asked to turn over the jobsite premises as soon as possible. 16 The Plaza sent copy
of said letter to FGU but the latter replied that it has no liability under the circumstances and hence it
could not act favorably on its claim against the bond. 17

On March 3, 1981, The Plaza notified Gaite that it could no longer credit any payment to Rhogen for
the work it had completed because the evaluation of the extent, condition, and cost of work done
revealed that in addition to the violations committed during the construction of the building, the
structure was not in accordance with plans approved by the government and accepted by Ayala.
Hence, The Plaza demanded the reimbursement of the down payment, the cost of uprooting or
removal of the defective structures, the value of owner-furnished materials, and payment of
liquidated damages.18

On March 26, 1981, The Plaza filed Civil Case No. 40755 for breach of contract, sum of money and
damages against Gaite and FGU in the Court of First Instance (CFI) of Rizal. 19 The Plaza later
amended its complaint to include Cynthia G. Gaite and Rhogen. 20 The Plaza likewise filed Civil Case
No. 1328 (43083) against Ramon C. Gaite, Cynthia G. Gaite and/or Rhogen Builders also in the CFI
of Rizal for nullification of the project development contract executed prior to the General
Construction Contract subject of Civil Case No. 40755, which was allegedly in violation of the
provisions of R.A. No. 545 (Architectural Law of the Philippines). 21 After the reorganization of the
Judiciary in 1983, the cases were transferred to the RTC of Makati and eventually consolidated.

On July 3, 1997, Branch 63 of the RTC Makati rendered its decision granting the claims of The Plaza
against Rhogen, the Gaites and FGU, and the cross-claim of FGU against Rhogen and the Gaites.
The trial court ruled that the Project Manager was justified in recommending that The Plaza withhold
payment on the progress billings submitted by Rhogen based on his evaluation that The Plaza is
liable to pay only ₱32,684.16 and not ₱260,649.91. The other valid grounds for the withholding of
payment were the pending estafa case against Gaite, non-compliance by Rhogen with Construction
Memorandum No. 18 and the non-lifting of the stoppage order. 22

Regarding the non-lifting of the stoppage order, which the trial court said was based on simple
infractions, the same was held to be solely attributable to Rhogen’s willful inaction. Instead of readily
rectifying the violations, Rhogen continued with the construction works thereby causing more
damage. The trial court pointed out that Rhogen is not only expected to be aware of standard
requirements and pertinent regulations on construction work, but also expressly bound itself under
the General Construction Contract to comply with all the laws, city and municipal ordinances and all
government regulations. Having failed to complete the project within the stipulated period and
comply with its obligations, Rhogen was thus declared guilty of breaching the Construction Contract
and is liable for damages under Articles 1170 and 1167 of the Civil Code.23

The dispositive portion of the trial court’s decision reads:

WHEREFORE, in Civil Case No. 40755, defendants Ramon Gaite, Cynthia Gaite and Rhogen
Builders are jointly and severally ordered to pay plaintiff:

1. the amount of ₱525,422.73 as actual damages representing owner-furnished materials

with legal interest from the time of filing of the complaint until full payment;

2. the amount of ₱14,504.66 as actual damages representing expenses for uprooting with
interest from the time of filing the complaint until full payment;

3. the amount of ₱1,155,000.00 as actual damages representing the downpayment with

legal interest from the time of filing the complaint until full payment;

4. the amount of ₱150,000.00 for moral damages;

5. the amount of ₱100,000.00 for exemplary damages;

6. the amount of ₱500,000.00 as liquidated damages;

7. the amount of ₱100,000.00 as reasonable attorney’s fees; and,

8. the cost of suit.

Under the surety bond, defendants Rhogen and FGU are jointly and severally ordered to pay plaintiff
the amount of ₱1,155,000.00 with legal interest from the time of filing the complaint until full
payment. In the event [that] FGU pays the said amount, third-party defendants are jointly and
severally ordered to pay the same amount to FGU plus ₱50,000.00 as reasonable attorney’s fees,
the latter having been forced to litigate, and the cost of suit.

Civil Case No. 1328 is hereby ordered dismissed with no pronouncement as to cost.

SO ORDERED.24

Dissatisfied, Ramon and Cynthia Gaite, Rhogen and FGU appealed to the CA. 25 In view of the death
of Ramon C. Gaite on April 21, 1999, the CA issued a Resolution dated July 12, 2000 granting the
substitution of the former by his heirs Cynthia G. Gaite, Rhoel Santiago G. Gaite, Genevieve G.
Gaite and Roman Juan G. Gaite.26

In their appeal, the heirs of Ramon C. Gaite, Cynthia G. Gaite and Rhogen assigned the following
errors, to wit:

I. THE TRIAL COURT ERRED IN DECLARING THAT THE GROUNDS RELIED UPON BY
DEFENDANT-APPELLANT RHOGEN BUILDERS IN TERMINATING THE CONTRACT ARE
UNTENABLE;

II. THE TRIAL COURT ERRED IN DECLARING THAT THE NON-LIFTING OF THE
STOPPAGE ORDER OF THE THEN MUNICIPAL GOVERNMENT OF MAKATI WAS
SOLELY ATTRIBUTABLE TO DEFENDANT-APPELLANT RHOGEN’S WILLFUL
INACTION;

III. THE TRIAL COURT ERRED IN FAILING TO CONSIDER THAT IT WAS THE WILLFUL
INACTION OF PLAINTIFF-APPELLEE WHICH MADE IT IMPOSSIBLE FOR DEFENDANT–
APPELLANT RHOGEN TO PERFORM ITS OBLIGATIONS UNDER THE CONTRACT;

IV. THE TRIAL COURT ERRED IN AWARDING ACTUAL DAMAGES AS WELL AS MORAL,
EXEMPLARY, AND LIQUIDATED DAMAGES AND ATTORNEY’S FEES SINCE THERE
WERE NO FACTUAL AND LEGAL BASES THEREFOR; AND

V. THE TRIAL COURT ERRED IN FAILING TO AWARD ACTUAL, MORAL AND

EXEMPLARY DAMAGES AND ATTORNEY’S FEES IN FAVOR OF DEFENDANTS-
APPELLANTS.27

For its part, FGU interposed the following assignment of errors:

I. THE REGIONAL TRIAL COURT ERRED IN NOT RULING THAT DEFENDANT-

APPELLANT RAMON GAITE VALIDLY TERMINATED THE CONTRACT BETWEEN HIM
AND PLAINTIFF-APPELLEE.

II. THE REGIONAL TRIAL COURT ERRED IN HOLDING DEFENDANT-APPELLANT

RAMON GAITE RESPONSIBLE FOR THE STOPPAGE OF THE CONSTRUCTION.

III. THE REGIONAL TRIAL COURT ERRED IN ORDERING DEFENDANT-APPELLANT

RAMON GAITE TO PAY THE AMOUNT OF P525,422.73 FOR THE OWNER FURNISHED
MATERIALS.

IV. THE REGIONAL TRIAL COURT ERRED IN ORDERING DEFENDANT-APPELLANT

RAMON GAITE TO PAY PLAINTIFF-APPELLEE THE AMOUNT OF P14,504.66 AS
ALLEGED EXPENSES FOR UPROOTING THE WORK HE PERFORMED.

V. THE REGIONAL TRIAL COURT ERRED IN ORDERING DEFENDANT-APPELLANT

RAMON GAITE TO REFUND THE DOWN PAYMENT OF P1,155,000.00 PLAINTIFF-
APPELLEE PAID HIM.

VI. THE REGIONAL TRIAL COURT ERRED IN AWARDING MORAL DAMAGES TO

PLAINTIFF-APPELLEE.
 VII. THE REGIONAL TRIAL COURT ERRED IN AWARDING EXEMPLARY DAMAGES TO
PLAINTIFF-APPELLEE.

VIII. THE REGIONAL TRIAL [COURT] ERRED IN AWARDING LIQUIDATED DAMAGES TO

PLAINTIFF-APPELLEE.

IX. THE REGIONAL TRIAL COURT ERRED IN AWARDING ATTORNEY’S FEES TO

PLAINTIFF-APPELLEE.

X. THE REGIONAL TRIAL COURT ERRED IN HOLDING DEFENDANT-APPELLANT FGU

INSURANCE CORPORATION LIABLE TO PLAINTIFF-APPELLEE. 28

On June 27, 2006, the CA affirmed the Decision of the trial court but modified the award of damages
as follows:

WHEREFORE, the Decision dated July 3, 1997 rendered by the Regional Trial Court of Makati City,
Branch 63 in Civil Case Nos. 40755 and 1328 is AFFIRMED with the modification that: (a) the
award for actual damages representing the owner-furnished materials and the expenses for
uprooting are deleted, and in lieu thereof, the amount of P300,000.00 as temperate damages is
awarded; and (b) the awards for moral, exemplary, liquidated and attorney’s fees are likewise
deleted.

SO ORDERED.29

According to the CA, The Plaza cannot now be demanded to comply with its obligation under the
contract since Rhogen has already failed to comply with its own contractual obligation. Thus, The
Plaza had every reason not to pay the progress billing as a result of Rhogen’s inability to perform its
obligations under the contract. Further, the stoppage and revocation orders were issued on account
of Rhogen’s own violations involving the construction as found by the local building official. Clearly,
Rhogen cannot blame The Plaza for its own failure to comply with its contractual obligations. The CA
stressed that Rhogen obliged itself to comply with "all the laws, city and municipal ordinances and all
government regulations insofar as they are binding upon or affect the parties [to the contract] , the
work or those engaged thereon." 30 As such, it was responsible for the lifting of the stoppage and
revocation orders. As to Rhogen’s act of challenging the validity of the stoppage and revocation
orders, the CA held that it cannot be done in the present case because under Section 307 of
the National Building Code, appeal to the Secretary of the Department of Public Works and
Highways (DPWH) – whose decision is subject to review by the Office of the President -- is available
as remedy for Rhogen.31

However, the CA modified the award of damages holding that the claim for actual damages of
₱525,422.73 representing the damaged owner-furnished materials was not supported by any
evidence. Instead, the CA granted temperate damages in the amount of ₱300,000.00. As to moral
damages, no specific finding for the factual basis of said award was made by the trial court, and
hence it should be deleted. Likewise, liquidated damages is not proper considering that this is not a
case of delay but non-completion of the project. The Plaza similarly failed to establish that Rhogen
and Gaite acted with malice or bad faith; consequently, the award of exemplary damages must be
deleted. Finally, there being no bad faith on the part of the defendants, the award of attorneys’ fees
cannot be sustained.32

The motion for reconsideration of the aforesaid Decision was denied in the Resolution dated April
20, 2007 for lack of merit. Hence, this appeal.
Before us, petitioners submit the following issues:

I.

Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when it found that
Petitioner Rhogen had no factual or legal basis to terminate the General Construction
Contract.

II.

Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when, as a consequence of
its finding that Petitioners did not have valid grounds to terminate the Construction Contract,
it directed Petitioners to return the downpayment paid by The Plaza, with legal interest.

III.

Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when, in addition thereto, it
awarded temperate damages to The Plaza.

IV.

Whether or not the Court of Appeals acted without or in excess of jurisdiction, or with grave
abuse of discretion amounting to lack of or excess of jurisdiction, when it failed to award
damages in favor of Petitioners.33

Petitioners contend that the CA gravely erred in not holding that there were valid and legal grounds
for Rhogen to terminate the contract pursuant to Article 1191 of the Civil Code and Article 123 of the
General Conditions of the Construction Contract. Petitioners claim that Rhogen sent Progress Billing
No. 1 dated September 10, 1980 and demanded payment from The Plaza in the net amount of
₱473,554.06 for the work it had accomplished from July 28, 1980 until September 7, 1980. The
Plaza, however, failed to pay the said amount. According to petitioners, Article 123 of the General
Conditions of the Construction Contract gives The Plaza seven days from notice within which to pay
the Progress Billing; otherwise, Rhogen may terminate the contract. Petitioners also invoke Article
1191 of the Civil Code, which states 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.

We deny the petition.

Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. They are to be performed simultaneously such that the performance of one is conditioned
upon the simultaneous fulfillment of the other. Respondent The Plaza predicated its action on Article
119134 of the Civil Code, which provides for the remedy of "rescission" or more properly resolution, a
principal action based on breach of faith by the other party who violates the reciprocity between
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. 35
The construction contract between Rhogen and The Plaza provides for reciprocal obligations
whereby the latter’s obligation to pay the contract price or progress billing is conditioned on the
former’s performance of its undertaking to complete the works within the stipulated period and in
accordance with approved plans and other specifications by the owner. Pursuant to its contractual
obligation, The Plaza furnished materials and paid the agreed down payment. It also exercised the
option of furnishing and delivering construction materials at the jobsite pursuant to Article III of the
Construction Contract. However, just two months after commencement of the project, construction
works were ordered stopped by the local building official and the building permit subsequently
revoked on account of several violations of the National Building Code and other regulations of the
municipal authorities.

Petitioners reiterate their position that the stoppage order was unlawful, citing the fact that when the
new contractor (ACK Construction, Inc.) took over the project, the local government of Makati
allowed the construction of the building using the old building permit; moreover, the basement depth
of only two meters was retained, with no further excavation made. They cite the testimony of the late
Ramon Gaite before the trial court that at the time, he had incurred the ire of then Mayor of Makati
because his (Gaite) brother was the Mayor’s political opponent; hence, they sought to file whatever
charge they could against him in order to call the attention of his brother. This "political harassment"
defense was raised by petitioners in their Amended Answer. Gaite’s testimony was intended to
explain the circumstances leading to his decision to terminate the construction contract and not to
question the revocation of the building permit. As the available remedy was already foreclosed, it
was thus error for the CA to suggest that Rhogen should have appealed the stoppage and
revocations orders issued by the municipal authorities to the DPWH and then to the OP. 36

Article 123 of the Articles of General Conditions states the grounds for the termination of the work or
contract by the Contractor:

123. CONTRACTOR’S RIGHT TO STOP WORK OR TERMINATE

CONTRACT

If work should be stopped under order of any court, or other public authority, for period of three (3)
months through no act or fault of Contractor or of anyone employed by him, or if Owner’s
Representative should fail to issue any certificate of payment within seven (7) days after its maturity
and presentation of any sum certified by Owner’s Representative or awarded arbitrator, then
contractor, may, stop work or terminate Contract, recover from Owner payment for work executed,
loss sustained upon any plant or materials, reasonable profit, damages. 37 (Emphasis supplied.)

Petitioners may not justify Rhogen’s termination of the contract upon grounds of non-payment of
progress billing and uncooperative attitude of respondent The Plaza and its employees in rectifying
the violations which were the basis for issuance of the stoppage order. Having breached the
contractual obligation it had expressly assumed, i.e., to comply with all laws, rules and regulations of
the local authorities, Rhogen was already at fault. Respondent The Plaza, on the other hand, was
justified in withholding payment on Rhogen’s first progress billing, on account of the stoppage order
and additionally due to disappearance of owner-furnished materials at the jobsite. In failing to have
the stoppage and revocation orders lifted or recalled, Rhogen should take full responsibility in
accordance with its contractual undertaking, thus:

In the performance of the works, services, and obligations subject of this Contract, the
CONTRACTOR binds itself to observe all pertinent and applicable laws, rules and regulations
promulgated by duly constituted authorities and to be personally, fully and solely liable for any and
all violations of the same.38 (Emphasis supplied.)
Significantly, Rhogen did not mention in its communications to Reyes that Gaite was merely a victim
of abuse by a local official and this was the primary reason for the problems besetting the project.
On the contrary, the site appraisal inspection conducted on February 12 and 13, 1981 in the
presence of representatives from The Plaza, Rhogen, FGU and Municipal Engineer Victor Gregory,
disclosed that in addition to the violations committed by Rhogen which resulted in the issuance of
the stoppage order, Rhogen built the structure not in accordance with government approved plans
and/or without securing the approval of the Municipal Engineer before making the changes thereon. 39

Such non-observance of laws and regulations of the local authorities affecting the construction
project constitutes a substantial violation of the Construction Contract which entitles The Plaza to
terminate the same, 

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 177685               January 26, 2011

HEIRS OF RAMON C. GAITE, CYNTHIA GOROSTIZA GAITE and RHOGEN

BUILDERS, Petitioners,
vs.
THE PLAZA, INC. and FGU INSURANCE CORPORATION, Respondents.

DECISION

VILLARAMA, JR., J.:

This is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, which
seeks to reverse and set aside the Decision1 dated June 27, 2006 and Resolution2 dated April 20,
2007 of the Court of Appeals (CA) in CA-G.R. CV No. 58790. The CA affirmed with modification the
Decision3 dated July 3, 1997 of the Regional Trial Court (RTC) of Makati City, Branch 63, in Civil
Case Nos. 1328 (43083) and 40755.

The facts are as follows:

On July 16, 1980, The Plaza, Inc. (The Plaza), a corporation engaged in the restaurant business,
through its President, Jose C. Reyes, entered into a contract 4 with Rhogen Builders (Rhogen),
represented by Ramon C. Gaite, for the construction of a restaurant building in Greenbelt, Makati,
Metro Manila for the price of ₱7,600,000.00. On July 18, 1980, to secure Rhogen’s compliance with
its obligation under the contract, Gaite and FGU Insurance Corporation (FGU) executed a surety
bond in the amount of ₱1,155,000.00 in favor of The Plaza. On July 28, 1980, The Plaza paid
₱1,155,000.00 less withholding taxes as down payment to Gaite. Thereafter, Rhogen commenced
construction of the restaurant building.

In a letter dated September 10, 1980, Engineer Angelito Z. Gonzales, the Acting Building Official of
the Municipality of Makati, ordered Gaite to cease and desist from continuing with the construction of
the building for violation of Sections 301 and 302 of the National Building Code (P.D. 1096) and its
implementing rules and regulations.5 The letter was referred to The Plaza’s Project Manager,
Architect Roberto L. Tayzon.
On September 15, 1980, Engr. Gonzales informed Gaite that the building permit for the construction
of the restaurant was revoked for non-compliance with the provisions of the National Building
Code and for the additional temporary construction without permit. 6 The Memorandum Report of
Building Inspector Victor Gregory enumerated the following violations of Rhogen in the construction
of the building:

1) No permit for Temporary Structure.

2) No notice of concrete pouring.

3) Some workers have no safety devices.

4) The Secretary and Construction Foreman refused to [receive] the Letter of Stoppage
dated September 10, 1980.

5) Mr. Ramon Gaite [is] questioning the authority of the Building Official’s Inspector.

6) Construction plans use[d] on the job site is not in accordance to the approved plan. 7

On September 19, 1980, the Project Manager (Tayzon) in his Construction Memo #23 reported on
his evaluation of Progress Billing #1 submitted by Rhogen. Tayzon stated that actual jobsite
assessment showed that the finished works fall short of Rhogen’s claimed percentage of
accomplishment and Rhogen was entitled to only ₱32,684.16 and not ₱260,649.91 being demanded
by Rhogen. Further, he recommended that said amount payable to Rhogen be withheld pending
compliance with Construction Memo #18, resolution of cases regarding unauthorized withdrawal of
materials from jobsite and stoppage of work by the Municipal Engineer’s Office of Makati. 8

On October 7, 1980, Gaite wrote Mr. Jose C. Reyes, President of The Plaza regarding his
actions/observations on the stoppage order issued. On the permit for temporary structure, Gaite said
the plans were being readied for submission to the Engineering Department of the Municipality of
Makati and the application was being resent to Reyes for his appropriate action. As to the notice for
concrete pouring, Gaite said that their construction set-up provides for a Project Manager to whom
the Pouring Request is first submitted and whose job is to clear to whoever parties are involved (this
could still be worked out with the Building Inspector). Regarding the safety devices for workers,
Gaite averred that he had given strict rules on this but in the course of construction some workers
have personal preferences. On the refusal of the secretary and construction foreman to receive the
stoppage order dated September 10, 1980, Gaite took responsibility but insisted it was not a
violation of the National Building Code. Likewise, questioning the authority of the Building Inspector
is not a violation of the Code although Gaite denied he ever did so. Lastly, on the construction plans
used in the jobsite not being in accordance with the approved plan, Gaite said he had sent Engr.
Cristino V. Laurel on October 3, 1980 to Reyes’ office and make a copy of the only approved plan
which was in the care of Reyes, but the latter did not give it to Engr. Laurel. Gaite thus thought that
Reyes would handle the matter by himself.9

On the same day, Gaite notified Reyes that he is suspending all construction works until Reyes and
the Project Manager cooperate to resolve the issue he had raised to address the problem. 10 This was
followed by another letter dated November 18, 1980 in which Gaite expressed his sentiments on
their aborted project and reiterated that they can still resolve the matter with cooperation from the
side of The Plaza.11 In his reply-letter dated November 24, 1980, Reyes asserted that The Plaza is
not the one to initiate a solution to the situation, especially after The Plaza already paid the agreed
down payment of ₱1,155,000.00, which compensation so far exceeds the work completed by
Rhogen before the municipal authorities stopped the construction for several violations. Reyes made
it clear they have no obligation to help Rhogen get out of the situation arising from non-performance
of its own contractual undertakings, and that The Plaza has its rights and remedies to protect its
interest.12

Subsequently, the correspondence between Gaite and Reyes involved the custody of remaining
bags of cement in the jobsite, in the course of which Gaite was charged with estafa for ordering the
removal of said items. Gaite complained that Reyes continued to be uncooperative in refusing to
meet with him to resolve the delay. Gaite further answered the estafa charge by saying that he only
acted to protect the interest of the owner (prevent spoilage/hardening of cement) and that Reyes did
not reply to his request for exchange.13

On January 9, 1981, Gaite informed The Plaza that he is terminating their contract based on the
Contractor’s Right to Stop Work or Terminate Contracts as provided for in the General Conditions of
the Contract. In his letter, Gaite accused Reyes of not cooperating with Rhogen in solving the
problem concerning the revocation of the building permits, which he described as a "minor problem."
Additionally, Gaite demanded the payment of ₱63,058.50 from The Plaza representing the work that
has already been completed by Rhogen.14

On January 13, 1981, The Plaza, through Reyes, countered that it will hold Gaite and Rhogen fully
responsible for failure to comply with the terms of the contract and to deliver the finished structure on
the stipulated date. Reyes argued that the down payment made by The Plaza was more than
enough to cover Rhogen’s expenses.15

In a subsequent letter dated January 20, 1981, Reyes adverted to Rhogen’s undertaking to complete
the construction within 180 calendar days from July 16, 1980 or up to January 12, 1981, and to pay
the agreed payment of liquidated damages for every month of delay, chargeable against the
performance bond posted by FGU. Reyes invoked Section 121 of the Articles of General Conditions
granting the owner the right to terminate the contract if the contractor fails to execute the work
properly and to make good such deficiencies and deducting the cost from the payment due to the
contractor. Reyes also informed Gaite that The Plaza will continue the completion of the structure
utilizing the services of a competent contractor but will charge Rhogen for liquidated damages as
stipulated in Article VIII of the Contract. After proper evaluation of the works completed by Rhogen,
The Plaza shall then resume the construction and charge Rhogen for all the costs and expenses
incurred in excess of the contract price. In the meantime that The Plaza is still evaluating the extent
and condition of the works performed by Rhogen to determine whether these are done in
accordance with the approved plans, Reyes demanded from Gaite the reimbursement of the balance
of their initial payment of ₱1,155,000.00 from the value of the works correctly completed by Rhogen,
or if none, to reimburse the entire down payment plus expenses of removal and replacement.
Rhogen was also asked to turn over the jobsite premises as soon as possible. 16 The Plaza sent copy
of said letter to FGU but the latter replied that it has no liability under the circumstances and hence it
could not act favorably on its claim against the bond. 17

On March 3, 1981, The Plaza notified Gaite that it could no longer credit any payment to Rhogen for
the work it had completed because the evaluation of the extent, condition, and cost of work done
revealed that in addition to the violations committed during the construction of the building, the
structure was not in accordance with plans approved by the government and accepted by Ayala.
Hence, The Plaza demanded the reimbursement of the down payment, the cost of uprooting or
removal of the defective structures, the value of owner-furnished materials, and payment of
liquidated damages.18

On March 26, 1981, The Plaza filed Civil Case No. 40755 for breach of contract, sum of money and
damages against Gaite and FGU in the Court of First Instance (CFI) of Rizal. 19 The Plaza later
amended its complaint to include Cynthia G. Gaite and Rhogen. 20 The Plaza likewise filed Civil Case
No. 1328 (43083) against Ramon C. Gaite, Cynthia G. Gaite and/or Rhogen Builders also in the CFI
of Rizal for nullification of the project development contract executed prior to the General
Construction Contract subject of Civil Case No. 40755, which was allegedly in violation of the
provisions of R.A. No. 545 (Architectural Law of the Philippines). 21 After the reorganization of the
Judiciary in 1983, the cases were transferred to the RTC of Makati and eventually consolidated.

On July 3, 1997, Branch 63 of the RTC Makati rendered its decision granting the claims of The Plaza
against Rhogen, the Gaites and FGU, and the cross-claim of FGU against Rhogen and the Gaites.
The trial court ruled that the Project Manager was justified in recommending that The Plaza withhold
payment on the progress billings submitted by Rhogen based on his evaluation that The Plaza is
liable to pay only ₱32,684.16 and not ₱260,649.91. The other valid grounds for the withholding of
payment were the pending estafa case against Gaite, non-compliance by Rhogen with Construction
Memorandum No. 18 and the non-lifting of the stoppage order. 22

Regarding the non-lifting of the stoppage order, which the trial court said was based on simple
infractions, the same was held to be solely attributable to Rhogen’s willful inaction. Instead of readily
rectifying the violations, Rhogen continued with the construction works thereby causing more
damage. The trial court pointed out that Rhogen is not only expected to be aware of standard
requirements and pertinent regulations on construction work, but also expressly bound itself under
the General Construction Contract to comply with all the laws, city and municipal ordinances and all
government regulations. Having failed to complete the project within the stipulated period and
comply with its obligations, Rhogen was thus declared guilty of breaching the Construction Contract
and is liable for damages under Articles 1170 and 1167 of the Civil Code.23

The dispositive portion of the trial court’s decision reads:

WHEREFORE, in Civil Case No. 40755, defendants Ramon Gaite, Cynthia Gaite and Rhogen
Builders are jointly and severally ordered to pay plaintiff:

1. the amount of ₱525,422.73 as actual damages representing owner-furnished materials

with legal interest from the time of filing of the complaint until full payment;

2. the amount of ₱14,504.66 as actual damages representing expenses for uprooting with
interest from the time of filing the complaint until full payment;

3. the amount of ₱1,155,000.00 as actual damages representing the downpayment with

legal interest from the time of filing the complaint until full payment;

4. the amoun