G.R. No. 119033; July 9, 2008
EK LEE STEEL WORKS CORPORATION, Petitioner, vs. MANILA CASTOR OIL CORPORATION, ROMY LIM, and THE COURT OF APPEALS, Respondents.

FACTS

Petitioner Ek Lee Steel Works Corporation was contracted by respondent Manila Castor Oil Corporation, through its President Romy Lim, to construct several structures for a castor oil plant in Davao City under seven letter-agreements. The agreements stipulated down payments and progress billings for the remaining balances. Petitioner later alleged an additional verbal agreement for a warehouse (Building II), which respondent denied, leading petitioner to discontinue that structure after partial work. On May 16, 1988, respondent paid ₱500,000 and promised further payments upon completion of specific project phases. After an additional payment of ₱70,000 in July 1988, petitioner demanded payment of alleged remaining balances and, receiving none, stopped construction. Petitioner then requested an ocular inspection by the Davao City Engineer’s Office, which reported most work items as 100% completed. Petitioner filed a collection suit. Respondent countered that petitioner was already in delay, had abandoned the project, and that construction was substandard, citing a tilting oil tank that caused operational stoppage.

ISSUE

The core issue is whether petitioner was justified in suspending work and entitled to payment for work accomplished, or whether it had abandoned the project, making respondent entitled to damages.

RULING

The Supreme Court denied the petition, affirming the Court of Appeals’ reversal of the trial court, but modified it by deleting the order for petitioner to reimburse ₱70,000. The legal logic centered on the burden of proof and the nature of reciprocal obligations in a construction contract. The Court held that petitioner failed to substantiate its claim for payment for the alleged additional warehouse (Building II) as no written approval from respondent existed, violating the Statute of Frauds for agreements not to be performed within one year. Crucially, the Court found petitioner did not successfully refute respondent’s evidence of project abandonment and substandard work. The Technical Verification Report presented by respondent credibly showed the project was incomplete and non-functional when petitioner left. In reciprocal obligations, like a construction contract, if one party fails to comply, the other may seek rescission or suspend performance. Here, petitioner’s suspension was unjustified as it did not first establish respondent’s failure to pay was unlawful, especially given the unresolved issues over work completion and quality. Petitioner bore the burden to prove its claim for payment by preponderance of evidence, which it did not meet. However, the ₱70,000 reimbursement was deleted as respondent never pleaded it as an overpayment in its answer.