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.

FACTS

On July 16, 1980, respondent The Plaza, Inc. (The Plaza) entered into a construction contract with petitioner Rhogen Builders (Rhogen), represented by Ramon C. Gaite, for a restaurant building in Greenbelt, Makati, for ₱7,600,000.00. A surety bond from respondent FGU Insurance Corporation (FGU) secured Rhogen’s performance. The Plaza paid a down payment of ₱1,155,000.00. Construction commenced but was ordered stopped on September 10, 1980, by the Makati Building Official for violations of the National Building Code, including constructing without a permit, using plans not in accordance with approved plans, and lack of worker safety devices. The building permit was revoked on September 15, 1980. The Plaza’s Project Manager evaluated Rhogen’s first progress billing as grossly overstated. Correspondence between Gaite and The Plaza’s President, Jose C. Reyes, ensued, with Gaite blaming The Plaza’s lack of cooperation for the permit issues and eventually suspending work on October 7, 1980. On January 9, 1981, Gaite terminated the contract, citing The Plaza’s non-cooperation. The Plaza countered, holding Rhogen responsible for failure to complete the project and demanding reimbursement of the down payment, costs of removing defective work, and liquidated damages. The Plaza filed a complaint for breach of contract and damages against Gaite, Rhogen, and FGU. The Regional Trial Court (RTC) ruled in favor of The Plaza, ordering petitioners and FGU to pay damages. The Court of Appeals (CA) affirmed the RTC with modification, deleting the award for unrealized profits. Petitioners appealed to the Supreme Court.

ISSUE

Whether the Court of Appeals erred in affirming the trial court’s finding that petitioners committed a fundamental breach of the construction contract, justifying its rescission and making them liable for damages.

RULING

The Supreme Court DENIED the petition and AFFIRMED the Court of Appeals Decision. The Court held that petitioners committed a fundamental breach of the construction contract. Rhogen’s violations of the National Building Code, which led to the stoppage order and revocation of the building permit, constituted a failure to perform its obligation in accordance with the contract’s terms and the law. This breach went to the very essence of the agreement, as the contractor’s primary duty is to construct the building in accordance with approved plans and legal requirements. The contractor’s attempt to shift blame to The Plaza for lack of cooperation was unavailing, as securing permits and complying with building codes are primarily the contractor’s responsibilities under the contract’s General Conditions. The Plaza was thus justified in rescinding the contract under Article 1191 of the Civil Code. Petitioners were liable to reimburse the down payment, as the value of the work actually completed was far less than the amount paid. The award of liquidated damages for delay was also proper under the contract. The surety, FGU, was correctly held solidarily liable with the principal obligor, Rhogen, under the performance bond. The CA correctly deleted the award for unrealized profits for lack of sufficient factual basis.