G.R. No. 179545 ; July 11, 2012
ENGR. EMELYNE P. CAYETANO-ABANO, OPERATING UNDER THE NAME AND STYLE JACOB JOSEPH BUILDERS & PLANNERS, AND ENGR. DARIO C. ABANO, Petitioners, vs. COLEGIO DE SAN JUAN DE LETRAN-CALAMBA, Respondent.

FACTS

Petitioners, as contractors, entered into a construction contract with respondent Colegio de San Juan de Letran-Calamba for a library building. The contract specified a 14-month duration and detailed technical specifications. Petitioners received substantial advance payments but repeatedly failed to meet project deadlines, unilaterally extending the completion date without respondent’s consent. By the contract’s completion date, the building was unfinished. A joint inspection in May 2005 revealed significant defects and deficiencies, including the use of non-conforming electrical wiring brands contrary to contract specifications. Petitioners agreed to undertake corrective works but later denied conformity with the inspection report. A second inspection in July 2005 confirmed persistent defects. Petitioners demanded full payment and initiated arbitration before the Construction Industry Arbitration Commission (CIAC) for their unpaid billings.
The CIAC rendered a Final Award ordering respondent to pay petitioners over P13.9 million. The CIAC found that petitioners had substantially performed the contract and that respondent’s refusal to pay constituted a breach. Respondent appealed to the Court of Appeals, which reversed the CIAC award. The CA found that petitioners were guilty of gross negligence and breach of contract for failing to complete the project on time and for using substandard, non-conforming materials. Petitioners elevated the case to the Supreme Court via a Petition for Review.

ISSUE

Whether the Court of Appeals erred in reversing the CIAC Final Award and in finding petitioners liable for breach of contract and gross negligence.

RULING

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The legal logic rests on the fundamental principles of contractual obligations and the duty of care in construction contracts. The Court emphasized that a contractor is bound to execute the work in accordance with the plans and specifications and with the diligence of a good father of a family. Petitioners failed on both counts. First, they breached the contract by not completing the project within the stipulated period and by unilaterally altering the completion schedule. Second, and more critically, they were found guilty of gross negligence. The evidence, particularly the use of electrical wires not conforming to the specified “Phelps Dodge” brand or its accepted equivalent, constituted a flagrant violation of the contract’s technical specifications. This was not a minor deviation but a fundamental breach going to the heart of the agreed-upon standards and safety.
The Court upheld the CA’s finding that this gross negligence exempted respondent from its obligation to pay, as the contractor’s right to compensation is extinguished when the work is so defective that it becomes virtually useless for its intended purpose. The CIAC’s finding of substantial completion was overturned because the defects were substantial, pervasive, and involved the use of inferior materials. Consequently, petitioners were not entitled to payment for their substandard and incomplete work. The ruling reinforces that contractors must adhere strictly to contract specifications and that gross negligence in performance forfeits their claim for compensation.