G.R. No. 212327 . November 17, 2021
LINEAR CONSTRUCTION CORPORATION, PETITIONER, VS. DOLMAR PROPERTY VENTURES, INC., RESPONDENT.

FACTS

Petitioner Linear Construction Corporation (Linear) and respondent Dolmar Property Ventures, Inc. (Dolmar) entered into separate construction contracts for two projects: the Marilao Project (1998) and the Sta. Maria Project (2003). For the Sta. Maria Project, Dolmar was to pay Linear Php40,820,000.00, with payments on a progress billing basis less an 8% retention. The retention money, amounting to Php3,823,997.96, was to be released within 45 days after Dolmar’s final written acceptance, contingent upon Linear submitting proof of payment of all project-related debts and as-built plans.
After Linear completed the Sta. Maria Project and submitted the required documents, Dolmar, in a letter dated June 7, 2007, demanded from Linear Php6,379,875.00 for alleged rectification costs due to defective works in the separate Marilao Project. Dolmar subsequently withheld the retention money for the Sta. Maria Project, claiming that the parties’ mutual obligations had been extinguished through legal compensation, leaving a balance of Php2,613,642.88 in its favor. Linear denied liability for the Marilao Project defects and filed a complaint for collection of the retention money.
The Regional Trial Court (RTC) ruled in favor of Linear, ordering Dolmar to pay the retention money plus damages, holding that Dolmar failed to prove Linear’s liability for the Marilao Project and that the elements of legal compensation were absent. The Court of Appeals (CA) reversed the RTC, finding that Dolmar sufficiently proved Linear’s obligation for the rectification costs and that legal compensation had extinguished Linear’s claim. The CA ordered Linear to pay Dolmar the net balance after offsetting the claims.

ISSUE

Whether Linear’s claim for the retention money from the Sta. Maria Project has been extinguished through legal compensation by Dolmar’s claim for rectification costs from the Marilao Project.

RULING

No. The Supreme Court granted Linear’s petition, reversed the CA Decision, and reinstated the RTC Decision with modification regarding the interest rate. Legal compensation under Article 1279 of the Civil Code did not apply because the two obligations did not arise from the same contract or transaction—the retention money pertained to the Sta. Maria Contracts, while the rectification costs pertained to the separate Marilao Contracts. For compensation to operate, the obligations must be of the same kind and equally liquidated and demandable. Dolmar’s claim against Linear for the Marilao Project was not liquidated and demandable, as it remained disputed and unproven in the trial court; Dolmar’s evidence focused on the Marilao Project, while Linear’s cause of action concerned the Sta. Maria Project. Consequently, Dolmar’s withholding of the retention money was unjustified. The Court ordered Dolmar to pay Linear the retention money of Php3,823,997.96 with legal interest at 6% per annum from the filing of the complaint until finality, and 6% per annum from finality until full payment. The awards for attorney’s fees and costs of suit were sustained, but exemplary damages were deleted.