G.R. No. L-30056 August 30, 1988
MARCELO AGCAOILI, plaintiff-appellee vs. GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.

FACTS

The Government Service Insurance System (GSIS) approved Marcelo Agcaoili’s application to purchase a house and lot in its Nangka, Marikina housing project. The approval letter advised Agcaoili to occupy the house immediately, warning that failure to do so within three days would result in automatic disapproval. Agcaoili complied but found the house absolutely uninhabitable, being a mere shell lacking essential features like a ceiling, stairs, water connection, and bathroom. He was forced to leave the next day, though he left a friend on the premises as a watchman.
Agcaoili complained to GSIS and refused to pay further monthly amortizations until the house was completed. GSIS, instead of completing the unit, cancelled the award and demanded Agcaoili vacate the premises. Agcaoili filed an action for specific performance and damages in the Court of First Instance of Manila. The trial court ruled in his favor, declaring the cancellation void, ordering GSIS to respect the award and complete the house, and awarding damages. GSIS appealed.

ISSUE

The primary issue is whether GSIS could validly cancel the award and demand further payments from Agcaoili given the uninhabitable state of the house, and whether Agcaoili was entitled to specific performance.

RULING

The Supreme Court affirmed the trial court’s judgment with modification. The Court rejected GSIS’s arguments. First, it held that the contract of sale was perfected upon GSIS’s acceptance of Agcaoili’s application. The condition for immediate occupancy implied the house was habitable; it could not be construed as requiring occupation of an uninhabitable shell. Second, Agcaoili’s suspension of amortization payments was justified. GSIS failed in its reciprocal obligation to deliver a habitable dwelling, thereby giving Agcaoili the right to suspend his own performance under Article 1169 of the Civil Code. The act of placing a watchman did not constitute repudiation of the award but was a reasonable measure to protect his interest in the property given GSIS’s failure.
However, the Court modified the order for specific performance to complete the house. Applying the principle of balancing equities, the Court found that compelling GSIS to complete construction at the original contract price, given the passage of time and increased costs, would be unjust. Instead, the contract was ordered to be reformed. The purchase price was to be adjusted to reflect only the value of the land and the house in its unfinished state at the time of perfection of the contract, with corresponding amortization adjustments. This solution balanced Agcaoili’s right to the award with fairness to GSIS, preventing undue enrichment at its expense. The award of nominal damages and attorney’s fees was sustained.