G.R. No. 137677 - Francisco vs. Boiser

In May 2002, petitioner Star Electric Corporation, functioning as a sub-contractor, entered into a Construction Contract with respondent R & G Construction Development and Trading, Inc. for the installation of electrical, plumbing, and mechanical works in the Grami Empire Hotel project.
The contract price was set at P2,571,457.21, payable through progress billings.
As provided in the contract, work commenced immediately upon signing with an initial payment structure that included a P500,000 downpayment and an advance payment of P80,000.

Despite the progressive work, respondent repeatedly refused to pay the progress billings submitted by petitioner.
On September 20, 2002, petitioner informed respondent via letter that it would suspend work until the outstanding amounts were fully paid; however, petitioner also indicated its readiness to terminate the contract if necessary.
On September 21, 2002, respondent formally terminated the Construction Contract, alleging that:

A significant portion of the delivered breakers were secondhand.
Rough-in materials such as full-boxes and PVC conduit pipes were installed improperly.
The overall progress of work was only 23.13%, with the downpayment considered as full compensation for the work done.

On September 24, 2002, petitioner responded by attributing the delays to several modifications in the building’s construction plan, and it contended that defects (such as issues with electrical panel boards) should have been rejected earlier.
Petitioner further argued that the actual completion percentage should have been at least 40%, taking into account all unused materials on site, and suggested the involvement of an independent appraiser.
Additionally, petitioner requested permission to retrieve its tools and equipment from the project site.

Petitioner filed a complaint on April 4, 2003, claiming non-payment amounting to P1,235,052.70 for the progress billings, which included:

Progress Billing No. 1 (August 18, 2002): P356,129.26
Change Order No. 1 (August 18, 2002): P50,000.00
Progress Billing No. 2 (September 12, 2002): P278,250.66
Progress Billing No. 3 (September 13, 2002): P345,100.00
Progress Billing No. 4 (October 1, 2002): P205,472.82

On October 20, 2003, an amended complaint was filed lowering the claim to P771,152.48 by subtracting the P580,000 downpayment and adding P116,100 which was purportedly for the cost of withheld tools and equipment.
A subsequent demand was made via letter on August 29, 2004 for a final billing dated November 3, 2002 amounting to P498,581.35.
Petitioner later filed a second amended complaint on October 4, 2004, increasing its claim to P1,269,734.05, rationalizing that the final billing was initially omitted due to misplacement and was only later discovered.

Petitioner’s work was defective, citing the use of secondhand materials and improper installation practices.
The project was delayed due to petitioner’s inefficiency and unacceptable workmanship.

Respondent contended that it had already made a complete payment of P580,000 corresponding to 23.13% completion of the contract amount.
To rectify the alleged defects, respondent engaged CP Giron Enterprises and PTL Power Corporation, incurring costs of P558,730.00 and P161,810.00 respectively, and subsequently filed a counterclaim for reimbursement of these expenses.

On November 16, 2009, the Regional Trial Court (RTC) issued a decision in favor of petitioner, ordering respondent to pay P1,153,534.09 (representing the unpaid value of the progress billings) in addition to legal interest, attorney’s fees, and costs of suit.
On July 17, 2013, the Court of Appeals (CA) reversed and set aside the RTC decision. The CA dismissed petitioner’s complaint and imposed liquidated damages of P540,009.75 on petitioner, based on the premise that both parties were at fault and had breached the Construction Contract.
The CA based its assessment on:

The determination that petitioner’s work was defective and that the materials used were substandard.
The contention that both parties had failed to meet their contractual obligations, notably respondent’s failure to allow petitioner the opportunity to rectify the defects prior to hiring third-party contractors.

Evidence indicated that petitioner had, in practice, conducted inspections and promptly remedied certain issues, which contradicted respondent’s assertions about defective workmanship.
It was proved that modifications in the building’s design—including the addition of floors and changes to the building’s frontage—were initiated by respondent, impacting the project schedule and contributing to delays.
Testimonies and documentary evidence established that respondent’s repeated modifications and unilateral actions led to significant delays in the project’s execution.

After the CA decision and the denial of a motion for reconsideration on April 1, 2014, petitioner filed a petition for review under Rule 45.
Petitioner maintained that the CA’s findings were erroneous, particularly regarding the attribution of delay and the imposition of liquidated damages, insisting that the base factual record upheld the RTC’s award for the unpaid progress billings.
Petitioner argued that respondent’s counterclaims and allegations of defective workmanship were unsupported by competent evidence, and that the delays were primarily attributable to respondent’s modifications to the project design.

Reversing and setting aside the RTC decision that favored petitioner.
Dismissing petitioner’s complaint on the basis of mutual breach, thereby ordering liquidated damages against petitioner.

Whether the evidence supports the conclusion that both parties breached their contractual obligations.
Whether respondent successfully established by preponderant evidence that petitioner’s work was defective and that substandard materials were used.
Whether the delays in the project should be attributed primarily to petitioner’s performance or to respondent’s modifications and actions during the course of the project.