G.R. No. 11002 - People vs. Palacio

On 18 March 2002, a Construction Contract was entered into between the respondents, the Heirs of Manuel Sia (represented by Rosemarie Sia), and petitioner Engr. Ruben Y. Yu, doing business as RYU Construction.
The contract involved the construction of a four-storey commercial building located at F. Imperial St., Legazpi City, with the contractor (Ruben) furnishing labor and materials only.
The contract price was fixed at PHP 9,842,240.00, with an advance payment of PHP 3,000,000.00 and subsequent progress billing payments scheduled upon every 30 days of work accomplishment, including a final payment contingent upon the issuance of a certificate of occupancy.

On 27 July 2006, Ruben initiated a complaint for the collection of PHP 448,240.00 – the unpaid balance of the contract – claiming that the building was completed and turned over in 2003 in strict compliance with the plans and specifications.
Rosemarie admitted non-payment but contended that the remaining balance should not be released until:

The issuance of a full occupancy permit.
The defects in the 3rd and 4th floors, particularly undersized or non-compliant guest room dimensions with minimum standards under PD 1096, were remedied.

In 2009, Rosemarie consulted the Office of the City Engineer regarding alleged non-compliance with PD 1096.
An Inspection Report identified several violations, including:

In response, Rosemarie secured the services of Architect Leo Del Rosario in 2013 to prepare a renovation plan, which was approved by the City Engineer.
The renovations were executed by Del Rosario and Engr. Fernando Joquico (J-Squared Construction), costing PHP 1,576,163.86, leading to the issuance of a certificate of occupancy for the affected floors in 2014.

Ruben amended the complaint in 2012 to name additional defendants; however, the RTC later dropped all but Rosemarie in its 2013 order.
After trial on the merits, the Regional Trial Court (RTC) rendered a Decision on 08 August 2016 in which it ruled:

Ruben had complied with the contract obligations, having constructed the building in accordance with approved plans.
The non-issuance of a full occupancy permit was not attributable to Ruben, as the building had been accepted and in continuous use since 2003.
The defects (e.g., undersized rooms) were a result of the respondents’ instructions and not the contractor’s fault.

On appeal, the CA, in its Decision dated 29 March 2019, reversed and set aside the RTC’s ruling.
The CA held that the contract’s final payment was conditioned upon the remittance of the occupancy permit, which was not obtained by Ruben.
The CA found that:

Ruben should have been aware that the submitted building plans were non-compliant with PD 1096.
The defects in the construction were attributable to the plan and thus to the parties’ collective negligence.

Pay Rosemarie PHP 1,127,923.86 for renovation costs (earning interest at 6% per annum).
Pay moral damages of PHP 200,000.00 and exemplary damages of PHP 200,000.00.
Pay attorney’s fees and additional costs including a fee per court appearance.
The total award was to earn interest after finality.

Ruben, aggrieved by the CA decision, filed a Petition for Review on Certiorari questioning the reversal of the RTC’s factual findings and the re-allocation of liabilities.
The petition raised questions on the extent to which the CA erred in its findings regarding compliance with PD 1096 and the legality of the contract given the building defects.

Whether the Court of Appeals seriously erred in reversing the RTC’s Decision which had found that:

The defects in the subject building were not attributable to the contractor’s (Ruben’s) performance.
Ruben was entitled to claim the unpaid balance under the Construction Contract.

Whether Ruben’s failure to consider non-compliance with PD 1096, both in the building plan and construction, shifts responsibility and affects his claim for payment.
Whether the parties, by constructing a building in violation of PD 1096, became in pari delicto, thereby barring any action against each other under Article 1411 of the Civil Code.