Case Summary (G.R. No. 212327)
Background and Contractual Engagements
Dolmar engaged Linear to perform construction works on two distinct projects. In 1998 Linear was contracted for the drainage system works of the Marilao Project under several agreements (Phases 1 and 2). In 2003 Linear was contracted for works in the Sta. Maria Project, covered by a horizontal construction agreement and two supplemental agreements, with contract price for Sta. Maria set at Php40,820,000.00 and payments structured on progress billings less an 8% retention.
Contractual Terms on Retention and Final Payment
The Sta. Maria Contracts expressly provided that the 8% retention would be released within forty-five (45) days from Dolmar’s final written acceptance following submission of proof of payment of all project-related debts and the as-built plans. The final certificate of acceptance issuance was conditioned on those submissions.
Inspection, Alleged Defects, and Rectification Efforts
Dolmar engaged R.S. Caparros and Associates to manage construction for the Marilao Project and conducted joint inspections which Linear did not attend. R.S. Caparros reported numerous defects and irregularities in the Marilao drainage works (missing pipes, discrepancies from as-built drawings). Dolmar communicated defects to Linear; Linear undertook some rectifications that Dolmar deemed insufficient. R.S. Caparros prepared cost estimates for corrective works totaling Php6,379,935.00, and Dolmar engaged Mr. Elpidio D. Agapito for drainage rehabilitation.
Correspondence, Withholding of Retention, and Reciprocal Claims
After Linear completed the Sta. Maria Project, it demanded release of retention money (originally Php3,766,292.12, later adjusted to Php3,823,997.96). Dolmar required submission of requisite documents (proofs of non-indebtedness and as-built plans), which Linear furnished. Simultaneously, Dolmar demanded Php6,379,935.00 from Linear for rectification costs in Marilao and announced it would withhold Linear’s retention money, asserting legal compensation that left an alleged balance owed by Linear of Php2,613,642.88. Linear denied liability and litigated for collection.
Trial Court (RTC) Ruling
The Regional Trial Court (Branch 213, Mandaluyong City) rendered judgment for Linear on 22 January 2013. The RTC ordered Dolmar to pay Linear Php3,823,997.96 (unpaid retention) with 12% interest per annum from filing of the complaint, awarded amounts for acceptance and appearance fees, attorney’s fees (Php956,000.00), exemplary damages (Php20,000.00), and costs of suit. The RTC found that legal compensation could not apply because Dolmar had not established that Linear owed it a demandable, liquidated debt; Dolmar’s proofs addressed only liabilities from the Marilao Project while Linear’s cause of action concerned Sta. Maria. The RTC further found Dolmar acted in bad faith in refusing to issue a certificate of acceptance for Sta. Maria.
Court of Appeals (CA) Ruling
On appeal, the CA reversed the RTC. The CA concluded Dolmar sufficiently proved Linear’s obligation for the Marilao rectification costs (Php6,379,935.00), found Linear failed to rebut such liability, and held all requisites of legal compensation were present such that Dolmar’s rectification-cost claim extinguished Linear’s retention claim by offset. The CA ordered Linear to pay Dolmar Php2,555,937.04 (balance after offset) with 6% interest from filing of the complaint, awarded exemplary damages (Php100,000.00), attorney’s fees and litigation expenses (Php1,200,000.00), and costs. The CA also found Linear acted in bad faith and refused to award moral damages to the juridical person.
Issues Presented to the Supreme Court
(1) Whether the petition should be dismissed for Linear’s procedural lapses in filing the petition for review (defective attachments, undated affidavit of service, proof of corporate authority, and initially no soft copy). (2) Whether Linear’s claim for retention money was extinguished ipso jure by legal compensation in light of Dolmar’s counterclaim for rectification costs.
Supreme Court on Procedural Compliance
The Supreme Court acknowledged several procedural defects but exercised discretion to resolve the petition on the merits. Linear cured most deficiencies shortly after filing, submitted relevant records and the soft copy, and both the CA and Dolmar received and fully litigated the issues. The Court emphasized that rules are tools to attain justice and that strict procedural technicalities should not frustrate substantial justice. One remaining procedural lapse (a duly dated affidavit of service) was mitigated by submission of proof of service and the registry return card. Given these circumstances, the Court proceeded to the merits.
Scope of Review Under Rule 45 and Exceptions Invoked
Although Rule 45 appeals are generally confined to questions of law, the Court recognized an exception where appellate factual findings are unsupported by evidence or the judgment rests on a misapprehension of facts. The Court found that exception applicable here and therefore entertained review of the factual basis for the CA’s conclusion that Linear owed Php6,379,935.00.
Legal Compensation: Requisites and Applicable Law
The Court set out the requisites for legal compensation under the Civil Code: (1) each party is principal debtor and principal creditor of the other; (2) the debts are sums of money or consumable things of same kind and quality; (3) both debts are due; (4) the debts are liquidated and demandable; and (5) there is no retention or controversy by third persons properly communicated. These requirements (Arts. 1278–1279) govern ipso jure extinction of mutual obligations.
Supreme Court Findings on Liquidation and Demandability of Dolmar’s Claim
The Court concluded that Dolmar’s claimed rectification cost (Php6,379,935.00) was neither liquidated nor demandable. Linear consistently disputed liability; the claimed amount was a unilateral estimate by R.S. Caparros and not supported by receipts or evidence of actual expenditures. Documentary evidence indicated only approximately Php700,000.00 in actual payments and did not establish that Dolmar had disbursed the estimated amount at the time it withheld retention. Because the amount was disputed and unliquidated, and because defenses (e.g., completion, expiration of warranty or prescription) could bar Dolmar’s recovery, Dolmar’s claim was not a demandable, liquidated debt that could operate as legal compensation.
Legal vs. Judicial Compensation and the Court’s Refusal to Adjudicate the Marilao Claim
The Court explained the distinction: legal compensation operates ipso jure upon concurrence of requisites; judicial compensation arises when an unliquidated counterclaim is liquidated by judgment (Art. 1283). Although Dolmar pleaded its rectification costs as a compulsory counterclaim, the Court declined to resolve its merits for several reasons: (1) the primary issue before the Court was legal, not judicial compensation; (2) the Marilao and Sta. Maria projects are separate transactions involving different factual and procedural requirements, so liquidation of the Marilao claim would amount to treating a compulsory counterclaim as a permissive one and would implicate procedural rul
Case Syllabus (G.R. No. 212327)
Antecedents and Parties
- Petitioner: Linear Construction Corporation (Linear). Respondent: Dolmar Property Ventures, Inc. (Dolmar), also referred to in the record as Dolmar Property Ventures, Incorporated.
- The dispute arises from construction contracts entered into between Linear and Dolmar for two distinct projects: the Marilao Project (Dolmar Golden Hills Subdivision, Brgy. Loma De Gato, Marilao, Bulacan) and the Sta. Maria Project (Dolmar Golden Hills Subdivision, San Vicente, Sta. Maria, Bulacan).
- Chronology of contracting: Linear was engaged for the Marilao Project beginning in 1998 under several contracts (including Phase 1 and Phase 2 agreements). In 2003, Linear and Dolmar entered into agreements for the Sta. Maria Project, covered by a service contract and two supplemental agreements.
Contractual Terms Relevant to the Dispute
- Under the Sta. Maria Contracts, Dolmar agreed to pay Linear Php40,820,000.00 for the construction works to be undertaken by Linear.
- Payments for the Sta. Maria Project were to be made on a progress billing basis, as determined and accepted by Dolmar, with an eight percent (8%) retention withheld.
- Articles 6 and 8 of the Sta. Maria Contracts provided the conditions for final payment of retention money: the retention was to be paid within forty-five (45) days from Dolmar's final written acceptance; the final certificate of acceptance would be issued after submission of proof of payment of all project-related debts and the as-built plans of the completed work.
Inspection, Alleged Defects, and Rectification for the Marilao Project
- Dolmar engaged R.S. Caparros and Associates (R.S. Caparros) to manage construction of the Marilao Project among others and invited Linear to a joint inspection preparatory to issuance of a certificate of acceptance in Linear's favor; Linear did not send a representative.
- Dolmar (through R.S. Caparros) proceeded with inspections and inventories on several dates and allegedly discovered numerous defects and irregularities in the constructed drainage system—examples include missing drainage pipes and discrepancies between existing layouts and as-built drawings.
- These alleged defects were communicated to Linear in separate letters. Linear performed some rectification works; Dolmar contended those were insufficient.
- R.S. Caparros prepared reports estimating correction/rectification works at Php6,379,935.00 (with Phase 1 alleged rectification cost Php3,241,474.00 and Phase 2 alleged cost Php3,138,401.00).
- Dolmar engaged Mr. Elpidio D. Agapito for drainage rehabilitation and repair related to the Marilao Project; evidence of actual payments presented in the record reflected roughly over Php700,000.00 paid to contractors as of a witness’s testimony.
Correspondence, Demands, and Positions of the Parties
- Linear completed the Sta. Maria Project and demanded in writing the release of retention money initially claimed as Php3,766,292.12, which after review was represented by Linear as Php3,823,997.96.
- On 7 June 2007, Dolmar requested submission of proof of non-indebtedness and as-built plans; Linear complied by submitting the required documents.
- On the same date (7 June 2007), Dolmar also demanded from Linear Php6,379,875.00 representing the rectification costs for the Marilao Project.
- Dolmar wrote (05 September 2007 letter) that while a certificate of completion and owner’s acceptance for Sta. Maria would be issued, Dolmar would withhold release of Linear’s retention money on account of Linear’s alleged outstanding liabilities arising from defects in the Marilao Project.
- The parties disputed liability and amounts: Linear consistently denied liability for the claimed rectification sum and insisted on entitlement to its retention money; Dolmar insisted on applying legal compensation by offsetting its claimed rectification costs against Linear’s retention.
Procedural Posture and Trial Court (RTC) Ruling
- Linear filed a complaint for collection of a sum of money with damages against Dolmar.
- The Regional Trial Court (Branch 213, Mandaluyong City) issued a Decision dated 22 January 2013 in Civil Case No. MC07-3385 in favor of Linear, ordering Dolmar to pay Linear:
- Php3,823,997.96 (unpaid retention money) with 12% interest per annum from date of filing of complaint;
- Php418,000.00 (acceptance and appearance fees) [note: phrasing in record shows a typographical inconsistency];
- Php956,000.00 as attorney’s fees;
- Php20,000.00 as exemplary damages;
- Costs of suit.
- The RTC found that the elements of legal compensation were not present because Dolmar failed to establish that Linear was legally indebted to it; it observed Dolmar presented proof focused on Marilao liabilities while Linear’s cause of action was based on Sta. Maria; all Dolmar’s witnesses testified regarding the Marilao Project; and that Dolmar acted in bad faith by refusing to issue a certificate of acceptance for the Sta. Maria Project.
- Dolmar’s motion for reconsideration was denied by the RTC in an Order dated 24 June 2013.
Court of Appeals Ruling
- On appeal, the Court of Appeals (CA) reversed the RTC in a Decision dated 29 April 2014 (CA-G.R. CV No. 101201), adjudging in favor of Dolmar and ordering Linear to pay Dolmar:
- Php2,555,937.04 (balance after deducting Linear’s claimed retention of Php3,823,997.96 from Dolmar’s rectification cost of Php6,379,935.00) with 6% interest per annum from date of filing of the complaint until fully paid;
- Php100,000.00 as exemplary damages;
- Php1,200,000.00 as attorney’s fees and litigation expenses;
- Costs of suit.
- The CA found Dolmar sufficiently proved Linear’s obligation for Php6,379,935.00 for defective works in the Marilao Project and concluded Linear presented no countervailing evidence negating its liability for reconstruction.
- The CA held that all elements of legal compensation were present: Linear and Dolmar were mutual creditors and debtors; by operation of law Dolmar’s obligation was extinguished to the concurrent amount. The CA considered immaterial that the obligations did not arise from the same contract or transaction.
- The CA further held Linear acted in bad faith (allegedly concealing circumstances around the Marilao Project and failing to finish or pay for rectification works) and imposed exemplary damages, attorney’s fees and litigation expenses; it refused to award moral damages, citing the general rule that a juridical person is not generally entitled to the same.
Issues Presented to the Supreme Court
- The Supreme Court framed the issues for resolution as:
- Whether the petition should be dismissed for Linear’s failure to strictly comply with procedural requirements.
- Whether Linear’s claim over the Sta. Maria retention money had been extinguished ipso jure through legal compensation invoked by Dolmar.
Procedural Compliance, Admissibility, and Merits Consideration by the Supreme Court
- The Court noted several procedural deficiencies in Linear’s petition: absence of a certified true copy of the assailed decision and material record portions, a duly dated affidavit of service (affidavit notarized on 19 May 2014 though service occurred on 20 May 2014), proof of corporate authority for verification, and initial failure to submit a soft copy.
- Linear subsequently submitted the missing records and soft copy two day