Title
Sandoval Shipyards, Inc. vs. Philippine Merchant Marine Academy
Case
G.R. No. 188633
Decision Date
Apr 10, 2013
PMMA contracted Sandoval Shipyards to build lifeboats, but non-compliant engines and defects led to breach claims. Courts ruled breach, not rescission, upheld damages, and denied dismissal over mediation absence.
breach of contract
damages
mobilization fund

Case Summary (G.R. No. 96189)

Ship Building Contract and Payments

On 19 December 1994, respondent entered into a ship building arrangement with petitioners through the latter’s agent, Rimport Industries, Inc. The contract required the construction of two lifeboats with 45-HP Gray Marine diesel engines, delivery within 45 working days from the contract’s signing and payment of the mobilization/organization fund, and staggered payment by respondent based on progress accomplishment.

Respondent paid petitioners P236,694.00 on 08 March 1995 as mobilization fund; P504,947.20 on 15 March 1995 as the first progress billing; and P386,600.00 on 25 March 1995 as the final payment for the lifeboats. The narrative later established that petitioners were paid in full except for the 10% retention at the time of audit findings.

Alleged Delivery and Initial Complaints of Nonconformity

On 10 August 1995, Angel Rosario (Rosario), a faculty member of respondent, who claimed to have been verbally authorized by respondent’s president, allegedly received the lifeboats at the Philippine Navy Wharf in good order and condition.

In November 1995, respondent formed an inspection team which checked whether the plans and specifications had been complied with. The inspection team reported that petitioners installed surplus Japan-made Isuzu C-240 diesel engines with plates bearing Isuzu Marine markings, instead of the contracted 45-HP Gray Marine diesel engines. The team also noted defects in the engine electric starting systems for lack of a required manual in case of failure, and nonconformity in the construction of the engine compartment with the approved plan. The report recommended rectification, and a meeting between representatives of respondent and petitioners was held on 01 December 1995. Petitioners were reminded to strictly comply with the agreed plans and specifications, as no authorized alterations existed, and they were advised to put in writing any request for an extension of time.

Petitioners complied by sending a letter dated 18 December 1995 requesting an extension of delivery from 01 December 1995 to January 1996.

COA Ocular Inspection Findings

On 18 July 1996, the Commission on Audit (COA), through its technical audit specialist Benedict S. Guantero (Guantero), conducted an ocular inspection of the lifeboats. The COA report indicated that the lifeboats were corroded and deteriorating due to exposure to weather elements, and that plankings and benches deteriorated because they were not coated with fiberglass. The audit also found that the lifeboats had no mast sails or row locks, that the installed prime mover was an Isuzu engine contrary to the agreed plans and specifications, and that the lifeboats were paid in full except for the 10% retention.

RTC Action for Rescission with Damages

Despite repeated demands by respondent, petitioners refused to deliver lifeboats complying with the agreed specifications. Respondent then filed a complaint for rescission of contract with damages before the RTC, and the trial proceeded.

The RTC decision dated 10 April 2006 treated the case as one involving breach of contract notwithstanding the complaint caption, holding that petitioners violated the contract by installing surplus diesel engines contrary to the agreed plans and specifications. The RTC held petitioners jointly and severally liable for actual damages of P1,516,680, imposed a penalty of one percent of the total contract price for every day of delay, and ordered petitioners to pay P200,000 as attorneys fees plus costs of suit. The RTC justified attorneys fees on the ground that petitioners’ unjustified refusal compelled respondent to resort to court action.

The RTC also ruled that petitioners were estopped from questioning respondent’s noncompliance with mediation proceedings, considering that petitioners nonetheless actively participated in the trial.

Parties’ Positions on Appeal to the CA

Petitioners appealed to the CA under Rule 41. They argued, among others, that: (1) the RTC erred in treating the case as breach of contract rather than rescission; (2) the RTC should have dismissed the case as a sanction for respondent’s deliberate failure to attend mediation; (3) the RTC erred in concluding they had not fully complied with their contractual obligations; and (4) the award of attorneys fees lacked explanation.

CA Ruling: Substantial Breach and Rescission; Deletion of Attorneys Fees

The CA held that petitioners committed a clear substantial breach of the contract warranting rescission. The CA emphasized that rescission requires mutual restoration of benefits received, but it found that petitioners could not compel respondent to return what respondent never possessed or had under custody. It reasoned that petitioners’ alleged delivery to Rosario was invalid, because Rosario was not a duly authorized representative named in the contract. Thus, the CA concluded that respondent never effectively received the lifeboats in a manner that would trigger mutual restitution of the object of the contract.

Accordingly, the CA deleted the RTC’s award of attorneys fees. It found that the RTC failed to cite any specific factual basis to justify the award.

Petitioners’ Motion for Reconsideration and CA Resolution

Petitioners filed a Motion for Reconsideration dated 20 March 2009, contending that respondent had agreed to substitute engines of equivalent quality in the form of surplus engines that were old stock kept in petitioners’ warehouse, rather than secondhand or used units. They also claimed that acceptance was implied by the acts of respondent’s president who allegedly christened the lifeboats as MB Amihan and MB Habagat.

In its Resolution dated 06 July 2009, the CA denied the motion. It ruled that the installed engines, being different from the contracted specifications, constituted a breach. It further considered documentary and testimonial evidence showing that the lifeboats remained docked at Navotas in petitioners’ possession.

Issues Raised Before the Supreme Court in the Rule 45 Petition

Petitioners came before the Supreme Court through a Rule 45 petition. They reiterated their CA arguments and added the contention that the judge who wrote the RTC decision was not present during trial, thus allegedly affecting the credibility assessment of Rosario’s testimony and progress report and the validity of a delivery receipt.

The Supreme Court identified the issues as: whether a factual review was warranted because the trial judge who penned the decision differed from the judge who received the evidence; whether the case was properly one for rescission rather than merely damages or breach of contract; and whether failure to attend mediation proceedings required dismissal.

Rule 45 Scope: No Exception for a Different Decision-Pennng Judge

The Supreme Court denied the petition, first addressing the limitations of Rule 45, which permits only questions of law and does not convert the Court into a trier of facts. It reiterated that factual findings of lower courts are generally not reviewed, subject to specific recognized exceptions, and that the alleged difference between the judge who heard the evidence and the judge who penned the decision was not among them.

The Court relied on its ruling in Decasa v. CA to hold that such a difference did not render the judgment erroneous. The Court explained that even if the judge who rendered the decision did not observe witness demeanor, the judge could still base credibility determinations on the records, including transcripts of stenographic notes, and that this practice did not violate substantive or procedural due process. Petitioners could not invoke an exception where none existed.

Cause of Action and Relief: Rescission or Damages Did Not Mischaracterize the Action

On the issue of whether the CA erred in upholding the RTC’s approach, the Supreme Court held that the RTC did not substitute respondent’s cause of action. The Court described a cause of action as the act or omission that violates the rights of another. It reasoned that respondent’s complaint alleged that petitioners failed to comply with obligations under the Ship Building Contract, making such failure the cause of action. The Court explained that rescission or damages were part of the available reliefs, not the cause of action itself.

The Court approved the RTC and CA sequence: first determining whether a breach existed, then whether that breach warranted rescission and/or damages. Both lower courts had found substantial breach due to installation of engines contrary to contract specifications and failure to deliver within agreed time.

The Court reaffirmed that rescission entails mutual restitution of benefits received and that an injured party choosing rescission may still be entitled to damages. It nonetheless emphasized that mutual restitution may be rendered impossible by the factual circumstances.

Mutual Restitution and the Invalid Delivery to Rosario

The Supreme Court sustained the CA’s conclusion on restitution. It recognized that both the RTC and the CA had found that petitioners delivered the lifeboats to Rosario, but it agreed with the lower courts that Rosario was not authorized by respondent to receive them. Therefore, the Court treated the delivery to Rosario as invalid and reasoned that it was as if respondent never received the lifeboats. Because respondent never received the object, it could not be required to return it.

At the same time, the Court noted that petitioners had received payments totaling P1,516,680. Since petitioners admitted receipt of the total amount paid in consideration for the construction, the Court held that petitioners should return the same amount to respondent. This reconciled the substantial breach and rescission remedy with the impossibility of mutual restoration of the lifeboats.

Mediation Non-Attendance: No Dismissal Without Findings of Willful o

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