Title
Velasco vs. Court of Appeals
Case
G.R. No. L-47544
Decision Date
Jan 22, 1980
Alta Farms defaulted on GSIS loans; petitioners built houses on foreclosed land, unpaid. SC ruled GSIS liable for labor/materials under equity and Civil Code, awarding P607,328.27 plus interest and attorney’s fees.
liability
contractors
construction
A

Case Summary (G.R. No. L-47544)

Petitioners

Contractors who built houses pursuant to contracts with Laigo Realty Corporation (and with home buyers through Laigo). They claim unpaid balances for materials and labor totaling P607,328.27 (broken down among petitioners) and sought interest, attorney’s fees, and other relief.

Respondent (GSIS)

GSIS foreclosed on Alta Farms’ mortgaged property; acquired ownership of the lots and improvements (houses). GSIS denied contractual privity with petitioners and relied on Laigo’s Deed of Quitclaim (May 7, 1970) and urged that Laigo should be joined as a party. GSIS also argued against the trial court’s fourfold revaluation of petitioners’ claim based on judicial notice of inflation.

Key Dates

  • Contracts between Laigo and contractors: late 1969–1970.
  • Deed of Quitclaim by Laigo to GSIS: May 7, 1970.
  • GSIS foreclosure and issuance of certificates of sale: 1970–1971 (consolidation in Nov–Dec 1971).
  • Petitioners’ extrajudicial demand: August 3, 1974.
  • Complaint filed by petitioners: April 14, 1975.
  • Trial court judgment awarding inflated amount (and revaluation): decision quoted in record.
  • Court of Appeals decision: December 6, 1977 (procedural issue on motion for new trial).
  • Supreme Court decision (opinion): January 22, 1980.

Applicable Law and Constitutional Basis

Operative constitution at the time of decision: the 1973 Philippine Constitution. Governing statutory and civil-law authorities applied and discussed in the opinion include Article 1729, Article 1311, Article 2242 (Civil Code), Article 2208 (Civil Code), and applicable special laws and banking circulars referenced by the courts (e.g., Central Bank Circular No. 416). Republic Act No. 5440 governed conversion of the certiorari petition into an appeal.

Procedural Posture and Conversion to Appeal

The petition was framed as certiorari (erroneously citing Rule 65). The Supreme Court, observing that the parties’ pleadings and the record presented undisputed material facts and complete argumentation on the merits, exercised judicial economy and converted the proceeding into an appeal under R.A. 5440 rather than confining review to the narrow procedural question concerning the effect of GSIS’s timely motion for new trial. The Court required the parties to state whether factual issues would be involved in the intended appeal and, finding none that required remand, treated the case as submitted for decision on appeal.

Material Facts Found and Evidentiary Posture

  • Petitioners established by written admissions and documentary exhibits that they constructed houses, furnished materials and labor, and have outstanding balances. Petitioners’ own letters and exhibits (checks, itemizations, lists of home buyers and balances) were in evidence.
  • Laigo issued checks to petitioners which were dishonored; Laigo was the direct contracting party with the petitioners and with the home buyers.
  • GSIS foreclosed the mortgaged property and became the owner of the lots and the houses (improvements). GSIS admitted it had not collected payments from the occupants.
  • The parties filed a Joint Manifestation in the trial court that stipulated material facts, including that Laigo had executed a quitclaim/undertaking; that petitioners’ claims related to Laigo’s development activities; and that GSIS had not collected from house occupants. Those stipulations were not disputed and thus stood as uncontroverted evidence.

Trial Court Ruling

The trial court accepted petitioners’ evidence and, taking judicial notice of inflation, substantially revalued petitioners’ asserted actual costs (P607,328.27) by multiplying upward (apparently by fourfold) to reflect present value, arriving at an award around P2.4 million. The trial court justified revaluation by reference to inflation and a labor-to-materials ratio, awarding the revalued sum.

Court of Appeals Ruling (procedural point)

The Court of Appeals, by a vote of four to one, declared null and void a trial-court order that had declared the trial-court judgment final and executory, concluding that GSIS’s timely motion for new trial was not pro forma and suspended the appeal period. The CA thus ordered the trial court to approve GSIS’s record on appeal and to give due course to the appeal, setting aside its prior restraining order. (Supreme Court recognized this procedural contest but broadened review.)

Issues Presented to the Supreme Court

  • Procedural: whether the Court of Appeals erred in characterizing GSIS’s motion for new trial as not pro forma and in its relief on that basis.
  • Substantive (as accepted by the Supreme Court after conversion to appeal): whether GSIS is liable to petitioners for unpaid labor and materials for houses now owned by GSIS, despite lack of direct contractual privity; the legal effect of Laigo’s Deed of Quitclaim/Undertaking; whether petitioners were required to join Laigo; the proper measure of recovery given inflation; and entitlement to interest, attorney’s fees, and costs.

Supreme Court’s Conclusions on Facts and Legal Issues

  • On facts: The Supreme Court found the material facts to be undisputed — petitioners constructed houses; Laigo contracted with petitioners; Laigo’s checks bounced; GSIS foreclosed and became owner of the houses; petitioners’ claims were supported by documentary evidence and admissions; and the parties’ stipulations in the trial court were binding.
  • On the Deed of Quitclaim: The Court analyzed the May 7, 1970 Deed of Quitclaim and held that, properly construed, it did not absolve GSIS of liability to petitioners. Rather, GSIS, by accepting the benefits of the development and by the language of the quitclaim (which contemplated and reserved possible liabilities and indemnity), assumed a potential liability to parties like petitioners and thus could be held liable while retaining a right to seek indemnity from Laigo. The Deed’s reservation of indemnity evidenced that GSIS contemplated possible claims arising from the development.
  • On privity and Article 1729: The Court applied Article 1729 of the Civil Code (laborers/materialmen’s action against the owner up to amount owing to the contractor) and treated petitioners’ claims as the functional equivalent of claims of laborers and materialmen. Under the circumstances — where GSIS owned the improvements and benefited from them and Laigo had not paid petitioners — the Court held that GSIS was liable to petitioners despite lack of direct contractual privity. Article 1729 creates a constructive vinculum (an exception to the privity requirement) to protect laborers and materialmen.
  • On Article 1311 and other defenses: The Court rejected GSIS’s reliance on Article 1311 (no contract, no obligation) because Article 1729 supplies an exception that allows action against the owner in equity and law. Article 525 (relating to builder’s good or bad faith) was said not to be determinative here because GSIS had accepted benefits and the quitclaim evidenced GSIS’s acknowledgment of potential liability.
  • On joinder of Laigo: The Court held that while Laigo was a necessary party, it was not indispensable; petitioners were not required to join Laigo to pursue recovery against GSIS. GSIS retained the right to seek indemnity from Laigo.

Measure of Recovery, Inflation, Interest and Attorney’s Fees

  • On revaluation for inflation: The Supreme Court found that the trial court’s fourfold revaluation was not a permissible mechanical uplift based solely on judicial notice. Although inflation and increased costs of materials and labor were judicially cognizable, the Court declined to multiply petitioners’ claimed amount by four as the trial court had done. The Court noted petitioners had prayed for recovery of P607,328.27 “in its current value due to inflation,” but declined to effectuate a revaluation to the trial court’s fourfold extent on the record before it.
  • On interest: The Supreme Court awarded interest on the amount properly recoverable. Although in its analysis it noted that 12% per annum from filing might be a fair measure, the Court ultimately awarded interest at 8% per annum from April 14, 1975 (the date of filing the complaint) until fully paid — the rate used in the final judgment. The Court indicated this rate was less than that allowed by the Central Bank circular but adopted it in the judgment.
  • On attorney’s fees and costs: The Court awarded attorney’s fees in the aggregate amount of P50,000, finding it jus

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