Vil-Rey Planners v. Lexber
REITERATIONFacts
The Antecedents: Vil-Rey Planners and Builders (Vil-Rey) and Lexber, Inc. (Lexber) entered into several construction contracts. The first contract was for compacted backfill on Lexber's property, secured by a surety bond from Stronghold Insurance Company, Inc. (Stronghold). This contract was mutually terminated. They then entered into a second contract for remaining works, followed by a third contract (Work Order No. CAB-96-09) for the completion of remaining works by January 15, 1997, with a consideration of ₱1,168,728.37. This third contract stipulated a 50% downpayment secured by a surety bond from Stronghold and a 50% balance upon completion. Stronghold issued the second surety bond for ₱584,364.19. Vil-Rey requested and was granted an extension to complete the works under the third contract, first to January 31, 1997, and then an additional five days. Vil-Rey failed to complete the works. Procedural History: Lexber filed a complaint against Vil-Rey and Stronghold for sum of money and damages. The Regional Trial Court (RTC) initially found Vil-Rey and Stronghold jointly and severally liable for ₱2,988,700.20 plus interest and attorney's fees. Upon partial reconsideration, the RTC ordered them to pay ₱1,084,364.19 in solidum with interest and reduced attorney's fees. The Court of Appeals (CA) modified the RTC order, reducing the liability to ₱284,084.46 plus interest and further reduced attorney's fees. The CA ruled that Vil-Rey was liable for breach of the third contract, and Stronghold was liable under the second surety bond for the amount Lexber paid another contractor to complete the works. The CA denied motions for reconsideration. The Petition: Vil-Rey and Stronghold filed petitions for review on certiorari before the Supreme Court, raising issues of Vil-Rey's liability for breach of contract, Stronghold's liability under the second surety bond despite contract extensions, and Lexber's entitlement to attorney's fees.
Issue(s)
Whether Vil-Rey is liable for breach of contract. Whether Stronghold's liability under the second surety bond was extinguished by the extension of the third contract. Whether Lexber is entitled to attorney's fees.
Ruling
The Supreme Court modified the Court of Appeals Decision. It held Vil-Rey Planners and Builders and Stronghold Insurance Company, Inc. jointly and severally liable to Lexber, Inc. for ₱284,084.46 with 6% interest per annum from February 17, 1997, until full payment, and 10% of ₱284,084.46 as attorney's fees. Vil-Rey Planners and Builders was ordered to indemnify Stronghold Insurance Company, Inc. for any amount the latter pays Lexber, Inc. Lexber, Inc. was ordered to pay Vil-Rey Planners and Builders ₱84,364.19 with 6% interest per annum from December 24, 1996, until full payment. The parties were allowed to compensate their respective obligations.
Ratio Decidendi
On Whether Vil-Rey is liable for breach of contract: The Court affirmed the CA's finding that Vil-Rey is liable for breach of contract. Vil-Rey's managing partner admitted in testimony that the company lacked funds to finish the works under the third contract, which was the reason for non-completion. The Court clarified that the payment terms of the third contract stipulated that the 50% balance was due upon completion of the works. Therefore, Vil-Rey could not claim it was not paid as a justification for its failure to complete the obligation. The failure to complete the works by the agreed deadline, even after extensions, constituted a breach of the reciprocal obligation, making Vil-Rey liable for damages, specifically the cost incurred by Lexber to hire another contractor to finish the job. The Court applied Article 1167 of the Civil Code, stating that the obligation shall be executed at the obligor's cost when the obligor fails to fulfill it. Furthermore, Article 2201 of the Civil Code was invoked to hold Vil-Rey liable for damages that are the natural and probable consequences of the breach, absent a clear showing of bad faith. On Whether Stronghold's liability under the second surety bond was extinguished by the extension of the third contract: The Court ruled that the extension of the third contract did not extinguish Stronghold's liability under the second surety bond. The second surety bond was a performance bond guaranteeing the full and faithful performance of Vil-Rey's obligations, not just for defects in materials and workmanship. While a material alteration of the principal contract can discharge a surety, this does not apply if the change does not make the obligation more onerous. The 15-day extension and a five-day grace period were aimed at completing the works, which would have benefited Stronghold by discharging its obligation. The Court also noted that Stronghold itself, in a letter dated March 25, 1997, sought the completion of the works, indicating it was not prejudiced by the extensions. Moreover, Stronghold's primary defense before the lower courts was that the bond only covered materials and workmanship, not the issue of extensions, which was raised for the first time in its motion for partial reconsideration before the CA. The Court reiterated the rule that issues not raised before the trial courts cannot be passed upon by reviewing courts. On Whether Lexber is entitled to attorney's fees: The Court affirmed Lexber's entitlement to attorney's fees based on contractual stipulations in all three contracts, which provided for attorney's fees of not less than 25% of the adjudged amount in case of judicial proceedings to enforce terms. However, considering the circumstances, including Vil-Rey's financial difficulties and Lexber's delay in making a partial downpayment, the Court equitably reduced the award to 10% of ₱284,084.46, applying Article 2227 of the Civil Code which allows for the equitable reduction of liquidated damages. The Court also noted that Lexber was guilty of delay regarding the amount of ₱84,364.19 for the downpayment, which would be compensated with the amount due to Vil-Rey.
Main Doctrine
The extension of time for the completion of a construction contract, when aimed at the completion of the works and does not make the surety's obligation more onerous, does not extinguish the surety's liability. Furthermore, issues not raised before the trial court cannot be raised for the first time on appeal.