In a contract involving reciprocal obligations, such as construction agreements, the failure of one party to fulfill their commitment allows the other party to seek rescission, effectively canceling the agreement. This remedy is appropriate when one party does not comply with their obligations, such as delivering promised units in exchange for completed construction work. The Supreme Court emphasizes that it will not fix a period for compliance if the breaching party has already been given ample time to fulfill their obligations, especially when doing so would further delay justice and payment to the injured party. This decision underscores the importance of fulfilling contractual obligations promptly and the right of the aggrieved party to seek rescission and damages when those obligations are not met.

Delayed Delivery: Can a Contractor Demand Monetary Compensation for Undelivered Units?

This case arose from a Contractor’s Agreement between Camp John Hay Development Corporation (CJHDC) and Charter Chemical and Coating Corporation. Charter Chemical was contracted to perform painting works on CJHDC’s property, with part of the payment to be settled by offsetting the price of two studio-type units at Camp John Hay Suites. However, CJHDC failed to deliver these units despite Charter Chemical completing its obligations. The central legal question is whether Charter Chemical is entitled to monetary compensation for the undelivered units, given CJHDC’s failure to meet its reciprocal obligation.

The heart of the legal matter lies in Article 1191 of the Civil Code, which addresses the power to rescind obligations in reciprocal agreements. This article states that in reciprocal obligations, if one party does not comply with their responsibilities, the injured party may choose between fulfilling the obligation or rescinding it, with damages in either case. Reciprocal obligations are those arising from the same cause, where each party is both a debtor and a creditor to the other, and the performance of one depends on the simultaneous fulfillment of the other.

ARTICLE 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

In this case, the Supreme Court affirmed that rescission was the proper remedy because CJHDC failed to deliver the units as agreed. The Court highlighted that Charter Chemical had completed its part of the agreement by rendering painting services, which CJHDC accepted. However, CJHDC did not fulfill its obligation to deliver the units, entitling Charter Chemical to seek rescission and damages. CJHDC argued that instead of rescission, the court should fix a period for them to comply with their obligation under Article 1197 of the Civil Code. However, the Court disagreed, stating that there was no just cause to fix such a period for CJHDC’s benefit.

Article 1197 applies when an obligation does not specify a period, but it can be inferred from the nature and circumstances that a period was intended. In such cases, courts may fix the duration. However, the Court emphasized that the power to fix a period is discretionary and should be exercised only when there is just cause. Here, CJHDC had already been given ample time to comply, and the construction of the units had been dragging on for years. The Court found no reason to further delay the payment to Charter Chemical by fixing a new period for compliance.

The Supreme Court also addressed the issue of jurisdiction, as CJHDC argued that the Construction Industry Arbitration Commission (CIAC) did not have jurisdiction over the dispute due to a dispute resolution clause in the contracts to sell, which stipulated that actions should be instituted in the proper courts of Pasig City. The Court, however, ruled that the CIAC had jurisdiction because the Contractor’s Agreement contained an arbitration clause, which took precedence. The contracts to sell were merely devices to facilitate the transfer of ownership of the units and did not supersede the arbitration clause in the primary agreement.

SECTION 4. Jurisdiction. – The CIAC shall have original and exclusive jurisdiction over disputes arising from, or connected with, contracts entered into by parties involved in construction in the Philippines, whether the dispute arises before or after the completion of the contract, or after the abandonment or breach thereof.

Furthermore, the Court affirmed the award of attorney’s fees to Charter Chemical. Generally, attorney’s fees are not awarded unless stipulated or in specific instances provided by law, such as when a party’s act or omission compels the other to litigate or incur expenses to protect their interest. In this case, CJHDC’s unjustified refusal to pay Charter Chemical compelled the latter to file a complaint and incur legal expenses. The Court found that CJHDC had breached the reciprocity of the contract, and it was only equitable to award attorney’s fees to Charter Chemical.

Rescission under Article 1191 requires mutual restitution, meaning both parties must return what they have received under the contract. However, in this case, Charter Chemical had already performed the painting services, which could not be undone. Therefore, the Court ordered CJHDC to pay Charter Chemical the value of the painting services with interest, computed from the date of extrajudicial demand. This ensures that Charter Chemical is compensated for the services it rendered and that CJHDC does not unjustly benefit from its breach of contract.

What was the key issue in this case?	The key issue was whether Charter Chemical was entitled to monetary compensation for undelivered units under a Contractor’s Agreement, given CJHDC’s failure to meet its reciprocal obligation.
What is rescission under Article 1191 of the Civil Code?	Rescission is a remedy available in reciprocal obligations where one party fails to comply with their obligations, allowing the injured party to cancel the contract and seek damages.
Why did the Supreme Court rule in favor of rescission?	The Court ruled in favor of rescission because CJHDC failed to deliver the units as agreed, despite Charter Chemical completing its obligations. This breach of contract entitled Charter Chemical to seek rescission and damages.
What is the significance of Article 1197 in this case?	Article 1197 allows courts to fix a period for compliance when an obligation does not specify a period, but the Court found no just cause to apply it in this case, as CJHDC had already been given ample time to comply.
Did the CIAC have jurisdiction over this dispute?	Yes, the CIAC had jurisdiction because the Contractor’s Agreement contained an arbitration clause, which took precedence over the dispute resolution clause in the contracts to sell.
Why was Charter Chemical awarded attorney’s fees?	Charter Chemical was awarded attorney’s fees because CJHDC’s unjustified refusal to pay compelled Charter Chemical to file a complaint and incur legal expenses to protect its interests.
What is mutual restitution in the context of rescission?	Mutual restitution requires both parties to return what they have received under the contract. In this case, since Charter Chemical’s painting services could not be undone, CJHDC was ordered to pay the value of those services with interest.
What does this case imply for construction contracts?	This case underscores the importance of fulfilling contractual obligations promptly. It affirms the right of the aggrieved party to seek rescission and damages when those obligations are not met, and that arbitration clauses will be upheld.

This decision highlights the importance of fulfilling reciprocal obligations in contracts and the remedies available to the injured party when a breach occurs. The Supreme Court’s ruling reinforces the principle that parties must honor their agreements and that failure to do so can result in rescission and the payment of damages, including attorney’s fees. The decision serves as a reminder to construction companies and contractors to adhere to their contractual obligations to avoid legal repercussions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: CAMP JOHN HAY DEVELOPMENT CORPORATION vs. CHARTER CHEMICAL AND COATING CORPORATION, G.R. No. 198849, August 07, 2019