DEL MONTE PHILIPPINES, INC., petitioner, vs.

NAPOLEON N. ARAGONES, respondent.

[G.R. No. 153033. June 23, 2005.]

Doctrine

Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security
for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or
a third person, the contract is a pledge and not a chattel mortgage. (n)

RTC CA SC

held in favor of Aragones, holding Court affirmed the RTC’s ruling.

Garcia/MEGA-WAFF and DMPI petition is DENIED.
jointly and severally liable

Facts

- Del Monte Philippines Inc. (DMPI) entered into an Agreement with Mega Engineering Services in joint
venture with WAFF Construction System Corporation (MEGA-WAFF), represented by Managing
Principal Edilberto Garcia, whereby the latter undertook the supply and installation of modular pavement at
DMPIs condiments warehouse at Cagayan de Oro City.
-
- MEGA - WAFF, represented by Garcia, entered a Supply Agreement with Dynablock Enterprises,
represented by Napoleon Aragones. MEGA -WAFF failed to meet the deadline stated in the Agreement
with DMPI, thus they were penalized for the delay.

- Under the Supply Agreement, it stated:

PERFORMANCE BOND

The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which may be deemed
adequate to secure its faithful compliance of the terms and conditions of this agreement.

11. PERFORMANCE BOND

The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which may be
deemed adequate to secure its faithful compliance of the terms and conditions of this
agreement.

12. PENALTY CLAUSE

In the event the SUPPLIER fails to meet the requirements demanded in this agreement
or when the SUPPLIER is in delay in the performance of its obligation to the prejudice of
the CONTRACTOR, the SUPPLIER shall answer for the corresponding damages
equivalent to one-tenth (1/10) of the rated monthly production capacity. (Emphasis
and underscoring supplied).3

- After the installation, MEGA- WAFF failed to pay Aragones. Aragones wrote a letter to DMPI requesting
that the payment be made directly to him instead of MEGA-WAFF.

- DMPI however released the payment to Garcia.

- Aragones was then prompted to file a complaint for a sum of money (P 188,652.65) with damages against
Garcia and/or MEGA-WAFF and DMPI.

- DMPI appealed to the Court of Appeals, but the court affirmed the RTC’s ruling.

Issue

● CORRECT: WAS THE SUPPLY AGREEMENT A CONTRACT OF SALE? Or for a piece of work?

● Is a surety/performance bond a chattel mortgage?

Ruling

At this juncture it is well to note that the Supply Agreement was in the nature of a contract for a piece
of work. The distinction between a contract of sale and one for work, labor and materials is tested by
inquiry whether the thing transferred is one not in existence and which never would have existed but
for the order of the party desiring to acquire it, or a thing which would have existed but has been the
subject of sale to some other persons even if the order had not been given. If the article ordered by
the purchaser is exactly such as the seller makes and keeps on hand for sale to anyone, and no
change or modification of it is made at purchaser’s request, it is a contract of sale  even though it
may be entirely made after, and in consequence of the purchaser’s order for it. [Commissioner of
Internal Revenue vs. Engineering Equipment and Supply Company, G.R. No. L-27044, June 30,
1975]

In the case at bench, the modular paving blocks are not exactly what the plaintiff-appellee
makes and keeps on hand for sale to anyone, but with a modification that the same be "S" in
shape. Hence, the agreement falls within the ambit of Article 1467 making Article 1729 likewise
applicable in the instant case.

As regard the issue of privity of contracts, We need to add only that Article 1311 of the New Civil
Code which DMPI invokes is not applicable where the situation contemplated in Article 1729 obtains.
The intention of the latter provision is to protect the laborers and the materialmen from being taken
advantage of by unscrupulous contractors and from possible connivance between owners and
contractors. Thus, a constructive vinculum or contractual privity is created by this provision, by way
of exception to the principle underlying Article 1311 between the owner, on the one hand, and those
who furnish labor and/or materials, on the other. [Velasco vs. Court of Appeals, G.R. No. L-47544,
January 28, 1980]

As a matter of fact, insofar as the laborers are concerned, by a special law, Act no. 3959, otherwise
known as "An Act making it obligatory for any person, company, firm or corporation owning any work
of any kind executed by contract to require the contractor to furnish a bond guaranteeing the
payment of the laborers." they are given added protection by requiring contractors to file bonds
guaranteeing payment to them.

It is true that defendant-appellant had already fully paid its obligation to defendant Garcia however,
the former’s payment to the latter does not extinguish its legal obligation to plaintiff-appellee because
such payment was irregular. The former should have taken care not to pay to such contractor the full
amount which he is entitled to receive by virtue of the contract, until he shall have shown that he first
paid the wages of the laborer employed in said work, by means of an affidavit made and subscribed
by said contractor before a notary public or other officer authorized by law to administer oaths. There
is no showing that defendant appellant DMPI, as owner of the building, complied with this
requirement paid down in Act No. 3959. Hence, under Section 2 of said law, said defendant-
appellant is responsible, jointly and severally with the general contractor, for the payment to plaintiff-
appellee as sub-contractor.

In this connection, while, indeed, Article 1729 refers to the laborers and materialmen themselves,
under the peculiar circumstances of this case, it is but fair and just that plaintiff-appellee be deemed
as suing for the reimbursement of what they have already paid the laborers and materialmen, as
otherwise he would be unduly prejudiced while either defendant-appellant DMPI or defendant Garcia
would enrich themselves at plaintiff-appellee’s expense.

Be that as it may, We so hold that plaintiff-appellee has a lawful claim against defendant-appellant
DMPI, owner of the constructed warehouse since it disregarded the notice of claim of plaintiff-
appellee, at a time when the amounts owing from defendant-appellant DMPI to defendant GARCIA
were more than sufficient to pay for plaintiff-appellee’s claim. The least that defendant-appellant
should have done was to withhold payment of the balance still owing to defendant Garcia as until the
claim of plaintiff-appellee was clarified. (Italics in the original; emphasis and underscoring supplied). 24

Other notes

● A performance bond is issued to one party of a contract as a guarantee against the failure of the other
party to meet obligations specified in the contract. Should the contractor fail to perform his job, a
performance bond shall be used as compensation for damages.

● Other issue:

Was the Supply Agreement between Aragones and MEGA-WAFF one for a piece of work?

- Yes. Contrary to DMPI’s claim, the Supply Agreement is replete with specifications, terms or
conditions showing that it was one for a piece of work. The machines Aragones was obliged to
fabricate were those for casting the concrete blocks specified by Garcia. Aragones did not have
those kinds of machines in his usual business, hence, the special order. Under Article 1467 of the
Civil Code, if the goods are to be manufactured specially for the customer and upon his special
order, and not for the general market, it is a contract for a piece of work. The Supply Agreement
was decidedly a contract for a piece of work.
Full text
THIRD DIVISION

[G.R. NO. 153033 : June 23, 2005]

DEL MONTE PHILIPPINES, INC., Petitioner, v. NAPOLEON N.

ARAGONES, Respondent.

DECISION

CARPIO-MORALES, J.:

The decision in the present Petition for Review on Certiorari hinges on the nature of the
contract denominated "Supply Agreement"1 which was forged between Dynablock
Enterprises, represented by its Manager herein respondent Napoleon N. Aragones
(Aragones) and Mega-Engineering Services in joint venture with WAFF Construction
System Corporation (MEGA-WAFF) - whether it was one of sale or for a piece of work.

On September 18, 1988, herein petitioner Del Monte Philippines Inc. (DMPI) entered
into an "Agreement"2 with MEGA-WAFF, represented by "Managing Principal" Edilberto
Garcia (Garcia), whereby the latter undertook "the supply and installation of modular
pavement" at DMPI's condiments warehouse at Cagayan de Oro City within 60 calendar
days from signing of the agreement.

To source its supply of concrete blocks to be installed on the pavement of the DMPI
warehouse, MEGA-WAFF, as CONTRACTOR represented by Garcia, entered into
a "Supply Agreement" with Dynablock Enterprises,represented by herein respondent
Aragones, as SUPPLIER, under the following terms:

1. ITEMS TO BE SUPPLIED

The SUPPLIER at its own expense shall provide the CONTRACTOR with labor and all
materials, equipment, tools and supplies necessary and incident thereto, the required
concrete blocks at the contractor's specified casting site, all in accordance with
the terms and conditions of this agreement, as well as the requirements of the
project specifications and provisions with respect to the fabrication of concrete blocks.

2. PRICE

The CONTRACTOR will pay the supplier in consideration for the full and total
performance of the above undertaking, inclusive of all applicable taxes, the unit price
of P7.00 per supplied and accepted piece. This price is based on the assumption that
the cost per bag of premium cement is P54.00 and aggregate at P95.00 per cu. m. Any
increase of the above raw materials shall be to the account of the contractor. All taxes
shall be for the account of the contractor.

3. PLANT/EQUIPMENT
3.1 - The machines for the fabrication/casting of the concrete blocks, including all
necessary equipment and accessories, shall be provided by the SUPPLIER. The
machines and equipment shall be mobilized and made operational at the specified
casting location/stockpiling yard designated and provided by the CONTRACTOR.

3.2 - The SUPPLIER shall ensure that all plant facilities/equipment must, at all times,
be accessible for inspection by the representatives of the CONTRACTOR.

3.3 - The SUPPLIER shall ensure that the plant/casting machines actual operating
capacities shall not be lower than 75,000 pieces every month. If at any time within the
life of this agreement the plant/casting machines are proven to be operating below the
required minimum capacity as aforesaid, the SUPPLIER shall be obliged to take the
necessary actions to upgrade the plant/casting machines and/or make the necessary
rehabilitation to increase the capacity to the required level.

4. QUALITY OF MATERIALS

4.1 - The SUPPLIER guarantees that all materials supplied to the CONTRACTOR
shall meet the approved specifications (Attached Annex "A") at 5,000 pci.

In this connection, the CONTRACTOR shall assign an inspector at the casting site to

ensure that all items supplied shall conform with the approved standards.

4.2 - The CONTRACTOR may reject any finished product or materials which do not pass
the approved standards.

4.3 - There shall be a system of sampling the output of the plant and/or each casting
machine for testing in accordance with the quality standards specified. Result of such
sampling tests shall be the basis for acceptance or rejection of the finished materials.

4.4 - Where the CONTRACTOR has provided materials to the SUPPLIER to be

incorporated into the SUPPLIER's production, as in the case of cement and
aggregates, the cost of such materials which becomes part of the rejected
products due to faulty batching/mixing/curing shall be for the account of the
SUPPLIER.

5. MATERIALS AND OTHER PROVISIONS SUPPLIED BY THE CONTRACTOR

5.1 - All the materials are for the account of the SUPPLIER. The CONTRACTOR shall,
however, provide all the cement and aggregates requirement for the
fabrication of the concrete blocks, in which the corresponding cost shall be
deducted from the periodical proceeds due to the SUPPLIER.

5.2 - The CONTRACTOR shall provide and make available to the SUPPLIER the following
provisions/facilities free of charge:

a) Casting/Fabrication Area

b) Stockpile Area
c) Warehouse for Cement

d) An all-weather working shed for workers

e) Night Watchers

5.3 - The CONTRACTOR shall arrange for the installation of electrical and water facilities
for the work in which the cost of electricity and water actually consumed shall be borne
by the SUPPLIER.

5.4 - The SUPPLIER shall be responsible for all materials already turned over by the
CONTRACTOR at the casting area. The responsibility, however, of the SUPPLIER on the
finished products ceases upon loading of the same to the CONTRACTOR's truck on way
to the project site.

6. OBLIGATIONS OF SUPPLIER

6.1 - To fabricate and provide the required block machines in such number
adequate to cope up with time schedule.

6.2 - To provide concrete mixers: one (1) unit of two-bagger, and two (2) units of one-
bagger.

6.3 - To provide drying racks, measuring boxes, wheel borrows and other necessary

hand tools.

6.4 - To supervise and provide the required manpower for the operation and production
of concrete blocks.

6.5 - To undertake the following:

a) mixing and formulation of proper mix.

b) to consolidate, form and compress the blocks.

c) to unload the formed blocks into the drying racks.

d) after initial setting of blocks, to unload and arrange them to wooden pallets.

e) curing of blocks as per approved standards.

7. OTHER OBLIGATIONS OF CONTRACTOR

7.1 - To provide tarpaulin or canvas or plastic sheets to cover blocks during the
seasoning stage.

7.2 - To provide forklift and wooden pallets.

8. EXCLUSIVITY OF PRODUCTION

8.1 - Effective upon the execution of this agreement, the SUPPLIER binds itself
to devote the entire plant/casting machines and its accessories for the
CONTRACTOR's exclusive use and full operation and production of the required
concrete blocks for the intended project.

8.2 - The SUPPLIER or his agents or representatives shall not, directly or indirectly,
enter into any contract, agreement, concessions or transactions of whatever nature or
kind with the project owner or of its representative which will affect the rights, interest
or participation of the CONTRACTOR in regard to the execution and accomplishment of
the project.

8.3 - In case of violation of this exclusivity clause, utmost fidelity and good faith being
of the essence, the CONTRACTOR shall have the right to demand reasonable amount of
damages or terminate this agreement upon due notice.

9. CONDITIONS OF PAYMENT

9.1 - Upon mobilization of the casting machines, equipments accessories and making
some operational at the casting area by the SUPPLIER, the CONTRACTOR shall advance
to the supplier a downpayment or mobilization fund of TEN THOUSAND (P10,000.00)
PESOS per machine. Said mobilization fee shall be deducted from the proceeds of the
SUPPLIER at two (2) equal installments beginning at the first billing.

9.2 - The SUPPLIER shall present its billing every fifteen days based on the below
indicated payment schedule:

a) Billing from 1st/day/month to 15th day payable after fifteen days from the date the
billing is submitted.

b) Billing from the 16th day of the month to the 31st day of the month, payable after
fifteen days from the date the billing is submitted.

10. EFFECTIVITY OF CONTRACT

This agreement shall be co-terminus with the terms of the contract for the project
and/or upon completion of all requirements therefor; PROVIDED, However, that if for
some reason or another the production of the concrete blocks is temporarily suspended,
this agreement shall remain in force and effective for a period of fifteen (15) days from
the date of the cessation of production. In case the said grace period expires without
the production having resumed, the CONTRACTOR shall be obliged to pay reasonable
compensation for the period of suspension counted from the expiration of the said
grace period.

11. PERFORMANCE BOND
The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which may be
deemed adequate to secure its faithful compliance of the terms and conditions of this
agreement.

12. PENALTY CLAUSE

In the event the SUPPLIER fails to meet the requirements demanded in this agreement
or when the SUPPLIER is in delay in the performance of its obligation to the prejudice of
the CONTRACTOR, the SUPPLIER shall answer for the corresponding damages
equivalent to one-tenth (1/10) of the rated monthly production capacity. (Emphasis
and underscoring supplied).3

Aragones thereupon started assembling the machines for the fabrication/casting of the
concrete blocks which MEGA-WAFF specified to be hexagonal shaped. MEGA-WAFF,
through Garcia, later directed Aragones to instead fabricate machines for S shaped
blocks.

As stated in the "Agreement" between DMPI and MEGA-WAFF, the deadline for the

installation of the pavement of the warehouse was November 18, 1988, but it was not
met. As extended, the installation was finished on or about February 28, 1989, but
MEGA-WAFF was, in accordance with its agreement with DMPI, penalized for the delay,
albeit at a reduced amount.

Aragones, having in the meantime gotten wind of MEGA-WAFF &

DMPI's "Agreement," more particularly the imposition of a penalty by DMPI for the
delay in the completion of the installation of the warehouse pavement, appealed to
DMPI, by letter of March 4, 1989,4 for leniency in the imposition of the penalty which
"would affect [him] also although [he] was not a direct party to the contract," he
inviting attention to the "intricacy and enormity of the job involved."

Aragones later failed to collect from MEGA-WAFF the full payment of the concrete
blocks. He thus sent DMPI a letter dated March 10, 1989,5 received by the latter on
March 13, 1989,6 advising it of MEGA-WAFF's unpaid obligation and requesting it to
earmark and withhold the amount of P188,652.65 "from [MEGA-WAFF's] billing" to be
paid directly to him "[l]est Garcia collects and fails to pay [him]."

DMPI, in the meantime, verbally advised Aragones to secure a court order directing it to
withhold payment of the amount due MEGA-WAFF for, in the absence of such court
order, DMPI was under its agreement with MEGA-WAFF obliged to release full payment
within 30 days from acceptance of the completed work.

It appears that Aragones reiterated his request to DMPI for direct payment to him, by
letter of March 28, 1989.7 This was followed by another letter dated April 6,
19898 which was received on April 8, 19899 by DMPI, copy of which it referred to
Garcia, by letter of April 27, 1989,10 for his comment.

By letter of May 3, 198911 addressed to DMPI, Garcia, commenting on Aragones' April 6,

1989 letter, stated:
 xxx

If there is somebody who have (sic) justifiable ground to complain, it is MEGA-WAFF

against Atty. Aragones for all the miseries and embarrassment we had suffered due to
the factors attributable to Atty. Aragones Dynablock Enterprises.

For proper evaluation of things and to give both parties a fair chance, we enclosed (sic)
pertinent papers for your perusal.

As contractor and businessman, it is our firm policy not to take advantage of other
people and definitely not to renegade (sic) from commitments/obligations.

We are willing to pay Atty. Aragones but based on the actual accomplishment and
amount only due to him as per reconciliation furnished to him. (attached)

We sincerely hope that the facts we had presented will suffice, and please accept our
apology for whatever inconvenience it has caused you and we pray that this matter of
payments be settled soon for the general benefit of all concerned.

x x x (Underscoring supplied).

It turned out that DMPI had, on or about April 6, 1989, released to MEGA-WAFF a check
dated April 4, 1989 in the amount of P157,863.77 representing DMPI's balance of its
obligation to MEGA-WAFF.

Aragones was thus prompted to file on May 25, 1989 a complaint12 for sum of money
(P188,652.65) with damages against Garcia and/or MEGA-WAFF and DMPI before the
Regional Trial Court (RTC) of Lanao del Norte which was raffled to Branch 5 thereof.

Aragones impleaded DMPI on the strength of Articles 1729 and 1467 of the Civil Code,
he contending that it was liable to him who put labor upon or furnished materials for a
piece of work.

By his July 14, 1989 Answer,13 Garcia, without disputing the amount being collected by
Aragones, justified his "refusal to satisfy [Aragones'] demand" by claiming that
Aragones defaulted in his obligation under the "Supply Agreement".

DMPI, by its Answer14 of June 25, 1989, pleaded that Aragones had no cause of action
against it as it had no privity of contract with him; that it had already paid MEGA-WAFF
the full amount due it; and that it had not committed any actionable wrong against
Aragones.

Aragones later filed an Amended Complaint,15 with leave of court, "to cure certain
formal defects in the original complaint as to the designation of parties . . ."

DMPI also later filed a Motion for Leave to File an Amended Answer with Cross-Claim
against Garcia and WAFF President Francisco Castro16 which the trial court granted. In
the Amended Answer with Cross Claim,17 DMPI alleged, inter alia, that "[i]n the event
[Aragones] succeeds in obtaining a judgment [against] DMPI, that said judgment
should be charged to and paid by the cross-defendants who have collected the full
contract price of the Agreement wherein [Aragones] claims the rights of a
subcontractor, plus consequential damages" (underscoring in the original).

The trial court, upon the following issues:

A. Whether or not [Aragones] has still a collectible amount of P188,652.65 from
defendants Garcia and Castro;

b. Whether or not defendant DMPI may also be held accountable for this unpaid
obligation of defendant Garcia/MEGA-WAFF;

c. Whether or not the remaining balance of defendant DMPI account payable

is P188,652.65 insisted by defendant Garcia/MEGA-WAFF or only P157,863.77 insisted
by defendant DMPI;

d. Whether or not the parties are entitled to damages pleaded;

e. Whether or not there was delay in the performance of the respective obligations of
either party or both;

f. Assuming that defendant DMPI is liable to plaintiff, whether or not cross defendant
Garcia/MEGA-WAFF shall be liable to DMPI for reimbursement.18,

found for the plaintiff Aragones in light of the following considerations:

Those who put their labor upon or furnish materials for a piece of work undertaken by

the contractor have an action against the owner up to the amount owing from the latter
to the contractor at the time the claim is made. However, the following shall not
prejudice the laborers, employees and furnishers of materials:

(1) Payments made by the owner of the contractor before they are due;

(2) Renunciation by the contractor of any amount due him from the owner.

This article is subject to the provisions of special laws (1597a)

(Article 1729, New Civil Code, [emphasis supplied]).

In interpreting the foregoing provision, the Supreme Court made the following pertinent
pronouncement:

"Article 1729 is promulgated to protect the laborers and the materialmen from being
taken advantage of by unscrupulous contractors and from possible
connivance between owners and contractors." (Velasco v. C.A. 95 Phils. (sic) (616-
641).
"The legal issue that arises is whether or not GSIS is liable to the petitioners for the
cost of the materials and labor furnished by them in construction of the 63 houses now
owned by the GSIS and for the construction of which no payment has been made on
the balance due to petitioners. Our considered view is and we so hold that even
in equity alone, GSIS should pay the petitioners, without prejudice to its securing
indemnity from Laigo Realty Corp." (Velaso v. C.A., 95 Phils. (sic) 616-641 [emphasis
and underscoring supplied]).

Moreover, anent this matter another decisional rule, says:

"Although there was no privity of contract between plaintiff and defendant Joven, Inc.,
there is sufficient evidence showing that he had really supplied stones and sands to said
defendant and also removed dirt and soil from its construction site. And it is this main
point which calls for resolution in the light of the provisions of Art. 1729 of the New Civil
Code, to determine whether or not defendant corporation is liable for materials supplied
and services rendered by the plaintiff. It is quite clear that the owner of the building,
Joven Inc. is liable for materials and labor furnished to the contractor "up to the
amount owing from the latter to the contractor" and to enforce such liability, the law
allows the person furnishing labor or materials to bring his right of action
directly against the owner." (Flores v. Ruelo, CA 52 OG 850, [emphasis and
underscoring supplied]).

Of course, while defendant DMPI is indeed directly liable to pay plaintiff the cost of the
construction material (modular paving blocks) sought to be collected, this defendant
has also a right of recourse against cross defendant Garcia/MEGA-WAFF for
reimbursement of whatever amount it will be required here to pay plaintiff, otherwise it
would result in making defendant Garcia/MEGA-WAFF enrich itself at the expense of
defendant DMPI. Additionally since the evidence on record shows that plaintiff was
compelled to litigate this matter if only to collect a just and demandable obligation, the
refusal of these defendants to pay their obligation upon demand could not be justified
in law, thus both defendants should be condemned to pay exemplary damages in the
amount of P20,000.00 each and attorney's fees in the amount of P10,000.00 each,
including the cost of this suit. (Underscoring supplied)19

The trial court accordingly rendered judgment in favor of Aragones by decision20 of

September 11, 1992, the dispositive portion of which reads:

WHEREFORE, the foregoing premises considered, the Court finds that there is ample
reason in law and preponderant evidence on record to sustain the cause of action of
plaintiff asserted against both defendants, thus judgment is now rendered granting the
following relief:

A. That the defendants Garcia/MEGA-WAFF and DMPI shall be liable to jointly and
severally pay plaintiff the unpaid cost of the modular paving blocks construction
material which he delivered to defendant DMPI priced at P188,652.65 and in the
event that defendant DMPI will be made to pay the full amount of this particular
obligation, the defendant Garcia MEGA-WAFF must reimburse said defendant such
amount;
b. That this unpaid obligation sought to be collected must bear legal interest of 12%
per annum from the time there was an extrajudicial demand made by plaintiff last
March 01, 1989; and cralawlibrary

c. Lastly, these defendants are condemned that each pay plaintiff P20,000.00 for

exemplary damages and P10,000.00 for attorney's fees, including the cost of this suit.

SO ORDERED. (Emphasis and underscoring supplied).21

On appeal to the Court of Appeals (CA) by only DMPI, upon the following assigned
errors:

THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF DID NOT INCUR DELAY AND
VIOLATE ITS SUPPLY AGREEMENT WITH DEFENDANT MEGA-WAFF;

II

THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT MEGA-WAFF'S LIABILITY TO

PLAINTIFF IS P188,652.65 BECAUSE AS STIPULATED IN THE SUPPLY AGREEMENT, THE
CEMENT AND AGGREGATES USED IN THE MANUFACTURE OF THE BLOCKS WERE
ADVANCED BY MEGA-WAFF, THE COST OF WHICH WILL BE DEDUCED FROM
PLAINTIFF'S BILLINGS;

III.

THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT DMPI IS ALSO LIABLE TO
PLAINTIFF FOR ANY LIABILITY OF MEGA-WAFF UNDER THE SUPPLY AGREEMENT;

IV.

ASSUMING EX GRATIA ARGUMENTI THAT DMPI IS LIABLE TO PLAINTIFF'S

AID LIABILITY CANNOT EXCEED THE SUM OF P157,863.77 BALANCE OF THE
CONTRACT PRICE BETWEEN DMPI AND MEGA-WAFF, LESS AGREED PENALTY FOR LATE
DELIVERY AS LIQUIDATED DAMAGES;

V.

THE TRIAL COURT ERRED IN HOLDING DEFENDANT DMPI LIABLE TO PLAINTIFF FOR
ATTORNEY'S FEES AND COSTS OF COLLECTION CONSIDERING THAT IT HAD THE
RIGHT TO RESIST PAYMENT BECAUSE IT HAS NO PRIVITY OF CONTRACT BETWEEN
PLAINTIFF AND DEFENDANT MEGA-WAFF, (Underscoring supplied),22
the CA, by decision of September 19, 200123 subject of the
petition at bar, affirmed the trial court's decision in this wise:
At this juncture it is well to note that the Supply Agreement was in the nature of a
contract for a piece of work. The distinction between a contract of sale and one for
work, labor and materials is tested by inquiry whether the thing transferred is one not
in existence and which never would have existed but for the order of the party desiring
to acquire it, or a thing which would have existed but has been the subject of sale to
some other persons even if the order had not been given. If the article ordered by the
purchaser is exactly such as the seller makes and keeps on hand for sale to anyone,
and no change or modification of it is made at purchaser's request, it is a contract of
sale even though it may be entirely made after, and in consequence of the purchaser's
order for it. [Commissioner of Internal Revenue v. Engineering Equipment and Supply
Company, G.R. No. L-27044, June 30, 1975]

In the case at bench, the modular paving blocks are not exactly what the plaintiff-
appellee makes and keeps on hand for sale to anyone, but with a modification that
the same be "S" in shape. Hence, the agreement falls within the ambit of Article 1467
making Article 1729 likewise applicable in the instant case.

As regard the issue of privity of contracts, We need to add only that Article 1311 of the
New Civil Code which DMPI invokes is not applicable where the situation contemplated
in Article 1729 obtains. The intention of the latter provision is to protect the laborers
and the materialmen from being taken advantage of by unscrupulous contractors and
from possible connivance between owners and contractors. Thus, a constructive
vinculum or contractual privity is created by this provision, by way of exception to the
principle underlying Article 1311 between the owner, on the one hand, and those who
furnish labor and/or materials, on the other. [Velasco v. Court of Appeals, G.R. No. L-
47544, January 28, 1980]

As a matter of fact, insofar as the laborers are concerned, by a special law, Act no.
3959, otherwise known as "An Act making it obligatory for any person, company, firm
or corporation owning any work of any kind executed by contract to require the
contractor to furnish a bond guaranteeing the payment of the laborers." they are given
added protection by requiring contractors to file bonds guaranteeing payment to them.

It is true that defendant-appellant had already fully paid its obligation to defendant
Garcia however, the former's payment to the latter does not extinguish its legal
obligation to plaintiff-appellee because such payment was irregular. The former should
have taken care not to pay to such contractor the full amount which he is entitled to
receive by virtue of the contract, until he shall have shown that he first paid the wages
of the laborer employed in said work, by means of an affidavit made and subscribed by
said contractor before a notary public or other officer authorized by law to administer
oaths. There is no showing that defendant appellant DMPI, as owner of the building,
complied with this requirement paid down in Act No. 3959. Hence, under Section 2 of
said law, said defendant-appellant is responsible, jointly and severally with the general
contractor, for the payment to plaintiff-appellee as sub-contractor.
In this connection, while, indeed, Article 1729 refers to the laborers and materialmen
themselves, under the peculiar circumstances of this case, it is but fair and just that
plaintiff-appellee be deemed as suing for the reimbursement of what they have already
paid the laborers and materialmen, as otherwise he would be unduly prejudiced while
either defendant-appellant DMPI or defendant Garcia would enrich themselves at
plaintiff-appellee's expense.

Be that as it may, We so hold that plaintiff-appellee has a lawful claim against

defendant-appellant DMPI, owner of the constructed warehouse since it disregarded the
notice of claim of plaintiff-appellee, at a time when the amounts owing from defendant-
appellant DMPI to defendant GARCIA were more than sufficient to pay for plaintiff-
appellee's claim. The least that defendant-appellant should have done was to withhold
payment of the balance still owing to defendant Garcia as until the claim of plaintiff-
appellee was clarified. (Italics in the original; emphasis and underscoring supplied).24

Its Motion for Reconsideration having been denied by the CA, DMPI (hereinafter
referred to as petitioner) lodged the present Petition for Review on Certiorari, faulting
the CA:

I.

. . . IN FINDING THAT DMPI WAS LIABLE TO RESPONDENT ARAGONES FOR THE

UNPAID PRICE OF THE CONCRETE PAVING BLOCKS OWED BY MEGA-WAFF TO THE
LATTER.

A. 'IN FINDING THAT THE CONTRACT FOR THE SUPPLY OF THE CONCRETE PAVING
BLOCKS WAS NOT A SALE BUT ONE FOR A PIECE OF WORK.

B. 'IN HOLDING DMPI LIABLE BASED UPON THE PROVISIONS OF ARTICLE 1729 OF THE
CIVIL CODE AND ACT 3959, WHICH ARE INAPPLICABLE.

II.

. . . IN FAILING TO AWARD MORAL DAMAGES, ATTORNEY'S FEES, AND LITIGATION

EXPENSES TO DMPI ON ITS COUNTERCLAIM.25

As reflected above, only petitioner appealed the trial court's decision. MEGA-WAFF did
not appeal. The decision as to it then is final and executory.

Petitioner, in the main, contends that while the CA correctly stated the test in
determining whether a transfer is a sale or one for a piece of work, it failed to properly
apply the same.

Applying the "nature of the object" test, petitioner insists that the concrete block to be
produced by Aragones under the "Supply Agreement" represented by Garcia clearly
shows that the contract was one of sale, advancing the following reasons:

1.4.1 First, the concrete paving blocks were . . . capable of being mass-produced
1.4.2 Second, save for the shape, there was here no consideration of any special needs
or requirements of DMPI taken into account in the design or manufacture of the
concrete paving blocks.26

Petitioner cites the following ruling in Commissioner of Internal Revenue v. Arnoldus

Carpentry Shop, Inc.:27

x x x As can be clearly seen from the wordings of Art. 1467, what determines whether
the contract is one of work or of sale is whether the thing has been "manufactured
specially for the customer and upon his special order." Thus, if the thing is specially
done on the order of another, this is a contract for a piece of work. If, on the other
hand, the thing is manufactured or procured for the general market in the
ordinary course of one's business, it is a contract of sale." (Italics and emphasis
in the original; underscoring supplied),28

and argues that "given habituality of business and the ability to mass-produce the
article ordered, that customers requires (sic) certain specifications is of no moment, the
transaction remains one of sale."

Petitioner further cites, among other authorities, the following ruling in Celestino Co. v.
Collector of Internal Revenue:29

x x x The important thing to remember is that Celestino & Co. habitually makes
sash, windows and doors, as it has represented in its stationery and
advertisements to the public. That it "manufactures" the same is practically
admitted by appellant itself. The fact that windows and doors are made by it only when
customers place their orders, does not alter the nature of the establishment of such
materials-moulding, frames, panels - as it ordinarily manufactured or was in a position
habitually to manufacture.

xxx

That the doors and windows must meet desired specifications is neither here
nor there. If these specifications do not happen to be of the kind habitually
manufactured by appellant - special forms of sash, mouldings, panels - it would not
accept the order - and no sale is made. If they do, the transaction would be no different
from purchaser of manufactured goods held in stock for sale; they are bought because
they meet specifications desired by the purchaser.

Nobody will say that when a sawmill cuts lumber in accordance with the peculiar
specifications of a customer - sizes not previously held in stock for sale to the public - it
thereby becomes an employee or servant of the customer, not the seller of lumber. The
same consideration applies to this sash manufacturer.

The Oriental Sash Factory does nothing more than sell the goods that it mass-
produces or habitually makes - sash, panels, mouldings, frames - cutting them to
such sizes and combining them in such forms as its customers may desire.

xxx
x x x Such new form does not divest the Oriental Sash Factory of its character
as manufacturer. Neither does it take the transaction out of the category of
sales under Article 1467 above quoted, because although the Factory does not,
in the ordinary course of its business, manufacture and keep on stock doors of
the kind sold to Teodoro, it could and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least). (Emphasis in the
original; underscoring supplied).

Petitioner concludes that as the "Supply Agreement" between Aragones and MEGA-

WAFF was one of sale to which it (petitioner) was not privy, it cannot be held liable for
any obligation arising therefrom.

Dodging liability for the damages ("exemplary and . . . attorney's fees including the
cost of this suit") awarded to Aragones, petitioner claims that it was in fact the one
which was injured by Aragones' filing in bad faith of a complaint bereft of cause of
action and "at best, [one] barred by full payment of the amount due to MEGA-WAFF,"
on account of which it is entitled to moral damages in the amount of P50,000.00
pursuant to Article 2217 of the Civil Code, and to attorney's fees and expenses of
litigation in the amount of at least P30,000.00 plus P2,500.00 per hearing pursuant to
Article 2208 of the Civil Code.

The petition fails.

The authorities petitioner cited in fact show that the nature of the "Supply
Agreement" between Aragones and MEGA-WAFF was one for a piece of work.

Contrary to petitioner's claim that "save for the shape, there was no consideration of
any special needs or requirements of DMPI taken into account in the design or
manufacture of the concrete paving blocks," the "Supply Agreement" is replete with
specifications, terms or conditions showing that it was one for a piece of work.

As reflected in the highlighted and underscored above-quoted provisions of

the "Supply Agreement," as well as other evidence on record, the machines Aragones
was obliged to fabricate were those for casting the concrete blocks specified by Garcia.
Aragones did not have those kind of machines in his usual business, hence, the special
order.

While initially Garcia specified that the machines to be fabricated should be for hexagon
shaped blocks, he later asked Aragones to instead fabricate machines for casting S
shaped blocks.

In accordance with the "Supply Agreement," Garcia furnished the cement and
aggregates for the fabrication of the blocks and Aragones fabricated three (3) machines
for S shaped blocks which were delivered at the casting site on different dates. And the
"entire plant/casting machines and . . . . accessories" were, as dictated under the
"Supply Agreement," devoted by Aragones "for [MEGA-WAFF]'s exclusive use.
There can be no gainsaying that the specifications/conditions in the "Supply
Agreement" and the admitted subsequent directive of Garcia for Aragones to fabricate
machines for casting S shaped, instead of hexagon shaped blocks, show that the
concrete blocks were "manufactured specifically for, and upon the special order" of
Garcia.

That Garcia supplied the cement and aggregates and that the entire made-to-order
casting machines and accessories used in the manufacture of those unusual shaped
blocks were agreed upon to be devoted only "for the exclusive use" of MEGA-WAFF
should belie petitioner's contention that the concrete blocks were mass-produced and
catered to the general market in the ordinary course of Aragones' business.

Under Art. 1467 then of the Civil Code which provides:

ART. 1467. A contract for the delivery at a certain price of an article which the vendor
in the ordinary course of his business manufactures or procures for the general market,
whether the same is on hand at the time or not, is a contract of sale, but if the goods
are to be manufactured specially for the customer and upon his special
order, and not for the general market, it is a contract for a piece of work. (Emphasis
and underscoring supplied),

the "Supply Agreement" was decidedly a contract for a piece of work.

Following Art. 1729 of the Civil Code which provides:

ART. 1729. Those who put their labor upon or furnish materials for a piece of work
undertaken by the contractor have an action against the owner up to the amount owing
from the latter to the contractor at the time the claim is made. x x x

x x x (Underscoring supplied),

Aragones having specially fabricated three casting machines and furnished some
materials for the production of the concrete blocks specially ordered and specified by
MEGA-WAFF which were to be and indeed they were for the exclusive use of MEGA-
WAFF, he has a cause of action upon petitioner up to the amount it owed MEGA-WAFF
at the time Aragones made his claim to petitioner.

As Velasco v. CA30 explains, the intention of Art. 1729 is

to protect the laborers and materialmen from being taken advantage of by

unscrupulous contractors and from possible connivance between owners and
contractors. Thus, a constructive vinculum or contractual privity is created by this
provision, by way of exception to the principle underlying Article 1311 between the
owner, on the one hand, and those who furnish labor and/or materials, on the other.

In fine, a constructive vinculum or contractual privity was created between petitioner

and Aragones.
Respecting petitioner's disclaimer of liability for damages and its claim for moral
damages, attorney's fees and expenses of litigation, the trial court's disposition thereof,
to wit:

. . . since the evidence on record shows that [Aragones] was compelled to litigate this

matter if only to collect a just and demandable obligation, the refusal of [DMPI and
MEGA-WAFF] to pay their obligation upon demand could not be justified by law, thus
both' should be condemned to pay exemplary damages in the amount of P20,000.00
each and attorney's fees in the amount of P10,000.00 each including' costs of this suit"
(underscoring supplied),

merits this Court's approval.

Why should not petitioner be liable for damages. Aragones' request, based on a
provision of law, to petitioner for it to pay directly to him his account receivable from
MEGA-WAFF/Garcia out of petitioner's account payable to MEGA-WAFF was
made before petitioner's obligation to it was due. Yet petitioner settled such obligation
to MEGA-WAFF on or about April 6, 1989 when it released to it its check-payment. For
petitioner to harp on its undertaking under its "Agreement" with MEGA-WAFF to pay
its full obligation thereunder within 30 days from complete installation of the pavement
by MEGA-WAFF unless a court injunction could be produced by Aragones is too shallow,
under the facts and circumstances surrounding the case, to merit consideration.

Petitioner's referral for comment of Garcia, by letter of April 27, 1989, on Aragones'
April 6, 1989 reiterative letter for the withholding of the release of so much amount to
MEGA-WAFF even after it (petitioner) had already released on or about April 6, 1989 its
check-full payment to MEGA-WAFF reflects a futile attempt to cover-up the apparent
"connivance" between it and contractor MEGA-WAFF to the prejudice of Aragones,
leaving him no option but to litigate.

As for the assailed citation by the appellate court of Act No. 3959 (which requires a
person or firm owning any work of any kind executed by contract to put up a bond
guaranteeing the payment of the laborers) as additional justification to hold petitioner
liable to Aragones, indeed, said Act had been repealed in 1974 by P.D. No. 442 (The
Labor Code of the Philippines).

WHEREFORE, in light of the foregoing discussions, the petition is hereby DENIED.

Costs against petitioner.

SO ORDERED.

Panganiban, (Chairman), Sandoval-Gutierrez, Corona, and Garcia, JJ., concur.

Endnotes:
1
 Exhibit "A," RTC Records at 262-266.

2
 Exh. "1 - DMPI", id. at 363.

3
 Rollo at 43-46.

4
 Exh. "J," RTC Records at 284-285.

5
 Exh. "K," id. at 286.

6
 Exh. "K-1," ibid.

7
 Exh. "L," id. at 287-288.

8
 Exh. "M," id. at 289-291.

9
 Exh. "M-2-A," id. at 291.

10
 Exh. "N," id. at 292.

11
 Exh. "9-DMPI," id. at 374.

12
 Id.  at 1-10.

13
 Id.  at 39-43.

14
 Id.  at 28-30.

15
 Id. at 99-107.

16
 Id. at 207-208.

17
 Id. at 209-212.

18
 Id.  at 444-445.

19
 Id.  at 81-82.

20
 Id.  at 443-456.

21
 Id.  at 13-14.

22
 Brief for appellant DMPI, CA Rollo at 24, 26-27.

23
 Id. at 68-81.

24
 Id.  at 96-98.
25
 Rollo  at 16-17.

26
 Id.  at 20.

27
 159 SCRA199 (1988).

28
 Id. at 206, 207.

29
 99 Phil. 841 (1956).

30
 95 SCRA 616-641 (1953).