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DEL MONTE PHILIPPINES v. NAPOLEON N. ARAGONES

FACTS:

The case involves a Supply Agreement between Dynablock Enterprises, represented by Napoleon N. Aragones, and Mega-Engineering Services in joint venture with WAFF Construction System Corporation (MEGA-WAFF). This contract was entered into for the supply and installation of modular pavement at Del Monte Philippines Inc.'s condiments warehouse in Cagayan de Oro City. The Supply Agreement specified that Dynablock Enterprises would provide labor, materials, equipment, tools, and supplies, particularly concrete blocks, for the project. The agreed price for the concrete blocks was P7.00 per piece, inclusive of taxes. Dynablock Enterprises was responsible for providing the necessary machines and ensuring compliance with approved specifications. The issue in question is whether the Supply Agreement is a contract for the sale of goods or a contract for a piece of work.

Aragones Dynablock Enterprises and F Contractor entered into an agreement where Dynablock Enterprises agreed to provide tarpaulin, forklift, and wooden pallets to F Contractor, while exclusively using its plant/machines for the production of concrete blocks. The agreement also contained provisions for payment, an effectivity clause, and a penalty clause. However, F Contractor failed to meet the deadline for the completion of the pavement installation, resulting in a penalty imposed by Del Monte Philippines Inc. Aragones requested leniency regarding the penalty but later failed to collect full payment from MEGA-WAFF. Aragones sought DMPI's assistance to withhold payment from MEGA-WAFF and pay him directly. DMPI advised Aragones to secure a court order, as it was obligated under its agreement with MEGA-WAFF to release full payment within 30 days. Aragones continued to request direct payment, and MEGA-WAFF responded by stating they are willing to pay Aragones based on the actual accomplishment and amount due to him.

Development Mining Corporation of the Philippines, Inc. (DMPI) and Mega-WAFF Construction and Development Corporation (MEGA-WAFF) had a supply agreement. Diosdado Aragones filed a complaint for sum of money against Edilberto Garcia and/or MEGA-WAFF and DMPI, claiming payment for labor and materials provided under the supply agreement. Garcia argued that Aragones defaulted in his obligation, while DMPI contended that it had no privity of contract with Aragones and had already paid MEGA-WAFF in full. The trial court addressed various issues, including whether Aragones had a collectible amount from Garcia and Castro, whether DMPI could be held accountable for the unpaid obligation, and the remaining balance payable by DMPI. The trial court ruled in favor of Aragones, citing Article 1729 of the Civil Code and previous Supreme Court decisions protecting laborers and materialmen from unscrupulous contractors and possible collusion between owners and contractors.

ISSUES:

  1. Whether GSIS is liable to the petitioners for the cost of materials and labor furnished in the construction of houses owned by GSIS.

  2. Whether Joven Inc. is liable for materials and labor furnished to the contractor.

  3. Whether DMPI is liable to pay the cost of construction material and has the right of recourse against Garcia/MEGA-WAFF.

  4. Whether the contract between the parties is a contract of sale or a contract for a piece of work.

  5. Whether the provisions of Article 1729 of the Civil Code and Act 3959 are applicable.

  6. Whether the "Supply Agreement" between Aragones and MEGA-WAFF was a contract for a piece of work or a contract of sale.

  7. Whether petitioner, who was not a party to the agreement, can be held liable for any obligation arising from the agreement.

  8. Whether the "Supply Agreement" between the petitioner and MEGA-WAFF is a contract for a piece of work.

  9. Whether the petitioner has a cause of action against MEGA-WAFF for the materials and labor provided by Aragones.

RULING:

  1. GSIS is liable to the petitioners for the cost of materials and labor furnished in the construction of houses owned by GSIS.

  2. Joven Inc. is liable for materials and labor furnished to the contractor.

  3. DMPI is liable to pay the cost of construction material and has the right of recourse against Garcia/MEGA-WAFF.

  4. The contract between the parties is a contract for a piece of work. The test to determine whether a transfer is a sale or a contract for a piece of work is whether the thing transferred is one that would not have existed but for the order of the party. In this case, the modular paving blocks were not exactly what the plaintiff makes and keeps on hand for sale to anyone, but with a modification that the same be "S" in shape. Therefore, the agreement falls within the ambit of Article 1467, making Article 1729 likewise applicable.

  5. The provisions of Article 1729 of the Civil Code and Act 3959 are applicable. Article 1729 creates a constructive vinculum or contractual privity between the owner of the work and those who furnish labor and/or materials. Act 3959, on the other hand, provides added protection to laborers by requiring contractors to file bonds guaranteeing payment to them. The owner, in this case, should not have fully paid the contractor until it was shown that the wages of the laborers were first paid. Thus, under Section 2 of Act 3959, the owner is responsible, jointly and severally with the general contractor, for the payment to the sub-contractor.

  6. The "Supply Agreement" between Aragones and MEGA-WAFF is a contract for a piece of work. The agreement contains specifications, terms, and conditions, indicating that it was intended for a specific project and not for the general market. The machines to be fabricated were specifically for casting the concrete blocks specified by Garcia, which were not part of Aragones' usual business. Additionally, Garcia later requested Aragones to fabricate machines for casting a different shape of blocks. The agreement also stipulated that the cement, aggregates, and entire plant/casting machines were exclusively provided and used by MEGA-WAFF. These circumstances establish that the concrete blocks were manufactured specifically and upon the special order of Garcia.

  7. Petitioner cannot be held liable for any obligation arising from the agreement. As petitioner was not a party to the "Supply Agreement," it cannot be liable for any obligations arising therefrom.

  8. The "Supply Agreement" is considered a contract for a piece of work under Article 1467 of the Civil Code, as the concrete blocks were specially manufactured for MEGA-WAFF upon its special order and not for the general market.

  9. The petitioner has a cause of action against MEGA-WAFF for the materials and labor provided by Aragones, as stated in Article 1729 of the Civil Code. The provision creates a constructive vinculum or contractual privity between the owner (petitioner) and those who furnish labor and/or materials (Aragones).

PRINCIPLES:

  • Article 1729 of the New Civil Code was promulgated to protect laborers and materialmen from being taken advantage of by unscrupulous contractors and from possible connivance between owners and contractors.

  • The owner of a building is liable for materials and labor furnished to the contractor up to the amount owing from the latter to the contractor, as provided in Article 1729 of the New Civil Code.

  • The person furnishing labor or materials has the right to bring a direct action against the owner of the building, even if there is no privity of contract between them.

  • The distinction between a contract of sale and a contract for a piece of work is determined by whether the thing transferred is one that would not have existed but for the order of the party. (Commissioner of Internal Revenue vs. Engineering Equipment and Supply Company)

  • Article 1729 of the Civil Code creates a constructive vinculum or contractual privity between the owner of the work and those who furnish labor and/or materials. (Velasco vs. Court of Appeals)

  • Act 3959 provides added protection to laborers by requiring contractors to file bonds guaranteeing payment to them. The owner is responsible, jointly and severally with the general contractor, for the payment to the sub-contractor. (Velasco vs. Court of Appeals)

  • Whether a contract is a contract for a piece of work or a contract of sale depends on whether the thing has been manufactured specially for the customer and upon his special order. If the thing is specially done on the order of another, it is a contract for a piece of work. If the thing is manufactured or procured for the general market in the ordinary course of one's business, it is a contract of sale. (Commissioner of Internal Revenue v. Arnoldus Carpentry Shop, Inc.)

  • The fact that goods are made only when customers place their orders does not alter the nature of the establishment if the establishment is habitually engaged in the manufacture of similar goods. The key consideration is whether the establishment habitually manufactures or is in a position to habitually manufacture the goods in question. (Celestino Co. v. Collector of Internal Revenue)

  • The intention of Article 1729 is to protect laborers and materialmen from being taken advantage of by unscrupulous contractors and from possible connivance between owners and contractors.

  • Article 1467 of the Civil Code distinguishes between a contract of sale and a contract for a piece of work based on whether the article is manufactured or procured for the general market or specially for the customer's exclusive use.