Breach of Construction Contract: Rescission and Unauthorized Deviations From Building Plans

When a contractor builds something different from what was agreed and approved, can the owner back out of the contract? In Spouses Francisco v. DEAC Construction, Inc., G.R. No. 171312 (February 4, 2008), the Supreme Court answered yes — and clarified that the right to rescind can be exercised even after construction is substantially complete, though only to the extent still possible.

The case matters to anyone hiring a builder. It shows that a contractor's failure to secure a building permit and its unilateral changes to approved plans are serious breaches that can justify rescission, damages, and even criminal liability.

The project and the problems

The Spouses Francisco engaged DEAC Construction, Inc. to build a three-storey residential building in Tondo, Manila for P3,500,000.00. Payment was staggered: a P2,000,000.00 downpayment, then two installments of P750,000.00 tied to completion milestones.

Construction began in October 1994 — before the contractor had obtained the required building permit. The permit was delayed because the lot's location was wrongly designated in one of the plans. To speed up approval of the corrected plans, DEAC's representative forged the signature of Guia Francisco.

The Office of the Building Official later issued a Notice of Violation citing deviations from the approved plan, including a reduced setback from the property line, an excessive roof-deck projection, and the covering of a required open patio. A work stoppage order followed.

The spouses sued for rescission of contract and damages. The trial court ruled in their favor, ordering partial rescission and awarding damages. The Court of Appeals reversed, holding that the spouses themselves had requested the deviations and had waived their right to rescind. The Supreme Court reinstated the trial court's decision.

Who authorized the deviations?

The trial court and the appellate court disagreed on a key fact: whether the spouses authorized the changes to the building plan. The Supreme Court resolved the conflict by reviewing the records.

It found that the open space was closed without the spouses' approval and in violation of the National Building Code. At a meeting between the parties, the contractor itself explained that the open space was omitted "in order to give extra space for the building" — not because the owners asked for it. The contractor also admitted forging Guia Francisco's signature to expedite approval of the plans.

The appellate court had treated an agreement to extend the second-floor balcony as approval of the open-space closure and the reduced setback. The Supreme Court rejected this: the balcony extension was entirely distinct from those changes.

The governing rule on rescission

The Court relied on Article 1191 of the Civil Code, which provides that the power to rescind obligations is implied in reciprocal ones when one party fails to comply with what is incumbent upon it. The Court explained that rescission in this context — more precisely called resolution — rests not on economic injury but on a breach of faith that violates the reciprocity between the parties.

The right to rescind may be waived, expressly or impliedly. But the Court found no waiver here. The spouses complained in a July 1, 1995 letter about the delayed permit, the unauthorized plan corrections, the forgery, and the deleted patio. They filed a criminal case against respondent Dadula and then a civil case for rescission within a reasonable time after learning of the violations. That vigilance defeated the waiver argument.

Notably, Dadula's conviction for violating the National Building Code — for the setback failure, excessive projection, patio deviation, illegal stockpiling, lack of safety standards, and failure to secure a permit — was affirmed all the way to the Supreme Court.

Partial rescission where full rescission is impossible

Because the building was already about 75% complete, the Court held that only partial rescission of the undelivered or unfinished portion was proper. Equitable considerations justified rescinding the portion of the obligation not yet performed.

Applying this, the trial court ordered DEAC to refund P205,000.00 — the excess of the P2,830,000.00 actually paid over the P2,625,000.00 value of the 75% completed work — plus moral damages, exemplary damages, attorney's fees, and costs. The Supreme Court reinstated that judgment in full.

Practical takeaways

• A building permit is the contractor's responsibility. Starting work without one exposes the owner to criminal prosecution under the National Building Code and is a breach of the construction contract.
• Deviations from approved plans require the owner's clear consent. Agreeing to one change (such as a balcony extension) does not authorize unrelated deviations like closing an open space or reducing a setback.
• Act promptly to preserve the right to rescind. The right may be waived, but written complaints and timely legal action demonstrate that the owner guarded their rights.
• Courts may order partial rescission. Where the work is substantially complete, the remedy may be limited to the unfinished portion, with a refund of excess payments and damages.
• Criminal and civil cases can proceed separately. A conviction under the Building Code can reinforce the civil claim for breach of contract.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.