PEPITO VELASCO V.

COURT OF APPEALS and GSIS, 95 SCRA

616 (1980)
FACTS: In 1965, Alta Farms secured a loan from GSIS to finance a
piggery project, which was secured by 2 mortgages. Alta Farms
subsequently default in the payment of its amortizations. As such,
it executed a Deed of Sale with Assumption of Mortgage in favor
Asian Engineering Corp, without the consent or GSIS and in direct
violation of the mortgage contracts
1. Asian Engineering Corp, in turn, entered into a contract
with Laigo Realty Corp to convert the piggery farm into a
subdivision
2. After developing the area, Laigo Realty entered into a
contract with Velasco et al for the construction of the
houses on the subdivision
3. However the checks given by Laigo in payment of the
services rendered by Velasco et al. When the petitioners
could not collect from Laigo Realty and the homebuyers,
and after GSIS foreclosed the subdivision including the
improvements, Velasco sent a letter of demand to GSIS to
pay for the indebtedness of Laigo Realty
4. GSIS denied the claim on the ground that GSIS had no
privity of contract with petitioners. As such, Velasco et al
filed an action against GSIS

ISSUE: WON Art 1311 (relativity of contracts) is applicable in this

case
HELD: No. Art 1311 NCC which GSIS invokes is not applicable
where the situation contemplated in Art 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 Art 1311 between the owner, on the one hand, and
those who furnish labor and/or materials, on the other. As a matter
of fact, insofar as the laborers are concerned, by a special law, Act
No. 3959, they are given added protection by requiring contractors
to file bonds guaranteeing payment to them. And under Art 2242
NCC, par (3) and (4), claims of laborers and materialmen,
respectively, enjoy preference among the creditors of the owner in
regard to specific immovable property.