G.R. No. 199650, June 26, 2013
J PLUS ASIA DEVELOPMENT CORPORATION, Petitioner, v. UTILITY ASSURANCE CORPORATION, Respondent.
D E C I S I O N
VILLARAMA, JR., J.:
III] STATUS OF PROJECT AS OF 14 NOVEMBER 2008
1) After conducting a joint inspection and evaluation of the project to determine the actual percentage of accomplishment, the contracting parties, assisted by their respective technical groups, SSB assisted by Arch. Elwin Olavario and JPLUS assisted by Engrs. Joey Rojas and Shiela Botardo, concluded and agreed that as of 14 November 2008, the project is only Thirty One point Thirty Nine Percent (31.39%) complete. 2) Furthermore, the value of construction materials allocated for the completion of the project and currently on site has been determined and agreed to be ONE MILLION FORTY NINE THOUSAND THREE HUNDRED SIXTY FOUR PESOS AND FORTY FIVE CENTAVOS (P1,049,364.45) 3) The additional accomplishment of SSB, reflected in its reconciled and consolidated 8th and 9th billings, is Three point Eighty Five Percent (3.85%) with a gross value of P1,563,553.34 amount creditable to SSB after deducting the withholding tax is P1,538,424.84 4) The unrecouped amount of the down payment is P2,379,441.53 after deducting the cost of materials on site and the net billable amount reflected in the reconciled and consolidated 8th and 9th billings. The uncompleted portion of the project is 68.61% with an estimated value per construction agreement signed is P27,880,419.52.9 (Emphasis supplied.)
Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:cralavvonlinelawlibrary
1. Respondents Mabunay and Utassco to jointly and severally pay claimant the following:cralavvonlinelawlibrarya) P4,469,969.90, as liquidated damages, plus legal interest thereon at the rate of 6% per annum computed from the date of this decision up to the time this decision becomes final, and 12% per annum computed from the date this decision becomes final until fully paid, and
b) P2,379,441.53 as unrecouped down payment plus interest thereon at the rate of 6% per annum computed from the date of this decision up to the time this decision becomes final, and 12% per annum computed from the date this decision becomes final until fully paid[.]
It being understood that respondent Utassco’s liability shall in no case exceed P8.4 million.
2. Respondent Mabunay to pay to claimant the amount of P98,435.89, which is respondent [Mabunay’s] share in the arbitration cost claimant had advanced, with legal interest thereon from January 8, 2010 until fully paid.
3. Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney’s fees.
WHEREFORE, premises considered, the instant petition for review is GRANTED. The assailed Decision dated 13 January 2010 rendered by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REVERSED and SET ASIDE. Accordingly, the Writ of Execution dated 24 November 2010 issued by the same tribunal is hereby ANNULLED and SET ASIDE.
- THE COURT OF APPEALS SERIOUSLY ERRED IN NOT HOLDING THAT THE ALTERNATIVE DISPUTE RESOLUTION ACT AND THE SPECIAL RULES ON ALTERNATIVE DISPUTE RESOLUTION HAVE STRIPPED THE COURT OF APPEALS OF JURISDICTION TO REVIEW ARBITRAL AWARDS.
- THE COURT OF APPEALS SERIOUSLY ERRED IN REVERSING THE ARBITRAL AWARD ON AN ISSUE THAT WAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED IN THE TERMS OF REFERENCE, NOT ASSIGNED AS AN ERROR, AND NOT ARGUED IN ANY OF THE PLEADINGS FILED BEFORE THE COURT.
- THE COURT OF APPEALS SERIOUSLY ERRED IN RELYING ON THE CASE OF AEROSPACE CHEMICAL INDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94, WHICH HAS NOTHING TO DO WITH CONSTRUCTION AGREEMENTS.21
SEC. 40. Confirmation of Award. – The confirmation of a domestic arbitral award shall be governed by Section 23 of R.A. 876.
A domestic arbitral award when confirmed shall be enforced in the same manner as final and executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial court in accordance with the Rules of Procedure to be promulgated by the Supreme Court.
A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided under E.O. No. 1008. (Emphasis supplied.)
SECTION 18.2 Petition for review. – A petition for review from a final award may be taken by any of the parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court.
ART. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
x x x x
- The CONTRACTOR shall complete the works called for under this Agreement within ONE (1) YEAR or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment.
- In this regard the CONTRACTOR shall submit a detailed work schedule for approval by OWNER within Seven (7) days after signing of this Agreement and full payment of 20% of the agreed contract price. Said detailed work schedule shall follow the general schedule of activities and shall serve as basis for the evaluation of the progress of work by CONTRACTOR.29
April 30, 2008
Seven Shades of Blue
Attention : Mr. Martin Mabunay
Thru : Engr. Reynaldo Gapasin Project : Villa Beatriz Subject : Notice of Delay
Dear Mr. Mabunay:cralavvonlinelawlibrary
This is to formalize our discussion with your Engineers during our meeting last April 23, 2008 regarding the delay in the implementation of major activities based on your submitted construction schedule. Substantial delay was noted in concreting works that affects your roof framing that should have been 40% completed as of this date. This delay will create major impact on your over-all schedule as the finishing works will all be dependent on the enclosure of the building.
In this regard, we recommend that you prepare a catch-up schedule and expedite the delivery of critical materials on site. We would highly appreciate if you could attend our next regular meeting so we could immediately address this matter. Thank you.
Very truly yours,
Engr. Sheila N. Botardo
Construction Manager – LMI/FEPI32
October 15, 2008
x x x x
Dear Mr. Mabunay,
We have noticed continuous absence of all the Engineers that you have assigned on-site to administer and supervise your contracted work. For the past two (2) weeks[,] your company does not have a Technical Representative manning the jobsite considering the critical activities that are in progress and the delays in schedule that you have already incurred. In this regard, we would highly recommend the immediate replacement of your Project Engineer within the week.
We would highly appreciate your usual attention on this matter.
x x x x33
November 5, 2008
x x x x
Dear Mr. Mabunay,
This is in reference to your discussion during the meeting with Mr. Joohan Lee last October 30, 2008 regarding the construction of the Field Office and Stock Room for Materials intended for Villa Beatriz use only. We understand that you have committed to complete it November 5, 2008 but as of this date there is no improvement or any ongoing construction activity on the said field office and stockroom.
We are expecting deliveries of Owner Supplied Materials very soon, therefore, this stockroom is badly needed. We will highly appreciate if this matter will be given your immediate attention.
x x x x34
November 6, 2008
x x x x
Dear Mr. Mabunay,
We would like to call your attention regarding the decrease in your manpower assigned on site. We have observed that for the past three (3) weeks instead of increasing your manpower to catch up with the delay it was reduced to only 8 workers today from an average of 35 workers in the previous months.
Please note that based on your submitted revised schedule you are already delayed by approximately 57% and this will worsen should you not address this matter properly.
We are looking forward for [sic] your cooperation and continuous commitment in delivering this project as per contract agreement.
x x x x35
ARTICLE 12 – LIQUIDATED DAMAGES:
12.01 Time is of the essence in this Agreement. Should the CONTRACTOR fail to complete the PROJECT within the period stipulated herein or within the period of extension granted by the OWNER, plus One (1) Week grace period, without any justifiable reason, the CONTRACTOR hereby agrees –a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One Percent (1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions and the One (1) week Grace Period until completed by the CONTRACTOR.
b. The CONTRACTOR, even after paying for the liquidated damages due to unexecuted works and/or delays shall not relieve it of the obligation to complete and finish the construction.
Any sum which maybe payable to the OWNER for such loss may be deducted from the amounts retained under Article 9 or retained by the OWNER when the works called for under this Agreement have been finished and completed.
Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the contractors collectibles without prior consent and concurrence by the CONTRACTOR.
12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity of any further act and deed, authorizes the OWNER to deduct any amount that may be due under Item (a) above, from any and all money or amounts due or which will become due to the CONTRACTOR by virtue of this Agreement and/or to collect such amounts from the Performance Bond filed by the CONTRACTOR in this Agreement.36 (Emphasis supplied.)
ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof.
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
ART. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.
ARTICLE 13 – DEFAULT OF CONTRACTOR:
13.01 Any of the following shall constitute an Event of Default on the [part] of the CONTRACTOR.
x x x xg. In case the CONTRACTOR has done any of the following:cralavvonlinelawlibrary(i.) has abandoned the Project
(ii.) without reasonable cause, has failed to commence the construction or has suspended the progress of the Project for twenty-eight days
(iii.) without justifiable cause, has delayed the completion of the Project by more than thirty (30) calendar days based on official work schedule duly approved by the OWNER
(iv.) despite previous written warning by the OWNER, is not executing the construction works in accordance with the Agreement or is persistently or flagrantly neglecting to carry out its obligations under the Agreement.
(v.) has, to the detriment of good workmanship or in defiance of the Owner’s instructions to the contrary, sublet any part of the Agreement.
13.02 If the CONTRACTOR has committed any of the above reasons cited in Item 13.01, the OWNER may after giving fourteen (14) calendar days notice in writing to the CONTRACTOR, enter upon the site and expel the CONTRACTOR therefrom without voiding this Agreement, or releasing the CONTRACTOR from any of its obligations, and liabilities under this Agreement. Also without diminishing or affecting the rights and powers conferred on the OWNER by this Agreement and the OWNER may himself complete the work or may employ any other contractor to complete the work. If the OWNER shall enter and expel the CONTRACTOR under this clause, the OWNER shall be entitled to confiscate the performance bond of the CONTRACTOR to compensate for all kinds of damages the OWNER may suffer. All expenses incurred to finish the Project shall be charged to the CONTRACTOR and/or his bond. Further, the OWNER shall not be liable to pay the CONTRACTOR until the cost of execution, damages for the delay in the completion, if any, and all; other expenses incurred by the OWNER have been ascertained which amount shall be deducted from any money due to the CONTRACTOR on account of this Agreement. The CONTRACTOR will not be compensated for any loss of profit, loss of goodwill, loss of use of any equipment or property, loss of business opportunity, additional financing cost or overhead or opportunity losses related to the unaccomplished portions of the work.40 (Emphasis supplied.)
As already demonstrated, the contractor’s default in this case pertains to his failure to substantially perform the work on account of tremendous delays in executing the scheduled work activities. Where a party to a building construction contract fails to comply with the duty imposed by the terms of the contract, a breach results for which an action may be maintained to recover the damages sustained thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms of the contract.41
The plain and unambiguous terms of the Construction Agreement authorize petitioner to confiscate the Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure to complete the building. Having elected to terminate the contract and expel the contractor from the project site under Article 13 of the said Agreement, petitioner is clearly entitled to the proceeds of the bond as indemnification for damages it sustained due to the breach committed by Mabunay. Such stipulation allowing the confiscation of the contractor’s performance bond partakes of the nature of a penalty clause. A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation. It functions to strengthen the coercive force of obligation and to provide, in effect, for what could be the liquidated damages resulting from such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. It is well-settled that so long as such stipulation does not contravene law, morals, or public order, it is strictly binding upon the obligor.42
Respondent, however, insists that it is not liable for the breach committed by Mabunay because by the terms of the surety bond it issued, its liability is limited to the performance by said contractor to the extent equivalent to 20% of the down payment. It stresses that with the 32.38% completion of the project by Mabunay, its liability was extinguished because the value of such accomplishment already exceeded the sum equivalent to 20% down payment (P8.4 million).
The appellate court correctly rejected this theory of respondent when it ruled that the Performance Bond guaranteed the full and faithful compliance of Mabunay’s obligations under the Construction Agreement, and that nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be apportioned.
The pertinent portions of the Performance Bond provide:cralavvonlinelawlibraryThe conditions of this obligation are as follows:Whereas the JPLUS ASIA, requires the principal SEVEN SHADES OF BLUE CONSTRUCTION AND DEVELOPMENT, INC. to post a bond of the abovestated sum to guarantee 20% down payment for the construction of Building 25 (Villa Beatriz) 72-Room Condotel, The Lodgings inside Fairways and Bluewater, Boracay Island, Malay, Aklan.
Whereas, said contract required said Principal to give a good and sufficient bond in the above-stated sum to secure the full and faithful performance on his part of said contract.It is a special provision of this undertaking that the liability of the surety under this bond shall in no case exceed the sum of P8,400,000.00 Philippine Currency.
Now, Therefore, if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions and agreements stipulated in said contract, then this obligation shall be null and void; otherwise to remain in full force and effect.43 (Emphasis supplied.)
While the above condition or specific guarantee is unclear, the rest of the recitals in the bond unequivocally declare that it secures the full and faithful performance of Mabunay’s obligations under the Construction Agreement with petitioner. By its nature, a performance bond guarantees that the contractor will perform the contract, and usually provides that if the contractor defaults and fails to complete the contract, the surety can itself complete the contract or pay damages up to the limit of the bond.44 Moreover, the rule is that if the language of the bond is ambiguous or uncertain, it will be construed most strongly against a compensated surety and in favor of the obligees or beneficiaries under the bond, in this case petitioner as the Project Owner, for whose benefit it was ostensibly executed.45
The imposition of interest on the claims of petitioner is likewise in order. As we held in Commonwealth Insurance Corporation v. Court of Appeals46Petitioner argues that it should not be made to pay interest because its issuance of the surety bonds was made on the condition that its liability shall in no case exceed the amount of the said bonds.
We are not persuaded. Petitioner’s argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union Gurantee Co. and reiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang Machinery Co., Inc., and more recently, in Republic vs. Court of Appeals and R & B Surety and Insurance Company, Inc., we have sustained the principle that if a surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of the default and the necessity of judicial collection.
Petitioner’s liability under the suretyship contract is different from its liability under the law. There is no question that as a surety, petitioner should not be made to pay more than its assumed obligation under the surety bonds. However, it is clear from the above-cited jurisprudence that petitioner’s liability for the payment of interest is not by reason of the suretyship agreement itself but because of the delay in the payment of its obligation under the said agreement.47 (Emphasis supplied; citations omitted.)
WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated January 27, 2011 and Resolution dated December 8, 2011 of the Court of Appeals in CA-G.R. SP No. 112808 are hereby REVERSED and SET ASIDE.
The Award made in the Decision dated February 2, 2010 of the Construction Industry Arbitration Commission is hereby REINSTATED with the following MODIFICATIONS:“Accordingly, in view of our foregoing discussions and dispositions, the Tribunal hereby adjudges, orders and directs:cralavvonlinelawlibrary
1) Respondent Utassco to pay to petitioner J Plus Asia Development Corporation the full amount of the Performance Bond, P8,400,000.00, pursuant to Art. 13 of the Construction Agreement dated December 24, 2007, with interest at the rate of 6% per annum computed from the date of the filing of the complaint until the finality of this decision, and 12% per annum computed from the date this decision becomes final until fully paid; and
2) Respondent Mabunay to indemnify respondent Utassco of the amounts respondent Utassco will have paid to claimant under this decision, plus interest thereon at the rate of 12% per annum computed from the date he is notified of such payment made by respondent Utassco to claimant until fully paid, and to pay Utassco P100,000.00 as attorney’s fees.
With the above modifications, the Writ of Execution dated November 24, 2010 issued by the CIAC Arbitral Tribunal in CIAC Case No. 03-2009 is hereby REINSTATED and UPHELD.
No pronouncement as to costs.
Sereno, C.J., (Chairperson), Leonardo-De Castro, Bersamin, Jr., and Reyes, JJ., concur.
Endnotes:1Rollo, pp. 57-68. Penned by Associate Justice Samuel H. Gaerlan with Associate Justices Hakim S. Abdulwahid and Ricardo R. Rosario concurring.cralawlibrary
2 Id. at 69-73.cralawlibrary
3 Id. at 87-99.cralawlibrary
4 Id. at 962-967.cralawlibrary
5 Id. at 101-103, 606.cralawlibrary
6 Id. at 184.cralawlibrary
7 Id. at 109.cralawlibrary
8 Id. at 109-110.cralawlibrary
9 Id. at 110.cralawlibrary
10 Id. at 76-86.cralawlibrary
11 Id. at 82.cralawlibrary
12 Id. at 189-197.cralawlibrary
13 Id. at 115-121, 132-136, 163-164.cralawlibrary
14 Id at 165-183.cralawlibrary
15 Id. at 211-212.cralawlibrary
16 Id. at 600-614.cralawlibrary
17 Id. at 614 to 614-A.cralawlibrary
18 ART. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.cralawlibrary
19 G.R. No. 108129, September 23, 1999, 315 SCRA 92.cralawlibrary
20Rollo, p. 67.cralawlibrary
21 Id. at 23.cralawlibrary
22 Approved on April 2, 2004.cralawlibrary
23 Metro Construction, Inc. v. Chatham Properties, Inc., G.R. No. 141897, September 24, 2001, 365 SCRA 697, 718-719 & 794.cralawlibrary
24 A.M. No. 07-11-08-SC, effective October 30, 2009.cralawlibrary
25 As amended by CIAC Resolution Nos. 15-2006, 16-2006, 18-2006, 19-2006, 02-2007, 07-2007, 13-2007, 02-2008, and 03-2008, which took effect on December 15, 2005.cralawlibrary
26 Rollo, pp. 202-210.cralawlibrary
27 IV Arturo M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 101 (1987 ed.).cralawlibrary
28 17 Am Jur 2d §387, p. 832.cralawlibrary
29 Rollo, p. 93.cralawlibrary
30Santos Ventura Hocorma Foundation, Inc. v. Santos, 484 Phil. 447, 457 (2004), citing IV Arturo M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 102 (1987 ed.). See also Philippine Export and Foreign Loan Guarantee Corporation v. V.P. Eusebio Construction, Inc., G.R. No. 140047, July 13, 2004, 434 SCRA 202, 218-219.cralawlibrary
31Rollo, p. 94.cralawlibrary
32 Id. at 104.cralawlibrary
33 Id. at 106.cralawlibrary
34 Id. at 107.cralawlibrary
35 Id. at 108.cralawlibrary
36 Id. at 93-94.cralawlibrary
37Atlantic Erectors, Inc. v. Court of Appeals, G.R. No. 170732, October 11, 2012, 684 SCRA 55, 65, citing Philippine Charter Insurance Corporation v. Petroleum Distributors & Service Corporation, G.R. No. 180898, April 18, 2012, 670 SCRA 166, 177 and Filinvest Land, Inc. v. Court of Appeals, G.R. No. 138980, September 20, 2005, 470 SCRA 260, 269.cralawlibrary
38 Id., citing H.L. Carlos Construction, Inc. v. Marina Properties Corporation, 466 Phil. 182, 205 (2004).cralawlibrary
39 Id., citing Empire East Land Holdings, Inc. v. Capitol Industrial Construction Groups, Inc., G.R. No. 168074, September 26, 2008, 566 SCRA 473, 489.cralawlibrary
40Rollo, pp. 94-95.cralawlibrary
41 13 Am Jur 2d §72, p. 73.cralawlibrary
42Suatengco v. Reyes, G.R. No. 162729, December 17, 2008, 574 SCRA 187, 194, citing Ligutan v. Court of Appeals, G.R. No. 138677, February 12, 2002, 376 SCRA 560, 567-568.cralawlibrary
43Rollo, p. 100.cralawlibrary
44 17 Am Jur 2d §1, p. 192.cralawlibrary
45 17 Am Jur 2d §3, p. 193.cralawlibrary
46 466 Phil. 104 (2004).cralawlibrary
47 Id. at 112-113.