A.C. No. 207-J - Secretary of Justice vs. Marcos

Respondent Herbal Cove Realty Corporation engaged several contractors and consultants for a subdivision project at Iruhin West, Tagaytay City, including DP Architects Philippines (architectural designs), RA&A Associates (engineering designs), and Building Energy Systems, Inc. (management services).
On June 20, 1996, Herbal Cove Realty Corporation (Owner) and petitioner Atlantic Erectors, Inc. (Contractor) entered into a Construction Contract for Construction Package A, which comprised four (4) units of Townhouse B and one (1) unit of Single Detached A1, at an original contract price of ₱15,726,745.19, later adjusted to ₱16,726,745.19 due to additional works.
Petitioner agreed to complete and deliver the works within 180 consecutive calendar days from the Notice to Proceed, with liquidated damages stipulated as one-tenth of one percent (1/10 of 1%) of the contract price per day of delay, not to exceed 10%.

Construction was instructed to commence on July 8, 1996.
Petitioner requested an extension of time due to delayed site turnover and bad weather (typhoons), which respondent granted with specified adjusted completion dates extending to April 7, 1997. Respondent notified that liquidated damages would apply beyond extended periods.
Petitioner failed to complete the project within the extended deadlines. On September 22, 1997, respondent demanded formal written commitment from petitioner to complete the works or face termination and takeover.
On October 3, 1997, respondent terminated the contract for reasons including defective workmanship, delayed completion, and lack of commitment by petitioner.

Respondent entered into a Construction Administration Agreement with another firm to complete the project.
On June 3, 1998, respondent filed a Request for Arbitration with the Construction Industry Arbitration Commission (CIAC) for liquidated damages, cost of remedying defects, excess completion costs, attorney’s fees, and litigation expenses.
Petitioner filed a separate civil case seeking payment for unpaid construction services, materials, and equipment costs, which was dismissed due to the arbitration clause.
In the arbitration, petitioner argued delays were caused by factors including delayed site turnover, typhoons, change orders, late approvals, suspension by respondent, and non-payment of billings, and contested the legality of contract termination.

CIAC found there was delay but deemed the termination illegal for failure to provide the 15-day notice required by contract.
It found petitioner liable for defective workmanship costs (reduced amount) but denied liquidated damages to respondent due to unlawful termination.
Petitioner was awarded retention money, payment for work accomplished, and value of materials and equipment left on site.
The net award was ₱1,087,187.80 in favor of petitioner.

Respondent appealed, alleging CIAC erred in not dismissing petitioner’s counterclaims for forum shopping and in denying liquidated damages and excess completion costs.
On February 28, 2005, the CA affirmed the illegality of contract termination but modified the CIAC ruling by awarding respondent liquidated damages of ₱1,572,674.51, reasoning the right to liquidated damages exists independently of contract termination.
Petitioner’s motion for partial reconsideration was denied.

Petitioner filed a petition for review on certiorari questioning the CA’s modification making it liable for liquidated damages despite the contract termination being illegal.

Whether the Court of Appeals erred or correctly ruled in modifying the CIAC decision by awarding respondent liquidated damages against petitioner despite the illegality of contract termination.