A.M. No. 99-12-192-MTC - Hold Departure Order Issued by Acting Judge Aniceto L. Madronio

On November 15, 2003, Colorite Marketing Corporation (Colorite) and Architect Ka Kuen Tan Chua, doing business as “Ka Kuen Chua Architectural” (KKCA), entered into a construction contract for a four-storey residential/commercial building in Makati City for a total contract price of Php33,000,000.00.
Key contractual provisions included:

Project commencement within seven days after notice to proceed and completion within 365 days from the seventh day after down payment release.
Liquidated damages of Php10,000 for each calendar day of delay beyond allowed limits.
A maximum allowable delay ("slippage") of 20% or 73 calendar days, beyond which Colorite could terminate the contract.
Colorite’s right to take over and complete the project with deductions for costs incurred from monies due KKCA.

Addenda (#01 and #02) complemented the main contract, incorporating various provisions including the inclusion of excavation and soil protection works within the contractor’s scope.

Colorite issued the Notice to Proceed and made the down payment of Php6,600,000.00 (20% of contract price).
Colorite engaged WE Construction Company (WCC) to perform excavation works. Excavation began on January 10, 2004.
On January 17, 2004, excavation caused soil erosion damaging the adjacent property owned by the Hontiveros family, who filed a formal complaint.
Makati City issued a Hold Order on January 22, 2004 to immediately stop excavation and restore the damaged property. Restoration was completed in October 2005, but the Hontiveros family refused to sign the quitclaim necessary for lifting the Hold Order, thereby suspending construction indefinitely.

After 878 days of delay, Colorite demanded liquidated damages from KKCA. KKCA refused, arguing:

The completion period was suspended during the Hold Order period issued by the city government.
Colorite failed to pay for soil protection costs and 70% of restoration costs for the Hontiveros property, which allegedly were agreed to be shared.

Colorite filed a claim before the Construction Industry Arbitration Commission (CIAC) asserting:

Entitlement to full liquidated damages based on the delay from March 6, 2005.
Claim for loss of rental income (Php13,345,481.00), attorney’s fees (Php500,000.00), and litigation expenses (Php300,000.00).

Excavation works were not part of its obligation but those of a subcontractor, WCC.
Suspension of contract period due to Hold Order and Colorite’s failure to pay soil protection and restoration costs.
Denial of claims for rental losses and liquidated damages.
Counterclaims for soil protection works, design fees, restoration costs, project site maintenance costs, moral and exemplary damages, and attorney’s fees.

The CIAC ruled that both parties shared blame for the delay, awarding Colorite only 50% of the liquidated damages claimed (Php4,390,000.00) and granting partial claims to KKCA (soil protection, design fees, restoration and maintenance costs at 50%).
The Court of Appeals affirmed the CIAC decision with modifications, ordering among others, Colorite to pay Php550,000.00 as part of restoration costs (less an advance), to share 50% of maintenance costs from May 1, 2006, and to reimburse KKCA the Php50,000.00 ECC permit fee. Also, KKCA was enjoined to secure the quitclaim and lifting of the Hold Order to allow construction to proceed.

Both parties filed petitions before the Supreme Court contesting various rulings:

Colorite challenged denial of full liquidated damages, disallowance of rental loss and attorney’s fees, and sharing of restoration and maintenance costs.
KKCA challenged findings on scope of excavation and soil protection works, directives to finish the project and secure quitclaim, amount of restoration cost share, liquidated damages amount, and denial of moral/exemplary damages and fees.

Whether excavation and soil protection works were part of KKCA’s contractual obligations.
Whether Colorite was liable to share restoration costs of the Hontiveros property or related maintenance expenses.

Which party was primarily liable for the erosion and subsequent damage causing project delay.
Whether the delay period was rightly computed including or excluding the suspension from the Hold Order.
Whether Colorite’s inaction in exercising its contractual remedies contributed to prolonged delay.

Reimbursement for soil protection works, design fees, ECC permit fee, restoration and maintenance costs.
Moral and exemplary damages and attorney’s fees.

Whether KKCA must complete the project and bear any increase in construction costs.

Whether the alleged agreement for Colorite to contribute Php700,000 or 70% of the restoration costs was a valid, binding contract superseding earlier provisions.
Whether the escalation clause applies beyond the original contract period given the prolonged delay and project incompletion.