G.R. No. 181961 - LVM Construction Corp. vs. F.T. Sanchez, Socor, Kimwa

LVM Construction Corporation, a duly licensed construction firm primarily engaged in building roads and bridges for the Department of Public Works and Highways (DPWH), was awarded the Arterial Road Link Development Project in Southern Leyte.
LVM sub-contracted approximately 30% of the contract amount to a Joint Venture composed of F.T. Sanchez Construction Corporation, Socor Construction Corporation, and Kimwa Construction and Development Corporation.
The original contract price was P90,061,917.25, later reduced to P86,318,478.38, wherein the Joint Venture undertook the construction work from Sta. 154 + 210.20 to Sta. 160 + 480.00.
The parties executed a Sub-Contract Agreement on 27 November 1996 which, among other things, provided:

Payment would be made based on the work accomplished at the awarded unit cost less a nine percent (9%) deduction.
A ten percent (10%) retention was to be withheld for every billing, with payment to be released within seven (7) days after the check from the DPWH was made good.
The Joint Venture was required to issue BIR-registered official receipts for every payment received.

The Joint Venture submitted a total of 27 billings for the work rendered.
For Billing Nos. 1 to 26, LVM paid the Joint Venture a total of P80,414,697.12 while retaining P8,041,469.79 (10% retention) as stipulated in the contract.
For Billing No. 27, amounting to P5,903,780.96, LVM made a partial payment of P2,544,934.99 on 31 May 2001, claiming non-receipt of the full payment from the DPWH.

After the completion of the subcontracted works, the Joint Venture demanded settlement of its unpaid claims and the release of the retention money.
On 16 May 2001, LVM communicated to the Joint Venture that its auditors had discovered that there were no deductions for E-VAT (8.5%) in its previous billings.
LVM claimed it would deduct the E-VAT payments from the outstanding amount, asserting that such deductions were justified even though they had not been previously implemented.
The Joint Venture responded on 14 June 2001 by insisting that, because it had issued official receipts for each payment, it was liable to pay a 10% VAT, for which LVM could claim an equivalent input tax.

With claims remaining unpaid more than four years after work completion, the Joint Venture filed a complaint for sum of money and damages on 30 June 2005 before the Construction Industry Arbitration Commission (CIAC).
The Joint Venture’s amended complaint further detailed specific monetary claims:

LVM, in its answer with a compulsory counterclaim, argued that the Joint Venture’s claims were offset by LVM’s outstanding obligation of P21,737,094.05 regarding liquidated damages from project delays.
During the subsequent proceedings, LVM reiterated that the Joint Venture was not entitled to have the E-VAT payments deducted from the retention money, asserting that no contractual basis provided for such offsetting.

Granting the Joint Venture its claims for the release of retention money for Billings 1-26, interest thereon, and the unpaid balance on Billing No. 27.
Holding that the VAT deductions made by DPWH pertained to the entire project and already included all supplies and subcontractor services.
Determining that LVM was entitled to claim the input VAT corresponding to the 10% output VAT paid by the Joint Venture.

The CIAC also denied LVM’s counterclaim for liquidated damages due to the absence of contractual provision.
LVM elevated the matter to the Court of Appeals (CA) via a petition for review.
The CA, in its 28 September 2007 Decision, affirmed the CIAC’s ruling including the rejection of LVM’s claim for the deduction of E-VAT from the retention money.
LVM subsequently filed a petition for review on certiorari before the Supreme Court, arguing that:

The statutory obligation under Republic Act 8424 (or the NIRC) should be read into the contract.
The issuance of official receipts by the Joint Venture should be sufficient to deem that the VAT had been paid.

Whether the Sub-Contract Agreement contained an express provision allowing LVM to deduct or offset its E-VAT payments from the retention money due to the Joint Venture.
Whether, in the absence of a contractual stipulation on the matter, the statutory provisions on VAT (under Republic Act 8424 and the NIRC) automatically become incorporated into the contract.
Whether the mere issuance of BIR-registered official receipts by the Joint Venture implies that its VAT liability has been discharged, thereby justifying the offset claimed by LVM.
Whether judicial bodies (CIAC and CA) correctly interpreted the contractual terms by denying LVM’s unilateral attempt to offset E-VAT payments from retention money.