G.R. No. L-41314 - Union Carbide Labor Union vs. Union Carbide Philippines, Inc.

On January 27, 1999, Petroleum Distributors & Services Corporation (PDSC), through its president Conrado P. Limcaco, entered into a Building Contract with N.C. Francia Construction Corporation (FCC), represented by Emmanuel T. Francia, for the construction of the four‐storey Park aN Fly building in Pasay City at a price of ₱45,522,197.72.
The contract provided for a two‐phase schedule under PERT‐CPM (Phase 1 to finish by May 17, 1999; Phase 2 from May 18 to October 20, 1999), with turnover by October 21, 1999, and liquidated damages of 0.1% of the contract price per day of delay.

FCC’s officers signed an Undertaking of Surety holding themselves personally liable for FCC’s obligations.
FCC procured Performance Bond No. 31915 from Philippine Charter Insurance Corporation (PCIC) in the amount of ₱6,828,329.00 to secure faithful performance.

Construction commenced February 1, 1999. By March 25, 1999, FCC was 16 days behind; delay grew to 30 then 60 days despite PDSC’s reminder.
On September 10, 1999, FCC executed a deed of assignment of Caltex receivables and a chattel mortgage over equipment in favor of PDSC; a Memorandum of Agreement (MOA) revised the work schedule and extended the bond to March 2, 2000.

On December 3, 1999, PDSC terminated the contract under Article 12.1, demanded liquidated damages of ₱9,149,962.02 from FCC and PCIC, and when no reply was received, filed suit for damages, recovery of property, foreclosure, replevin, and attachment.
FCC pleaded reduction of contract price to ₱19,809,822.12 due to outsourcing and subcontracting by PDSC; both FCC and PCIC denied liability for liquidated damages, contending the MOA extinguished obligations and the bond had expired or was not binding without PCIC’s consent.
RTC (Branch 111, Pasay City) rendered judgment on January 12, 2004, holding FCC and PCIC jointly and severally liable for ₱9,000,000 in damages and ₱50,000 attorney’s fees. FCC and PCIC appealed.
Court of Appeals (CA) on July 31, 2007, affirmed with modification: liquidated damages based on reduced contract price amounted to ₱3,882,725.13 plus 6% interest from January 10, 2000, ₱50,000 attorney’s fees, cost of suit; PCIC’s liability capped at bond face value ₱6,828,329.66; required FCC to indemnify PCIC for bond payments. CA denied reconsideration on December 28, 2007.
PCIC alone filed a petition under Rule 45 before the Supreme Court raising issues on the scope of bond liability, effect of the MOA, and deductibility of assigned receivables and auction proceeds.

Whether a performance bond answering only for actual and compensatory damages can be extended to cover liquidated damages.
Whether the award of liquidated damages is unconscionable under Article 2227 of the Civil Code and Palmares v. CA.

Whether the MOA, entered without PCIC’s knowledge or consent, discharged PCIC from liability under Article 2079 of the Civil Code by novating the principal contract.

Whether sums of ₱2,793,000.00 (Caltex receivables) and ₱662,836.50 (auction proceeds) must be deducted from the liquidated damages awarded.