Title
Atlantic Erectors, Inc. vs. Court of Appeals
Case
G.R. No. 170732
Decision Date
Oct 11, 2012
Construction contract dispute: Atlantic Erectors delayed Herbal Cove project, granted extensions but failed to meet deadlines. Unlawful termination upheld, but liquidated damages imposed for delay. SC affirmed CA ruling.
construction company
housing project
liquidated damages

Case Summary (G.R. No. 93252)

Construction Contract, Project Timeline, and Stipulated Liquidated Damages

On June 20, 1996, respondent and petitioner entered into a Construction Contract under which petitioner agreed to undertake, accomplish, and complete the works for the subdivision project. The contract required completion and delivery of the housing units within one hundred eighty (180) consecutive calendar days, reckoned from the date indicated in the Notice to Proceed to be issued to petitioner. To secure timely completion, petitioner agreed to pay respondent liquidated damages equivalent to one-tenth of one percent (1/10 of 1%) of the contract price per calendar day of delay, until completion, delivery, and acceptance of the works, capped at a maximum of ten percent (10%) of the contract price. Petitioner was instructed to commence construction on July 8, 1996.

Petitioner subsequently requested extensions of time. In a letter dated January 6, 1997, petitioner asked for an extension corresponding to days of delay in the start of the works allegedly caused by belated turnover of the sites, and it again sought additional extension due to bad weather. Respondent allowed schedule adjustments in a letter dated January 11, 1997, but it reminded petitioner that liquidated damages would apply beyond the extended periods. Respondent allowed completion and delivery by specified dates: for SDA-15, 15 March 1997 (or an extension of 67 days); for TH 16-A and TH 16-B, 7 March 1997 (or an extension of 59 days); and for TH 17-A and TH 17-B, 7 April 1997 (or an extension of 90 days).

Despite these adjustments, petitioner still failed to complete and deliver within the extended periods. On September 22, 1997, respondent demanded a formal written commitment to finish and complete the contracted works, warning that absent such commitment the contract would be deemed terminated and respondent would take over the project effective October 1, 1997, with corresponding excess cost charges and continued liquidated damages. On October 3, 1997, respondent informed petitioner that management unanimously agreed to terminate the contract due to: blatant defects in workmanship; delayed completion; and lack of firm commitment to finish.

Arbitration, Parallel Civil Case, and CIAC Proceedings

After the termination, respondent engaged Benedict O. Manalo and Associates, Engineers and Construction Managers to complete the housing units that petitioner had started. On June 3, 1998, respondent filed a Request for Arbitration with the Construction Industry Arbitration Commission (CIAC) against petitioner, seeking payment of liquidated damages, the cost to remedy defective workmanship, excess costs incurred to complete the works, attorneys’ fees, and litigation expenses, docketed as CIAC Case No. 13-98.

Before this arbitration, petitioner filed a civil case with the Regional Trial Court (RTC) on November 21, 1997 to recover sums for unpaid construction services, materials, equipment, and tools, as well as rental income from equipment held by respondent. The RTC dismissed the civil case on motion of respondent based on the arbitration clause, and the dismissal was affirmed on appeal.

In its response before the CIAC, petitioner alleged that the project delay was attributable to: delayed turnover of the site; the occurrence of two typhoons; change orders and additional works; late approval of shop drawings; non-arrival of a chimney expert; delayed payments; and non-payment of the last two billings. Petitioner also claimed that respondent suspended construction and deprived it of the opportunity to complete by November 15, 1997, and petitioner insisted that the termination was unlawful.

After receiving evidence and memoranda, the CIAC ordered respondent to pay petitioner P1,087,187.80 with 6% interest per annum from the time the award became executory. The CIAC’s computations and awards reflected a partial grant of both sides’ claims: petitioner obtained the net award of P1,087,187.80 through the retention and collectible work-related amounts, while respondent was awarded only the excess cost to complete with deductions reflecting offsets.

CIAC Findings on Delay, Illegality of Termination, and Refusal to Grant Liquidated Damages

The CIAC found that petitioner incurred delay in completion. Although petitioner had filed a request for extension granted until April 7, 1997, the project remained incomplete, and petitioner did not request any further extension. However, the CIAC declared respondent’s termination of the contract illegal because respondent failed to comply with the contract’s termination requirements, specifically the contract’s provision requiring 15-day notice prior to termination. The CIAC further held that petitioner’s delay was “overridden” by the unlawful termination and, therefore, respondent was not entitled to liquidated damages. Additionally, due to failure to submit sufficient evidence, the CIAC found respondent not entitled to the full additional cost to complete, though it still allowed a reasonable amount for correcting defects in light of admitted and proven defects. It also sustained petitioner’s entitlement to 10% retention, amounting to P1,012,139.89, from which respondent’s claims were deducted.

Court of Appeals Ruling: Liquidated Damages Awarded Despite Illegal Termination

The matter reached the CA through separate appeals. The petition concerning petitioner’s claims before the CA was previously dismissed, and the dismissal was affirmed up to the Court, effectively ending that particular track. Respondent’s separate appeal in CA-G.R. SP No. 52070 challenged the CIAC’s refusal to dismiss petitioner’s counterclaims based on forum shopping and, more importantly, the CIAC’s conclusions that: the termination was illegal; respondent was not entitled to liquidated damages and excess cost to complete; and petitioner was entitled to certain values related to materials and equipment left at the jobsite.

On February 28, 2005, the CA affirmed with modification the CIAC decision. It agreed that petitioner’s counterclaims could not be dismissed on forum-shopping grounds because the RTC civil case had been dismissed for lack of jurisdiction due to the arbitration clause. On the substantive issue, the CA sustained the CIAC’s conclusion that the termination was illegal for failure to comply with the 15-day notice. Nevertheless, the CA disagreed with the CIAC on liquidated damages. It held that even with the termination declared illegal, petitioner remained chargeable for liquidated damages due to delay in completion. The CA reasoned that the right to liquidated damages existed whether or not the contract was terminated, because delay alone was decisive.

The CA denied petitioner’s motion for reconsideration in a resolution dated September 7, 2005, and later issued another resolution dated December 5, 2005 correcting a clerical misidentification of the movant. Petitioner then filed a Rule 45 petition challenging the CA’s modification that imposed liquidated damages.

Issue Presented to the Supreme Court

Petitioner argued that the CA erred in ruling that petitioner was liable to pay respondent liquidated damages. The single issue presented was whether the CA decided a question of substance not in accord with law or applicable Supreme Court decisions when it modified the CIAC finding petitioner liable for liquidated damages.

Legal Basis: Liquidated Damages, Contractual Autonomy, and Proof of Delay

The Supreme Court approached the dispute by focusing on the controlling principle that liquidated damages are governed by Articles 2226-2228 of the Civil Code. Under Article 2226, liquidated damages are amounts agreed upon by the parties to a contract and payable in case of breach. Article 2227 provides for equitable reduction when the agreed amount is iniquitous or unconscionable. Article 2228 clarifies that when the breach is not the one contemplated by the parties, the law determines damages rather than the stipulation.

The Court reiterated that parties may stipulate liquidated damages to strengthen the coercive force of the obligation and provide an agreed measure of damages for the owner’s losses due to delays. As a pre-condition, however, the owner must prove the contractor’s delay in performance.

Applying these principles required a re-examination of the Construction Contract provisions. As a general matter, contracts are the law between the parties, and courts enforce their stipulations so long as they are not contrary to law, morals, good customs, public order, or public policy.

Contract Provisions on Default, Termination, and Separate Remedies

The contract provisions relevant to delay and remedies were Article IX (Failure to Complete Work). The contract recognized that the owner would not suffer losses due to the contractor’s delay or failure to complete within the time stipulated, and it expressly required the contractor to pay liquidated damages for delay at the agreed rate and up to the agreed maximum. It also specified that the owner’s right to terminate and take over performance either by administration or otherwise, and to charge excess costs against the contractor, required proper notice and a certification by the project manager that sufficient cause existed. The contract also included a rule that suspension of the works for at least fifteen days would be deemed unreasonable, thereby giving the owner the right to declare the contractor in default. Importantly, the contractual scheme distinguished damages due to unexcused delays from the owner’s right to terminate and take over performance.

The Supreme Court further considered the General Conditions, including provisions that time was an essential feature and that upon failure to complete within contract time the contractor shall pay liquidated damages as stipulated, with the owner entitled to deduct such amounts from sums due. It also noted provisions explaining that the owner’s takeover by administration or re

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