G.R. No. 198849 - Camp John Hay Development Corp. vs. Charter Chemical and Coating Corp.

Case Summary (G.R. No. 198849)

Key Dates

Contractor’s Agreement executed: January 2001. Painting works completed: 2003. Final Inspection and Acceptance Certificate issued: May 30, 2005 (belated). Contracts to sell executed: June 2005. Certifications of full payment under offsetting: August 2005. Extrajudicial demand for transfer or payment: August 3, 2007 (and earlier demands Sept 2004, April 2005). Request for Arbitration filed with CIAC: June 12, 2008. CIAC Final Award: March 30, 2009. Court of Appeals Decision: May 13, 2011; Resolution denying reconsideration: September 30, 2011. Petition for review filed with the Supreme Court: November 23, 2011. Supreme Court decision: August 7, 2019.

Applicable Law and Legal Authorities

Constitutional basis: 1987 Philippine Constitution (applicable given decision date). Statutes and rules relied upon: Executive Order No. 1008 (Construction Industry Arbitration Law) and CIAC Rules; Republic Act No. 9285 (Alternative Dispute Resolution Act of 2004); Civil Code provisions—Articles 1191 (rescission for reciprocal obligations), 1197 (fixing a period), 1169 (delay), 1385 (effects of rescission), 2208 (attorney’s fees), and 2210 (interest on damages); Rules of Court (Rule 43 and Rule 45 procedural provisions); relevant jurisprudence cited in the decision.

Procedural Posture

Charter Chemical sought arbitration under the Contractor’s Agreement after repeated demands for delivery or payment failed. CIAC awarded monetary equivalent of two units (P5,900,000.00) and attorney’s fees (P590,000.00). Camp John Hay Development petitioned for review with the Court of Appeals, which affirmed the arbitral award. The developer then filed a petition for review on certiorari to the Supreme Court, contesting CIAC jurisdiction, the characterization of remedy (rescission vs. fixing a period), and the award of attorney’s fees.

Material Facts

The Contractor’s Agreement (2001) encompassed painting works for unit 2E and included compensation partly by offsetting two studio units in Camp John Hay Suites. The Agreement did not state a specific turnover date for the units but allowed selection of specific units by the contractor.
Charter Chemical selected Units 102 and 104. Construction of the Suites had not yet commenced when the Contractor’s Agreement was signed. The contract price was reduced; petitioner paid part and the P5,900,000.00 balance was to be satisfied by conveyance of the two units.
Painting works were completed in 2003; petitioner issued a Final Inspection and Acceptance Certificate in 2005. Contracts to sell were executed in June 2005, but physical delivery did not occur because the Suites remained incomplete. Certifications of full payment under the offsetting scheme were issued in August 2005. Repeated demands by Charter Chemical were not satisfied, prompting arbitration in 2008.

Arbitration Proceedings and Award

CIAC found that petitioner failed to deliver the two units within the targeted completion date and therefore awarded Charter Chemical the monetary equivalent of the two units (P5,900,000.00) plus attorney’s fees (10% of that amount, P590,000.00). The Arbitral Tribunal declined to fix a period under Article 1197, reasoning that the reciprocal nature of the contract provided for delivery timing and that CIAC could fix a period if necessary.

Court of Appeals Findings

The Court of Appeals affirmed the CIAC award, holding that: (1) the arbitration clause in the Contractor’s Agreement remained in force and was not superseded by the later contracts to sell (which were pro forma devices to transfer possession/title); (2) there was a definite time for completion inferred from the July 18, 2003 Memorandum of Agreement between petitioner and the Bases Conversion and Development Authority (which projected completion by end of second quarter 2006), and publicized timetables sufficed to show a completion date; and (3) respondent was already in delay when it demanded transfer in 2007.

Issues Presented to the Supreme Court

Whether CIAC had jurisdiction over the dispute despite a contrary dispute resolution clause in the contracts to sell.
Whether rescission under Article 1191 was the correct remedy, or whether the proper remedy was fixing a period under Article 1197.
Whether attorney’s fees awarded to Charter Chemical were properly granted.

CIAC Jurisdiction — Legal Framework and Application

The CIAC’s jurisdiction is derived from Executive Order No. 1008 and is exclusive over construction disputes involving parties to an arbitration agreement. The Arbitration clause in a construction contract is deemed an agreement to submit disputes to CIAC jurisdiction irrespective of references to other fora. RA 9285 incorporated CIAC arbitration into the broader alternative dispute resolution framework and preserved CIAC’s original and exclusive jurisdiction for construction disputes. The Supreme Court applied these principles and emphasized the State policy favoring arbitration and liberal construction of arbitration clauses. Because the Contractor’s Agreement contained an arbitration clause and the dispute concerned payment and delivery arising from a construction contract, CIAC jurisdiction was upheld. The contracts to sell did not supersede the Contractor’s Agreement or remove the dispute from CIAC’s ambit.

Whether Contracts to Sell Superseded the Arbitration Clause

The Court held the contracts to sell were pro forma, aimed at facilitating transfer under the offsetting scheme, and not intended to supersede the Contractor’s Agreement. They were not inconsistent with the Contractor’s Agreement and did not displace CIAC jurisdiction. The contracts’ venue clause (litigation in Pasig courts) was not allowed to curtail the statutorily conferred jurisdiction of CIAC over construction disputes, and the substantive dispute (payment/default and the transfer-as-payment issue) remained a construction dispute within CIAC’s competence.

Rescission under Article 1191 — Legal Standard and Application

Article 1191 supplies rescission as a remedy when one party to reciprocal obligations fails to comply. Reciprocal obligations are interdependent and typically performed simultaneously. The injured party may elect rescission or fulfillment with damages, and the court shall decree rescission unless there is just cause to fix a period for compliance. Here, respondent completed its painting obligation in 2003 and petitioner retained the benefit of those services but failed to deliver the units or otherwise satisfy the remaining obligation. Given petitioner’s prolonged inability to deliver—construction delays extending over a decade—and absence of just cause to set a new period, the Court concluded that rescission was warranted under Article 1191. Rescission permitted respondent to recover the monetary equivalent of the undelivered units and damages (interest).

Fixing a Period under Article 1197 — Why the Court Declined

Article 1197 allows courts to fix a period where none was fixed but a period can be inferred from the nature and circumstances of the obligation. Fixing such a period is discretionary and requires just cause. The Supreme Court found no just cause to fix a period here because the construction had been protracted for many years (the Suites project dating from 1996 with multiple project plan revisions), and petitioner offered only generalized claims of force majeure and mutual delays without explanation sufficient to justify further tolerance. Fixing a period then would delay respondent’s right to immediate payment; given the lengthy past delay and lack of justification, rescission was the appropriate remedy.

Effects of Rescission and Restitution

Rescission annuls the contract retroactively and creates reciprocal obligations of restitution. Because respondent already performed the painting works and petitioner enjoyed their fruits, respondent could not be restored to a pre-contractual position by return of the services; thus, rescission translated into an indemnity award — payment of the monetary equivalent of the two units plus interest. The Court applied Article 1385 principles requiring return of benefits “as far as practicable” and recognized that where physical restitution is impossible, compensation in money is appropriate. Interest accrual was ordered pursuant to Article 1169 and Nacar v. Gallery Frames: interest from extrajudicial demand (August 3, 2007), at 12% per annum until June 30, 2013, and 6% per annum thereafter until full satisfaction.

Attorney’s Fees — Legal Basis and Rational

Case Syllabus (G.R. No. 198849)

Facts of the Case

Camp John Hay Development Corporation (petitioner) is the investment arm of a consortium engaged in construction of the Camp John Hay Manor in Baguio City and entered into a Contractor’s Agreement in January 2001 with Charter Chemical and Coating Corporation (respondent) to complete interior and exterior painting works of Unit 2E of the Camp John Hay Manor for a contract price of P15,500,000.00.
The Contractor’s Agreement included an offsetting scheme providing that part of the contract price would be offset against two (2) studio-type units at Camp John Hay Suites, the exact total to be based on the units chosen by Charter Chemical.
Charter Chemical selected Units 102 and 104, studio type, in the second phase of Camp John Hay Suites.
At the time the Contractor’s Agreement was signed in 2001, actual construction of Camp John Hay Suites had not yet commenced.
The original contract price was later reduced to P13,239,734.16; petitioner paid P7,339,734.16, leaving a balance of P5,900,000.00 to be settled by offsetting the two (2) studio units. (The Court of Appeals erroneously indicated P5,906,000.00 as the balance.)
Charter Chemical completed the painting works in 2003. Petitioner issued a belated Final Inspection and Acceptance Certificate on May 30, 2005.
Charter Chemical demanded execution of deed of sale and delivery of titles for the two (2) units in September 2004 and again in April 2005.
In June 2005, petitioner and respondent executed contracts to sell. Those uniform contracts provided that possession would be delivered within a reasonable period from the date of completion of the unit, and that delivery of notice of completion or Limited Warranty Deed would constitute constructive delivery.
In August 2005, petitioner issued certifications that the two (2) units were fully paid under the offsetting scheme, but the units were not delivered because Camp John Hay Suites remained under construction.
Petitioner had earlier entered a Lease Agreement with the Bases Conversion and Development Authority (BCDA) on October 19, 1996, providing a three-and-a-half-year period to complete various physical components in Camp John Hay; when delays occurred, parties executed multiple amendments and memoranda of agreement revising the Project Implementation Plan and targeted completion dates.
Under the July 18, 2003 revision, the second phase of Camp John Hay Suites was estimated to be completed by the end of the second quarter of 2006; under the July 1, 2008 revision, the Suites were estimated to be completed by 2012.
Due to continuing construction delay, Charter Chemical, through counsel, demanded that petitioner transfer the units or pay their value (P6,996,517.48 was one stated valuation).
After apparent futility of demands, Charter Chemical filed a Request for Arbitration with the Construction Industry Arbitration Commission (CIAC) on June 12, 2008 under the arbitration clause in the Contractor’s Agreement.

Procedural History

CIAC issued a Final Award on March 30, 2009, ordering petitioner to pay: (1) monetary equivalent of the two (2) units in the total sum of P5,900,000.00; and (2) attorney’s fees in the sum of P590,000.00 (10% of P5,900,000.00). CIAC denied exemplary damages and declined to fix a period for delivery under Article 1197, noting the reciprocal nature of the contract provided the period.
Petitioner filed a Petition for Review under Rule 43 with the Court of Appeals (CA) asserting, among other things, lack of CIAC jurisdiction because the contracts to sell superseded the arbitration clause and that there was no agreed completion date.
The Court of Appeals rendered a Decision on May 13, 2011, affirming the CIAC Final Award, holding (inter alia) that: the arbitration clause in the Contractor’s Agreement was not modified or superseded by the contracts to sell; the Contractor’s Agreement remained the principal covenant; petitioner was in delay by August 3, 2007 when respondent demanded transfer; and the 2003 Memorandum of Agreement showed a definite time for completion (by 2006).
Petitioner’s Motion for Reconsideration before the CA was denied in a Resolution dated September 30, 2011 (received October 7, 2011).
Petitioner moved for and was granted an extension of time to file a Petition for Review under Rule 45; it filed the Petition for Review on Certiorari with the Supreme Court on November 23, 2011.
Charter Chemical filed a Comment and petitioner later filed a Reply. The Supreme Court resolved the case by decision dated August 7, 2019.

Issues Presented to the Supreme Court

Whether the Court of Appeals erred in ruling that the Construction Industry Arbitration Commission had jurisdiction over the dispute despite the existence of a dispute resolution clause in the contracts to sell.
Whether the Court of Appeals correctly rescinded the obligation under Article 1191 of the Civil Code and whether the Court should have fixed a period under Article 1197 of the Civil Code instead.
Whether the Court of Appeals erred in affirming the award of attorney’s fees to respondent Charter Chemical and Coating Corporation.

Petitioner’s Principal Contentions (as raised in the record)

There was no specific, agreed date for completion or delivery of the two (2) units in any contract between the parties; the proper remedy should have been an action to fix a period under Articles 1191 and 1197, not rescission.
The arbitration clause in the Contractor’s Agreement was superseded by a subsequent dispute resolution clause contained in the contracts to sell, which provided venue in the proper courts of Pasig City exclusively.
Contracts take effect only between contracting parties (Article 1311); therefore, reliance on BCDA’s Master Development Plan or memoranda should not determine the date between petitioner and respondent.
The contracts to sell were not construction contracts contemplated by Executive Order No. 1008, and thus the dispute was effectively removed from CIAC’s ambit.
The award of attorney’s fees was unjustified: both tribunals denied exemplary damages; petitioner was not found to have acted in bad faith; and respondent failed to present official receipts to support claimed attorney’s fees.

Respondent’s Principal Contentions (as raised in the record)

The CIAC and the Court of Appeals’ decisions awarding the monetary equivalent of the units and attorney’s fees should be respected and afforded finality.
Charter Chemical agreed to bid on the painting works based on assurances from petitioner’s project manager that, per the Master Development Plan, units would be available w