Department of Public Works and Highways vs. Italian-Thai Development Public Co., Ltd.

Factual Background

The DPWH engaged a Joint Venture led by KEI as project consultant under an Agreement for Consultancy Services dated March 15, 2002 for detailed engineering design and construction supervision of road and viaduct works included in the Arterial Road Links Development Project V, PH-217. KEI prepared an Engineering Geological and Geohazard Assessment Report (EGGAR) after a scope expansion in 2003. KEI initially produced a sloping design with slopes ranging from .20:1 to .50:1 and road widths of four to five meters. KEI, with DPWH concurrence, later abandoned the original slope design and implemented an overhang design. The civil works were divided into separate contract sections and bid individually.

Contract Award and Variation Orders

ITD submitted the lowest bid for the Suyo-Cervantes Road Section and entered into a Contract Agreement with DPWH on March 27, 2006. The contract price was P1,164,622,570.23 and, after approval of Variation Order No. 4, rose to P1,184,169,948.20. The Contract incorporated FIDIC Conditions and COPA. On December 17, 2006, KEI instructed ITD to widen the carriageway to a uniform 6.10 meters and to limit stone masonry height to one meter. DPWH approved several Variation Orders: No. 1 (February 22, 2007) shifting from ACP to PCCP; No. 2 (June 5, 2008) standardizing width to 6.10 meters and reflecting the overhang design; No. 3 (February 20, 2009) adding the Butac Slope Protection; and No. 4 adding slope protection and reinstating a catch fence.

Claim, Joint Survey and Arbitration

In July 2010 ITD submitted claims for overrun earthwork quantities. KEI prepared a technical evaluation recommending denial. The parties conducted a joint survey of 314 cross-sections with the overhang design. On August 23, 2011 KEI informed ITD that its claim could not be allowed. ITD then notified DPWH of its intention to arbitrate and referred the dispute to CIAC in September 2011. ITD claimed overrun earthwork quantities arising from the overhang design (P184,957,341.20), road realignment (P115,616,592.15), road improvement (P12,138,852.37), miscellaneous works (P7,226,406.07), and legal and expert expenses (P5,000,000.00). DPWH counterclaimed for temperate and exemplary damages and litigation expenses. KEI asserted claims for attorney’s fees, litigation expenses, moral and exemplary damages.

CIAC Final Award

The CIAC rendered a Final Award dated January 14, 2014 and found DPWH liable for ITD’s claims for overrun earthwork quantities. The dispositive portion awarded ITD a total of P106,509,724.49, and directed interest at six percent per annum upon the award’s becoming final and executory. The CIAC reasoned that the change from the original sloping design to the overhang design caused collapses, slope failures, landslides and cliff edge collapse during ITD’s blasting operations, which demonstrated the overhang design’s unsuitability given the rock conditions described in the EGGAR. The CIAC also found that KEI’s instruction to widen the carriageway forced ITD to realign the road and excavate into the mountain to achieve the required width and to reduce stone masonry height, thereby producing overrun quantities. The CIAC awarded ITD additional earthwork quantities for road improvements in the amount of P9,119,385.91 because portions remained unpaid. The CIAC declined to award attorney’s fees and expert expenses, reasoning that lapses by DPWH and KEI did not rise to gross and evident bad faith. The CIAC refused DPWH’s and KEI’s counterclaims and held that ITD’s claims were not barred by waiver, abandonment or estoppel despite noncompliance with notice provisions in FIDIC and COPA, because FIDIC allows arbitration even when timely notice and contemporary records requirements are unmet and because DPWH’s conduct — including agreement to a joint survey — estopped it from invoking the procedural defense. The CIAC awarded only temperate damages in lieu of actual damages because the joint survey was not completed and actual damages could not be determined.

Court of Appeals Decision

DPWH filed a petition for review under Rule 43 before the Court of Appeals. The Court of Appeals, in a Decision dated November 27, 2017, dismissed the petition and affirmed the CIAC Final Award. The CA agreed that the Variation Orders reflected changes made at DPWH’s behest and that such changes constrained ITD to realign and excavate, producing collapses and other events that caused overrun earthwork quantities. The CA found undisputed that DPWH and KEI did not inform ITD of the existence of the EGGAR, and that this non-disclosure together with the failure to foresee the effects of the design changes caused ITD to incur additional quantities. The CA held that DPWH failed to present convincing proof that the overruns were due to excessive blasting by ITD. The CA further concluded that DPWH waived strict compliance with FIDIC and COPA procedures by agreeing to negotiate and by permitting a joint survey to determine settlement.

Grounds in the Petition for Review to the Supreme Court

DPWH elevated the matter to the Supreme Court by a Petition for Review under Rule 45, alleging grave abuse of discretion on the part of the CA. DPWH asserted that the CIAC committed errors in finding DPWH liable for overrun earthwork quantities attributed to the overhang design, to road realignment, and to road improvements and miscellaneous works. DPWH further contended that the CIAC erred in declaring the FIDIC and COPA claim procedures moot, in accepting ITD’s varying claims without sufficient proof, in denying DPWH’s cross-claims against KEI, and in awarding temperate damages.

Supreme Court’s Reviewability Analysis and Legal Standards

The Supreme Court denied the Petition. The Court reiterated that Section 1, Rule 45, Rules of Court restricts a petition for review on certiorari to pure questions of law and that Section 19, Construction Industry Arbitration Law renders CIAC awards final and unappealable except on questions of law. The Court surveyed controlling jurisprudence, including Hi-Precision Steel Center, Inc. v. Lim Kin Steel Builders, Inc., CE Construction Corp. v. Araneta Center, Inc., and Shinryo (Phils.) Company, Inc. v. RRN, Inc., to explain that factual findings of specialized quasi‑judicial bodies such as CIAC are generally final and not reviewable by this Court. The Court emphasized that exceptions to this rule are narrowly cabined and permit review only upon a clear showing that the arbitral process was so tainted that the tribunal lacked jurisdiction or that basic integrity of the process was imperiled. The Court identified recognized grounds permitting review: corruption, fraud or undue means in procuring the award; evident partiality or corruption of arbitrators; refusal to hear material evidence; disqualification of arbitrators with willful non‑disclosure; and excess or egregious imperfection in the exercise of powers so as to render the award not mutual, final and definite. The Court further noted additional instances recognized in prior cases, such as deprivation of a fair opportunity to present one’s position, awards obtained through fraud or corruption, findings contrary to those of the Court of Appeals, or denial of administrative due process.

Application of Standards to the Present Case

The Supreme Court found that DPWH failed to meet the heavy burden required to invoke any exception to the limited scope of review. DPWH did no