Title
Diesel Construction Co., Inc. vs. UPSI Property Holdings, Inc.
Case
G.R. No. 154885
Decision Date
Mar 24, 2008
Construction dispute between Diesel and UPSI over delays, unpaid balance, and liquidated damages; Supreme Court ruled in favor of Diesel, awarding unpaid contract balance and attorney’s fees, while UPSI received damages for unfinished work.
construction project
legal battle
ruling

Case Summary (G.R. No. 154885)

Factual Background

Diesel Construction Co., Inc. contracted with UPSI Property Holdings, Inc. for interior architectural works for floors 14 to 16 of UPSI Building 3 for PhP 12,739,099, payable by progress billing. Diesel posted a performance bond through FGU Insurance Corp. The Agreement fixed a 90-day prosecution period, initially commencing in August 1999. The Agreement contained a clause imposing liquidated damages equal to one-fifth of one percent of the total project cost per calendar day for unjustifiable delay, and an excusable delays provision listing specified causes. During performance, the parties executed change orders and Diesel sought extensions for causes that included manual hauling of materials, delayed supply of marble, various change orders, and delay in installation of shower assemblies. UPSI assessed liquidated damages by deductions from progress payments and withheld ten percent retention and the unpaid balance after rejecting Diesel’s notice of completion.

Proceedings Before the CIAC

Diesel filed for arbitration seeking the unpaid balance of the contract price, damages, and attorneys fees. UPSI counterclaimed for repayment of expenses allegedly incurred to complete the Project and defended its deductions for liquidated damages. The CIAC, on December 14, 2001, rendered judgment for Diesel in the aggregate amount of PhP 4,027,861.60, specifically PhP 3,661,692.60 as unpaid balance and PhP 366,169 as attorneys fees. The CIAC dismissed UPSI’s counterclaim and assessed arbitration costs in the amount of PhP 298,406.03 against UPSI.

Proceedings Before the Court of Appeals

UPSI petitioned the Court of Appeals. The CA rendered its decision on April 16, 2002 modifying the CIAC award by assessing Diesel with liquidated damages of P1,309,500 (forty-five days at P29,100 per diem), reducing Diesel’s unpaid balance award to P2,441,482.64 (subject to deduction of liquidated damages), denying all claims for attorneys fees, directing the parties to share arbitration costs equally, and discharging FGU as surety. On reconsideration, the CA by resolution dated August 21, 2002 partially granted Diesel’s motion and reduced the liquidated damages to P1,146,519 (forty-five days at P25,478.20 per diem), while affirming the remainder of its main opinion.

Issues on Review

The petitions presented competing issues. Diesel questioned whether the CA had jurisdiction and discretion to examine the qualifications of CIAC arbitrators and to overturn the CIAC’s factual findings and award on the basis of its own assessment. UPSI challenged the CA’s denial of its claim for additional expenses to complete alleged unfinished work, the CA’s finding that delay amounted to only forty-five days, and the CA’s resolution on motions for reconsideration. The Supreme Court consolidated the petitions and framed the issues principally as the proper scope of appellate review of CIAC factual findings, the existence and extent of delay and entitlement to liquidated damages, the claim for completion expenses and abandonment, and entitlement to attorneys fees and costs.

Jurisdiction to Review CIAC Findings

The Supreme Court affirmed that appellate courts may review findings of fact of specialized administrative bodies, including the CIAC, when the sufficiency of supporting substantial evidence is properly raised. The Court reiterated the settled rule that courts should respect administrative findings of specialized agencies unless there is absolutely no evidence or the evidence is manifestly and patently insubstantial. The Court rejected Diesel’s contention that the CA lacked competence to assess the CIAC’s factual conclusions, and observed that the CA’s critique of the personal qualifications of individual CIAC members was irrelevant to the legal question whether the CIAC’s factual findings were supported by substantial evidence.

Whether Diesel Was in Delay and Entitled to Extensions

The Supreme Court examined the conflicting factual findings on delay. The CIAC found that Diesel had substantially completed the Project and that UPSI’s imposed liquidated damages lacked basis. The CA found Diesel to have incurred delay and assessed forty-five days of unjustifiable delay, excluding certain delays it deemed foreseeable and attributable to Diesel—most notably the manual hauling of materials due to inability to install Diesel’s own hoisting machine. The Court analyzed the contract provision on excusable delays and the implementation and timing of Change Orders Nos. 1 to 4, as well as Diesel’s Schedule of Completion for additional works. The CIAC found that UPSI’s change orders effectively moved the completion date to April 7, 2000, and that progress reports showed Diesel’s scope of work at 97.56% complete by March 22, 2000. Applying Article 1234 of the Civil Code concerning substantial performance, the Court concluded that Diesel had substantially performed in good faith and that liquidated damages did not accrue after substantial completion. Consequently, the Court deleted the CA’s award of liquidated damages.

Attorneys’ Fees and Arbitration Costs

The CIAC had awarded Diesel PhP 366,169 as attorneys fees. The CA denied attorneys fees on the ground that Diesel was in delay. The Supreme Court reinstated the CIAC’s award of attorneys fees under Article 2208 of the Civil Code, specifically subparagraph allowing recovery where the defendant acted in gross and evident bad faith in refusing to satisfy a plainly valid and demandable claim. The Court found UPSI’s withholding of retention money and refusal to pay the unpaid balance to have been unreasonable and tantamount to bad faith, thereby justifying attorneys fees. The Court likewise charged arbitration costs of PhP 298,406.03 against UPSI.

UPSI’s Claim of Abandonment and Additional Completion Expenses

Both the CIAC and the CA had denied UPSI’s counterclaim that Diesel abandoned the Project and that UPSI incurred recoverable expenses to complete the work. The Supreme Court found no basis to disturb those factual conclusions. The Court observed that progress reports, including UPSI’s own Progress Report No. 19, contradicted UPSI’s assertion of abandonment by showing continued presence of laborers and 97.56% completion. UPSI failed to prove that any rectification works it performed were necessitated by faulty workmanship of Diesel. The Court therefore denied UPSI’s claim for additional completion expenses but awarded UPSI damages corresponding to the value of the unfinished portion.

Damages for Unfinished Work and Mathematical Adjustment

Acknowledging Diesel’s 97.56% accomplishment, the Court applied Article 1234 to require Diesel to be credited for substantial performance and to compensate UPSI for the unfinished 2.44% of the Project. The Court quantified 2.44% of the total Project cost at PhP 310,834.01 and directed that this amount be deducted from retention money, and if necessary, from the unpaid balance otherwise due Diesel.

Final Disposition

The Supreme Court modified the Court of Appeals decision and resolved the petitions as follows: (1) the award for liquidated damages was deleted; (2) the CIAC award to Diesel for the unpaid balance of the contract price of PhP 3,661,692.64 was affirmed; (3) UPSI was ordered to pay the costs of arbitration before the CIAC in the amount of PhP 298,406.03; (4) Diesel was awarded attorneys fees in the amount of PhP 366,169; a

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