G.R. No. 142525 - Federal Builders, Inc. vs. Daiichi Properties and Development, Inc.

Case Summary (G.R. No. 142525)

Factual Background: The Construction Agreement and the Deductive-Cost Dispute

Under the Construction Agreement, Daiichi possessed the right to revise construction plans. During construction, Daiichi reduced the concrete strength from 8,000 to 6,000 pounds per square inch. The reduction decreased the required quantities of cement, steel bars, other materials, and also diminished labor costs. Daiichi then issued revised construction plans.

Daiichi and Federal agreed to reduce the contract price and to submit a separate evaluation of the deductive costs arising from the plan revisions. They diverged, however, on the proper method for computing deductive cost. Daiichi proposed a formula based on the difference between the quantities (and peso value) of steel bars, cement, labor, and materials required under the original plan and those required under the revised plan. Using that approach, Daiichi computed deductive cost at P64,602,110.59.

Federal insisted on a different formula: it compared the quantities (and peso value) required under the construction agreement (specifically the guaranteed maximum or fixed quantity) with the quantities required under the revised plan. Applying this approach, Federal computed deductive cost at P31,326,810.15.

Because of these competing computations, Daiichi engaged an independent quantity surveyor, Davis Langdo and Seah Philippines, Inc. (DLS), to survey the deductive costs. DLS produced an estimate of P68,441,415.58, which was closer to Daiichi’s method. Daiichi also made deductions from the amounts it paid Federal, using Daiichi’s former computation. Federal, feeling aggrieved, initiated arbitration.

CIAC Arbitration Petition and the Central Issue Submitted to the Arbitral Tribunal

Federal filed a petition for arbitration with CIAC on 9 November 1998. The parties agreed that the dispute would be resolved by the Arbitral Tribunal. The record reflected that the basic issue submitted revolved around determining the correct approach for computing the deductive costs caused by the revisions in the construction project.

At the hearing stage, Daiichi filed a Motion to Commission an Independent Quantity Surveyor on 2 June 1999, intending to determine the actual quantities of materials needed to complete the project under both the original (old) plan and the revised plan. Daiichi took the position that the deductive costs could only be properly ascertained by comparing materials requirements under the old and new plans.

Federal opposed the motion. Federal argued that Daiichi already submitted estimates from DLS and that there was no need to commission an estimate of the old plans because the original plans were never implemented. Federal further insisted that the quantity of materials required for the project was reflected in the construction agreement.

Arbitral Tribunal’s Orders Denying the Motion

On 29 June 1999, the Arbitral Tribunal denied Daiichi’s motion. It reasoned that commissioning an independent surveyor was not absolutely necessary and that such engagement would only be useful if both parties agreed.

Daiichi moved for reconsideration. The Arbitral Tribunal denied the motion in an order dated 13 July 1999.

Court of Appeals Proceedings and Ruling Under Rule 65

Dissatisfied, Daiichi challenged the Arbitral Tribunal’s orders before the Court of Appeals. In a Decision dated 9 November 1999, the Court of Appeals set aside the Arbitral Tribunal’s orders and ordered the tribunal to commission an independent quantity surveyor, subject to the relevant time prescription under Section 5, Chapter XV of the Rules of Procedure Governing Construction Arbitration. The Court of Appeals directed the independent surveyor to determine the actual quantities of materials required to complete the “Orient Plaza” project under the original/bid plan and the revised plans.

Federal filed a motion for reconsideration, which the Court of Appeals denied in a Resolution dated 23 February 2000. Federal then filed the present petition to assail the Court of Appeals ruling.

Parties’ Contentions Before the Supreme Court

Federal argued that the petition before the Court of Appeals should have been dismissed outright because Federal believed Daiichi resorted to the wrong remedy: Federal maintained that Daiichi should have filed a Rule 45 petition for review instead of a Rule 65 certiorari petition. Federal emphasized that a special civil action under Rule 65 cannot replace an ordinary appeal.

Federal also contended that, even if procedural defects were ignored, the petition should still be dismissed because the Court of Appeals allegedly committed no grave abuse of discretion amounting to want or excess of jurisdiction. Federal further relied on the limited inquiry in certiorari under Rule 65: whether the tribunal acted without or in excess of jurisdiction, or with grave abuse of discretion.

The Court treated these issues in light of the Court of Appeals’ ground for reversal, namely, that the Arbitral Tribunal’s refusal to commission an independent quantity surveyor disregarded the arbitral rules’ mandate to ascertain facts speedily and objectively and to employ reasonable means to resolve technical disputes.

Legal Basis and Reasoning: Rule 65 Review and the Grave Abuse Finding

The Supreme Court addressed the nature of certiorari under Rule 65 by recalling doctrinal distinctions. A tribunal acts without jurisdiction when it lacks legal power to determine the case. Excess of jurisdiction exists when, although clothed with power, it oversteps its authority as determined by law. Grave abuse of discretion exists when action is capricious, whimsical, arbitrary, or despotic, amounting to lack of jurisdiction.

Applying these standards, the Court held that the Court of Appeals was not far from correctness in finding grave abuse. The Supreme Court agreed with the Court of Appeals that the Arbitral Tribunal’s refusal to allow the independent survey effectively prevented Daiichi from presenting what the Arbitral Tribunal deemed necessary but which the appellate court considered “vital” information for the judicious resolution of the dispute.

The Court explained that the central controversy concerned the computation formula for deductive cost. Daiichi maintained that deductive cost required comparing materials requirements under the original plan and the revised plan, which in turn required determining “old quantity” and “new quantity” through a quantitative survey. Without such survey, Daiichi argued, deductive cost could not be accurately determined. Federal’s approach allegedly relied on the guaranteed maximum quantities under the agreement and the revised plan, but the unresolved components remained the quantities related to the revised and old plan items, which Daiichi sought to establish through expert technical investigation.

The Supreme Court also emphasized that the case involved highly technical matters within the construction industry. Fair-minded and specialized persons were described as valuable sources of needed information for resolving confusing and contradicting claims.

In approving the Court of Appeals reasoning, the Supreme Court pointed out that Article 1, Section 3 of the Rules of Procedure Governing Construction Arbitration exhorts arbitrators to use every and all reasonable means to ascertain facts speedily and objectively, without regard to technicalities of law or procedure. The Court of Appeals concluded that refusal to consider the independent survey deprived the tribunal of a “vital and unimpeachable” piece of information and amounted to disregard of the spirit, if not the letter, of the arbitral rules. The Supreme Court viewed the tribunal’s approach as falling into speculation, conjecture, and guesswork if it relied on the parties’ conflicting submissions without commissioning an independent survey to determine the factual quantities relevant to the competing formulas.

The Supreme Court further addressed the Arbitral Tribunal’s stated justification that an independent survey would only be useful if both parties agreed. The Court of Appeals rejected this rationale as specious because Section 5, Chapter XV of the Rules of Procedure Governing Construction Arbitration permitted the use of technical or legal experts if requested by one of the parties. Thus, refusal to grant Daiichi’s motion conflicted with the rules’ express permission for one-party request of expert assistance.

The Supreme Court likewise found Federal’s argument—that there was no need for a survey because Daiichi already submitted DLS estimates—insufficient. It held that the survey initiated by Daiichi could not be equated with an independent survey sanctioned by the Arbitral Tribunal, which, according to the Court of Appeals and affirmed by the Supreme Court, was suitable for resolving technical disputes by providing the tribunal with objective detailed information.

On the Alleged Encroachment by the Court of Appeals

Federal also contended that the Court of Appeals encroached on CIAC’s jurisdiction by finding Daiichi’s formula more acceptable and thus pre-empting the tribunal’s decision on the merits. The Supreme Court rejected this claim. It held that the Court of Appeals resolved primarily the pro

Case Syllabus (G.R. No. 142525)

Federal Builders, Inc. filed a Petition for Review on Certiorari assailing the Court of Appeals Decision dated 9 November 1999 and its Resolution dated 23 February 2000.
The assailed Court of Appeals ruling set aside the Arbitral Tribunal orders that denied Daiichi Properties and Development, Inc.’s motion to commission an independent quantity surveyor.
The dispute arose from a construction project where the parties differed on the method for computing deductive costs brought about by revisions to the construction plans.
The petition before the Court focused on whether the Court of Appeals committed grave abuse of discretion in reversing the Arbitral Tribunal.

Parties and Procedural Posture

Federal Builders, Inc. (Federal) was the winning bidder and construction contractor for Daiichi’s high-rise building project, named Orient Plaza.
Daiichi Properties and Development, Inc. (Daiichi) was the owner that issued revisions to the construction plans and engaged in the computation of deductive costs.
Federal initiated arbitration before the Construction Industry Arbitration Commission (CIAC) on 9 November 1998.
The parties submitted their dispute to an Arbitral Tribunal under Rules of Procedure Governing Construction Arbitration.
Daiichi filed a Motion to Commission an Independent Quantity Surveyor on 2 June 1999, which the Arbitral Tribunal denied on 29 June 1999.
The Arbitral Tribunal also denied Daiichi’s motion for reconsideration on 13 July 1999.
The Court of Appeals granted Daiichi’s petition and nullified the Arbitral Tribunal orders in a Decision dated 9 November 1999.
The Court of Appeals denied reconsideration in a Resolution dated 23 February 2000, prompting Federal’s present petition.

Construction Agreement Terms

The parties executed a Construction Agreement on 29 December 1995 for the Orient Plaza project.
The agreement fixed Daiichi’s obligation to provide cement and steel bars under specified quantities framed as guaranteed maximum quantity.
The agreement required Federal to supply labor and other materials at a fixed amount of P212,000,000.00.
The agreement granted Daiichi the right to revise construction plans through change orders.
The contract provisions treated plan variations and deviations from bid plans as change order and obliged the contractor to undertake additional, extra, or reduced work at the owner’s written instructions.

Plan Revisions and Changed Engineering Parameters

During construction, Daiichi reduced the concrete strength from 8,000 to 6,000 pounds per square inch.
The reduction caused corresponding decreases in the quantities of cement and steel bars, and it also diminished labor costs.
Pursuant to the revisions, Daiichi issued revised construction plans.
The parties agreed to reduce the contract price, subject to submission of a separate evaluation of deductive costs arising from the revisions.

Deductive Cost Computation Dispute

The parties agreed on the occurrence of revisions affecting quantities and costs but could not agree on the method for arriving at the deductive costs.
Daiichi computed deductive costs by taking differences between material/labor quantities and their peso values under the original plan versus those under the revised plan.
Using that approach, Daiichi computed deductive costs at P64,602,110.59.
Federal insisted on a different formula that used the guaranteed maximum or fixed quantity under the construction agreement as the reference point, and compared it with quantities required under the revised plan.
Under Federal’s formula, Federal reached deductive costs of P31,326,810.15.
The conflicting computations created the core disagreement submitted to arbitration.

Motion for Independent Quantity Surveyor

Because of the computational disagreement, Daiichi engaged an independent quantity surveyor, Davis Langdo and Seah Philippines, Inc. (DLS), to conduct a survey of deductive costs.
DLS produced a deductive cost estimate of P68,441,415.58, which aligned more closely with Daiichi’s computation.
After making deductions from the amount paid to Federal using Daiichi’s computation, Federal filed its arbitration petition on 9 November 1998.

Arbitral Tribunal’s Denial

In the arbitral proceedings, Daiichi filed its Motion to Commission an Independent Quantity Surveyor on 2 June 1999.
Daiichi argued that the tribunal needed to determine the actual quantities of materials required under both the original (old) plan and the revised plan.
Federal opposed the motion, stating that Daiichi had already submitted estimates from an independent quantity surveyor.
Federal argued that estimating the old plan was unnecessary because the old plan was never implemented and that the construction agreement already reflected the relevant quantities.
On 29 June 1999, the Arbitral Tribunal denied the motion, reasoning that an independent survey was not absolutely necessary and that commissioning would be useful only if both parties agreed.
On 13 July 1999, the Arbitral Tribunal denied reconsideration.

Court of Appeals’ Reversal

The Court of Appeals annulled the Arbitral Tribunal orders in its Decision dated 9 November 1999.
The Court of Appeals held that the Arbitral Tribunal’s denial prevented Daiichi from obtaining a vital information necessary for a judicious resolution of the dispute.
The Court of Appeals found that the Rules of Procedure Governing Construction Arbitration required arbitrators to employ all reasonable means to ascertain facts in each case.
The appellate court reasoned that, because Daiichi claimed deductive costs could only be established by determining quantities required to complete the project under both the original plan and revised plans, the tribunal should have commissioned an independent expert.
The Court of Appeals ordered the Arbitral Tribunal to commission an