Title
F.F. Cruz and Co., Inc. vs. HR Construction Corp.
Case
G.R. No. 187521
Decision Date
Mar 14, 2012
F.F. Cruz & Co. contested arbitration findings regarding unpaid billings and payment measures with HR Construction. The court affirmed the arbitration ruling, holding FFCCI had waived its joint measurement requirements and was responsible for payment.
subcontract agreement
construction project
progress billing

Case Summary (G.R. No. 187521)

Factual Background

In 2004, F.F. Cruz & Co., Inc. contracted with the Department of Public Works and Highways for the Magsaysay Viaduct project. On August 9, 2004, F.F. Cruz & Co., Inc. and HR Construction Corp. executed a Subcontract Agreement for the supply of materials and performance of a portion of the works for a subcontract price of P31,293,532.72. The subcontract required monthly progress billings by HRCC, payment by FFCCI within thirty days subject to specified deductions, and a joint measurement with DPWH and consultants to arrive at agreed quantities. HRCC submitted four progress billings between September and November 2004 totaling P6,107,919.63. FFCCI made three payments between December 2004 and March 2005 amounting to P3,472,521.86 after deductions for retention and withholding tax. HRCC demanded payment and halted work after December 18, 2004. HRCC filed for arbitration with CIAC on March 7, 2005, claiming an unpaid balance, attorneys’ fees, and costs.

Proceedings before the CIAC

An Arbitral Tribunal was constituted and, after preliminary conferences, the parties defined the issues to include the correct unpaid amount, compliance with the joint-measurement condition, justification for work stoppage, and allocation of arbitration costs. HRCC reduced its monetary claim during proceedings to P2,635,397.77, reflecting the difference between its billings and FFCCI payments. Both parties presented evidence and testimony addressing valuation of completed works, the practice of measurement, and the parties’ conduct.

The CIAC Decision

On September 6, 2005, the CIAC rendered a decision in favor of HRCC. The arbitral tribunal held that FFCCI’s practice amounted to an unauthorized back-to-back payment scheme that was not provided in the subcontract. The CIAC credited HRCC’s progress billings as the proper valuation of its completed works. The CIAC also found that FFCCI had waived the contractual right to require a prior joint measurement because FFCCI had paid HRCC on prior billings without insisting upon joint quantification. The tribunal awarded HRCC P2,239,452.63 as balance of unpaid billings, plus reimbursement of arbitration costs and interest at six percent from the date of decision, thereafter twelve percent until full payment.

Court of Appeals Proceedings and Ruling

FFCCI sought review with the Court of Appeals. The CA, in its Decision dated February 6, 2009, denied the petition. The CA agreed with the CIAC that FFCCI had waived its right to insist on the joint measurement because FFCCI had received billings and paid amounts without enforcing the contractual measurement condition. The CA held that FFCCI, as the main contractor, bore the responsibility to include HRCC in any measurement conducted with DPWH. The CA also found HRCC’s stoppage justified as exercisable rescission for nonpayment, and observed that FFCCI had not counterclaimed for liquidated damages. A motion for reconsideration was denied in the CA Resolution dated April 13, 2009.

Issues Presented to the Supreme Court

FFCCI presented issues framed as legal questions, including whether FFCCI’s conduct in conducting verification surveys in HRCC’s presence constituted waiver of the right to verify and approve billings; whether FFCCI’s payments based on its verification obliged it to accept HRCC’s billed accomplishments; whether comparing FFCCI payments to HRCC billings resolved the controversy; whether FFCCI’s failure to counterclaim for liquidated damages ratified HRCC’s stoppage; and whether the CA disregarded material facts. The central legal questions narrowed to (1) the effect of FFCCI’s noncompliance with the subcontract’s joint-quantification requirement on HRCC’s progress billings, and (2) whether HRCC validly rescinded the subcontract by stopping work.

Procedural Issue — Finality of CIAC Findings

The Supreme Court first addressed whether the petition impermissibly sought review of CIAC factual findings. The Court reiterated that under E.O. No. 1008, CIAC arbitral awards were final and inappealable except on questions of law under Section 19. The Court recalled precedent that factual findings of CIAC are generally conclusive and not reviewable, subject to narrow exceptions such as corruption, evident partiality, misconduct, disqualification, or excess of powers. The Court found that the issues raised by FFCCI were primarily questions of law concerning the interpretation and effect of the subcontract terms, rather than challenges to the probative value of evidence, and thus were proper for review.

First Substantive Issue — Joint Quantification and Waiver

The Court reviewed the subcontract’s Article 4.3, which required monthly billings to include progress accomplishments “as approved by FFCCI” and mandated joint measurement with DPWH, consultants, FFCCI, and HRCC to arrive at agreed quantities. The Court emphasized that contract terms govern. The evidence showed that the stipulated joint measurements never occurred with HRCC’s signature and that FFCCI, as main contractor, was responsible for requesting and including DPWH in joint quantifications. Notwithstanding, FFCCI had received HRCC’s billings and made payments on three occasions without enforcing the joint-measurement condition. The Court applied the doctrine of waiver as set forth in precedent and held that FFCCI’s conduct constituted an implied, voluntary relinquishment of its contractual right to demand prior joint measurement. Having waived that condition, FFCCI lost the right to dispute HRCC’s valuation of completed works after the fact. The Court therefore agreed with the CIAC and CA that HRCC’s progress billings were enforceable against FFCCI to the extent awarded.

Second Substantive Issue — Rescission and Work Stoppage

The Court addressed HRCC’s cessation of work and its claim to have rescinded the subcontract. It noted Article 11.2 of the Subcontract Agreement, which expressly provided that notwithstanding any dispute or arbitration, HRCC “shall at all times proceed with the prompt performance of the Works in accordance with the directives of FFCCI and this SUBCONTRACT Agreement.” The Court treated that clause as an express waiver by HRCC of the right to effect extrajudicial rescission through work stoppage. The Court reconciled Article 1191 of the Civil Code — which recognizes the implied power to rescind reciprocal obligations for nonperformance — with the parties’ express contractual waiver. The Court concluded that HRCC had waived its extrajudicial rescission remedy and thus was not justified in stopping work on the subcontract.

Costs of Arbitration

On costs, the Court declined to impose the entire arbitration expenses on FFCCI despite FFCCI’s partial liability for

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