Title
H.L. Carlos Construction Inc. vs. Marina Properties Corp.
Case
G.R. No. 147614
Decision Date
Jan 29, 2004
Construction dispute between HLC and MPC over unpaid claims, change orders, and retention money; HLC awarded partial labor escalation, denied material escalation, and held liable for damages due to project delays.
building contractor
real estate development company
labor cost escalation

Case Summary (G.R. No. 147614)

Factual Background

On May 10, 1988, MARINA PROPERTIES CORPORATION contracted with H.L. CARLOS CONSTRUCTION, INC. to construct Phase III of the Marina Bayhomes Condominium Project for a lump-sum contract price of P38,580,609.00 and an original completion date of May 16, 1989, later extended to October 31, 1989 with a grace period until November 30, 1989. H.L. Carlos Construction continued work beyond the extended period and ultimately worked on the project until April 20, 1990. On December 15, 1989, H.L. Carlos Construction filed an action for sums allegedly due totaling approximately P14 million, consisting of claims for labor escalation, change orders and material price escalation, withheld retention, detained construction materials, and damages. Respondents filed answers and a counterclaim for P68,296,227.14 for actual and compensatory damages, liquidated damages, advances, and attorneys fees.

Trial Court Proceedings

The Regional Trial Court rendered judgment in favor of H.L. CARLOS CONSTRUCTION, INC., ordering joint and several payment by MARINA PROPERTIES CORPORATION, Tan Yu, and Jesus K. Typoco, Sr. of P7,065,885.03 for unpaid labor escalation, change orders and material price escalations; P3,147,992.39 for ten percent retention withheld; P2,000,000 for detained materials; plus attorneys fees and costs. The trial court dismissed the counterclaim for liquidated damages for lack of evidence, finding that delay and stoppage were caused by respondent’s default in paying progress billings.

Court of Appeals Decision

On appeal, the Court of Appeals reversed and set aside the trial court judgment, dismissed the petitioners’ complaint, and partially granted the counterclaim. The CA held that the contract was a lump-sum agreement that precluded escalation except as expressly allowed; it found no basis to award material cost escalation or unpaid change orders because no supplemental agreements were shown; it denied recovery of the ten percent retention for failure to comply with contractual conditions for release; and it absolved the individual respondents of personal liability. The CA concluded that petitioner abandoned the project and that respondents suffered actual damages exceeding the remaining contract balance, and that liquidated damages were due under the contract at one over one thousand of the contract price per calendar day of delay.

Issues Presented

The Supreme Court framed the principal issues as whether petitioner was entitled to: (1) price escalation for labor and materials, (2) compensation for change orders and extra work, (3) release of ten percent retention, (4) reimbursement for detained materials, and (5) attorneys fees; whether Typoco and Tan were solidarily liable with MPC; and whether petitioner was liable for actual and liquidated damages asserted by respondents.

Parties’ Contentions

Petitioner contended that it was entitled to labor and material escalation because respondents delayed payment and allowed work to continue beyond the original period; that change orders and extra work had been performed and accepted; that retention should be released because respondents prevented completion by contracting a second builder; that detained materials depreciated while respondents withheld them; and that respondents acted in bad faith, justifying attorneys fees under Article 2208, Civil Code. Respondents argued that the contract was lump sum precluding escalation except as expressly provided, that change orders required written supplementary agreements which were not shown, that retention release prerequisites were unmet, that detained materials were not proved to have been withheld, that individual respondents were not officers liable under Section 31, Corporation Code, and that petitioner abandoned the project thereby incurring actual and liquidated damages.

Supreme Court’s Ruling and Disposition

The Supreme Court partly granted the petition. It modified the appellate decision by awarding petitioner P1,196,202 for labor cost escalation and P79,340.52 for extra work, and affirmed the remainder of the Court of Appeals decision. The Court held that labor escalation was payable for the labor component specifically covered by the contract and that material cost escalation was barred by the contract and unsupported by evidence. The Court denied petitioner’s claim for the ten percent retention, refused recovery for detained materials, denied attorneys fees, sustained the finding that individual respondents were not personally liable, and affirmed the award of actual and liquidated damages against petitioner.

Legal Reasoning: Labor and Material Cost Escalation

The Court observed that the Construction Contract expressly provided that the contract was a lump-sum price and that “No cost escalation shall be allowed except on the labor component of the work.” Accordingly, material cost escalation was barred absent a contractual provision or evidentiary proof such as official price indices, which petitioner did not produce. The Court found petitioner entitled to labor escalation for the period during which it continued work with the acquiescence of MPC until April 20, 1990, because MPC had allowed continuation beyond the extended period and had paid labor escalation for an earlier period. The Court rejected the appellate court’s finding that petitioner waived the claim by accepting partial payments, explaining that the documents relied upon were respondents’ Accomplishment Evaluation Sheets noting that labor escalation was not included, and that acceptance of partial payments did not constitute waiver where respondent had not shown an intentional relinquishment of the right. The Court further reasoned that to permit MPC to retain the partially completed project without paying for labor escalation incurred would result in unjust enrichment, defined under Article 22, Civil Code, and cited authority supporting restitution for accepted services.

Legal Reasoning: Change Orders and Extra Work

The Court applied the contract clause requiring written notice and a supplementary agreement for extra work and claims for extra and force account work. It acknowledged that petitioner did not produce the alleged construction memoranda or fully documented supplementary agreements, but found on the evidence that additional work had been performed and was accepted by MPC. The Court relied on MPC’s own Over-all Summary of Reconciled Quantities valuing valid change order claims at P79,340.52 and accepted that valuation. The Court invoked quantum meruit as a basis for recovery of the reasonable value of services rendered to avoid unjust enrichment where extra work was accepted though not covered by a formal supplementary agreement.

Legal Reasoning: Retention Money

The Court upheld the denial of the ten percent retention claim. It emphasized the contractual conditions for release of retention under paragraph 6.3 of the Construction Contract, which required issuance of a Certificate of Completion and the submission of a guaranty bond, with ninety percent of the retained amount released upon certificate and the balance after the guaranty period. Because petitioner had failed to complete the project within the stipulated times and the conditions for release were not fulfilled, the Court affirmed forfeiture of the retention.

Legal Reasoning: Detained Materials

The Court denied recovery for detained materials. It found insufficient proof that respondents unreasonably prevented petitioner from removing materials; petitioner had not made repeated attempts to secure release and maintained a guarded warehouse on site under its control. The Court treated the letter permitting removal as a directive to clear out in view of hiring a second contractor rather than proof of prior detention. Accordingly, depreciation and alleged loss of materials did not justify recovery.

Legal Reasoning: Attorneys’ Fees

The Court refused to award attorneys fees. It held that prevailing in part does not automatically entitle a party to attorneys fees and that no premium should be placed on the right to litigate. The Court found petitioner not blameless, noting that MPC had legitimate claims and that withholding some payments did not constitute gross or evident bad faith sufficient to invoke Article 2208, Civil Code.

Legal Reasoning: Liability of Jesus Typoco, Sr. and Tan Yu

The Court affirmed the Court of Appeals’ rejection of personal liability against Jesus K. Typoco, Sr. and Tan Yu. It applied Section 31, Corporation Code (Batas Pambansa Blg. 68) and the established rule that corporate officers become personally liable only when they assent to patently unlawfu

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