Case Summary (G.R. No. 199650)
Project Performance, Notices, and Joint Evaluation
SSB began work January 7, 2008. Petitioner paid through the 7th monthly progress billing, totaling P15,979,472.03 as of September 16, 2008; however, SSB’s actual accomplishment lagged behind the approved work schedule. Multiple written notices from petitioner’s construction manager documented persistent delays, reduced manpower, and failure to perform critical activities. A joint inspection on November 14, 2008 (signed by representatives of both parties) found the project only 31.39% complete and calculated the uncompleted portion and its estimated value. Petitioner terminated the contract on November 19, 2008.
Arbitration, CIAC Award and Relief Sought
Petitioner filed a Request for Arbitration with CIAC, seeking liquidated damages (P8,980,575.89) and recovery of the unrecouped down payment (P2,379,441.53). The CIAC denied respondent’s motion to dismiss and, after hearings (with Mabunay failing to present evidence), the CIAC awarded petitioner liquidated damages (P4,469,969.90) and the unrecouped down payment (P2,379,441.53), with interest and a limitation that UTASSCO’s liability shall not exceed P8.4M. The CIAC also awarded indemnity and arbitration costs against Mabunay, and directed Mabunay to indemnify UTASSCO for amounts UTASSCO pays to petitioner.
Court of Appeals Ruling
On review under Rule 43, the Court of Appeals agreed with the CIAC that the performance bond’s wording did not clearly limit the surety’s obligation to only the percentage equivalent to the down payment; it interpreted the bond in favor of the obligee and against the surety. However, the CA reversed the CIAC regarding the finding of contractor default: applying a strict construction of the contract timeline, the CA held that delay should be reckoned only after the lapse of the full one‑year completion period (December 24, 2008), and thus petitioner’s termination on November 19, 2008 was premature. The CA annulled the CIAC decision and writ of execution.
Issues Presented on Supreme Court Review
Petitioner sought reversal of the CA insofar as it denied recovery under the performance bond and reinstatement of the CIAC award. Petitioner raised procedural jurisdictional arguments under R.A. No. 9285 and Special ADR Rules, alleged that the CA decided based on an issue not properly litigated below, and disagreed with the CA’s reliance on precedent regarding reckoning of default for construction contracts.
Jurisdictional and Procedural Analysis by the Supreme Court
The Supreme Court rejected petitioner’s contention that R.A. No. 9285 or the Special ADR Rules divested the Court of Appeals of its jurisdiction to review CIAC awards. The Court explained: EO No. 1008 still governs CIAC awards, which are final and unappealable except on questions of law to the Supreme Court; CIAC awards need not be confirmed by RTC under RA 9285; CIAC’s own rules provide for appeals to the CA under Rule 43. Therefore, the CA retained jurisdiction to review CIAC awards in construction disputes.
Whether Delay and Default Were Properly Considered
The Court analyzed default (mora) under Article 1169 and established requisites found in jurisprudence: (1) the obligation must be demandable and liquidated; (2) the debtor delays performance; and (3) the creditor requires performance judicially or extrajudicially. The Court rejected the CA’s view that delay could only be measured against the one‑year completion date and emphasized that the approved work schedule was part of the contract and served both as a basis for monthly payments and for evaluation of progress. The Construction Agreement expressly deemed the contractor in default if he delayed completion by more than 30 calendar days “based on official work schedule duly approved by the OWNER.” Records showed persistent delays beginning as early as April 2008, repeated written notices from petitioner, reduction of manpower, and a joint evaluation showing only 31.39% completion by November 14, 2008. The Court concluded that SSB was in default for failure to substantially perform in accordance with the contract and had not sought extensions or otherwise justified its delays. Consequently, petitioner’s termination was valid and the entitlement to liquidated damages and other remedies under the contract followed.
Nature and Interpretation of the Performance Bond
The Supreme Court considered the bond language in context: while the bond contained an unclear clause referring to guaranteeing “20% down payment,” the primary recitals stated the bond secured “the full and faithful performance” of the contract. Applying Article 1377 (interpretation should not favor the party who caused obscurity) and the rule that ambiguous bonds are construed most strongly against a compensated surety and in favor of the obligee, the Court held the bond guaranteed SSB’s full performance. The Court rejected UTASSCO’s contention that performance of 32.38% of the project extinguished the surety’s obligation because the accomplishment allegedly exceeded the 20% down payment. The Court reiterated that the obligation of a surety is not apportionable and that the bond’s recitals and nature support full guarantee of performance, subject only to the stated monetary cap on the surety’s liability.
Confiscation Clause, Liquidated Damages and Penalty Character
Article 13 of the Construction Agreement authorized the owner, upon contractor default, to confiscate the performance bond “to compensate for all kinds of damages the OWNER may suffer” and to complete the work and charge expenses to the contractor and/or bond. The Court treated this stipulation as a valid penalty clause accessory to the underlying obligation: such clauses strengthen the coercive force of the obligation and are binding if not contrary to law, morals, or public order. Given the contractor’s default, petitioner was entitled to recover from the bond under the contract terms.
Interest, Indemnity and Allocation of Liability
The Supreme Court applied precedent holding that a surety who fails to pay on demand can be held liable for interest even if payment results in exceeding the principal obligation; such interest arises from the law due to delayed payment and the necessity of judicial collection, not from the surety contract itself. The Court therefore authorized interest on amounts awarded. The Court also reaffirmed the CIAC’s indemnity directive: Mabunay must indemnify UTASSCO for amounts it pays under the decision, with interest and attorney’s fees for UTASSCO, as provided in the CIAC award and consistent with the indemnity agreement between Mabunay and UTASSCO.
Disposition and Modifications by the Supreme Court
The Supreme Court granted the petition for certiorari, reversed and set aside the CA decision, and reinstated the CIAC award with specific modifications: UTASSCO was ordered to pay petitioner the full amount of the performance bon
Case Syllabus (G.R. No. 199650)
Case Caption, Citation and Procedural Posture
- Supreme Court, First Division; G.R. No. 199650; Decision dated June 26, 2013; reported at 712 Phil. 587.
- Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeking reversal of the Court of Appeals Decision dated January 27, 2011 and Resolution dated December 8, 2011 in CA-G.R. SP No. 112808.
- Lower proceedings included (a) arbitration before the Construction Industry Arbitration Commission (CIAC), which rendered a Decision dated February 2, 2010; (b) CIAC writ of execution dated November 24, 2010; (c) petition for review to the Court of Appeals by respondent; (d) denial of motions for reconsideration by the CA; and (e) appeal to the Supreme Court by petitioner.
Parties and Roles
- Petitioner: J Plus Asia Development Corporation (Owner/Claimant).
- Contractor/Respondent in arbitration: Martin E. Mabunay doing business as Seven Shades of Blue Trading and Services (Principal/Contractor).
- Respondent/Surety: Utility Assurance Corporation (UTASSCO) (Issuer of Performance Bond / Surety).
- Relevant counsel and representatives were identified in the record; several notices and technical evaluations were executed by project engineers and architects of the parties.
Contract Formation and Principal Contract Terms
- Construction Agreement executed December 24, 2007 for construction of a 72‑room condominium/hotel (Condotel Building 25 / Villa Beatriz) at Fairways & Bluewaters Golf & Resort, Boracay Island, Malay, Aklan.
- Contract price: P42,000,000.00.
- Completion term: one (1) year or 365 days reckoned from the 1st calendar day after signing of the Notice of Award and Notice to Proceed and receipt of down payment (20% of contract price).
- Down payment: 20% = P8,400,000.00; fully paid on January 14, 2008.
- Payment of balance: based on actual work finished, payable upon monthly progress billings within 15 days of receipt.
- Contractor to submit detailed work schedule for Owner approval within seven (7) days after signing and full payment of down payment; this schedule serves as basis for evaluation of progress.
- Article 12 (Liquidated Damages): time is of the essence; contractor to pay 0.1% of Contract Amount for each day of delay after extensions and one‑week grace period; liquidated damages may be deducted from retainages or the Performance Bond as authorized.
- Article 13 (Default of Contractor):Enumerates events of default including delay over thirty (30) calendar days based on official work schedule; allows Owner, after fourteen (14) days written notice, to expel contractor, complete the work, confiscate performance bond to compensate for damages, and charge expenses to contractor and/or bond.
Performance Bond — Terms and Language
- Performance Bond submitted by Mabunay and issued by Utility Assurance Corporation in amount equivalent to 20% down payment (P8.4 million).
- Bond recitals included: (a) requirement to post bond to guarantee 20% down payment; (b) contract required principal to give a bond to secure full and faithful performance of contract; (c) special provision: “the liability of the surety under this bond shall in no case exceed the sum of P8,400,000.00 Philippine Currency”; (d) bond to be null and void if principal performs all undertakings, otherwise to remain in full force and effect.
- Language in the bond contains an unclear specific condition but otherwise recites that it secures the full and faithful performance of principal’s obligations.
Chronology of Performance, Notices and Inspections
- Work commencement: January 7, 2008.
- By September 16, 2008, petitioner had paid P15,979,472.03 (inclusive of down payment) while Mabunay had allegedly accomplished only 27.5% of the project (per record entry).
- Notices of delay and communications from petitioner’s Construction Manager, Engr. Sheila N. Botardo, were sent on multiple dates (examples in record):
- April 30, 2008: formal notice concerning delay in concreting and roof framing; recommendation to prepare a catch‑up schedule and expedite materials.
- October 15, 2008: notice regarding absence of contractor’s engineers on site and recommendation to replace Project Engineer.
- November 5, 2008: reference to uncompleted Field Office and Stock Room despite commitment to complete by that date.
- November 6, 2008: notice concerning decrease in manpower; observation that revised schedule showed approximately 57% delay and caution that reduction of manpower would worsen delay.
- Joint Construction Evaluation Result and Status Report (signed by representatives of both parties) dated November 14, 2008 concluded:
- Project was Thirty One point Thirty Nine Percent (31.39%) complete as of November 14, 2008.
- Construction materials on site valued at P1,049,364.45.
- Additional accomplishment reflected in reconciled 8th and 9th billings was 3.85% with gross value P1,563,553.34 (net creditable P1,538,424.84 after tax).
- Unrecouped amount of down payment: P2,379,441.53 after deducting cost of materials on site and net billings.
- Uncompleted portion of project: 68.61% with estimated value P27,880,419.52.
Termination, Claims and Relief Sought
- Petitioner terminated the Construction Agreement on November 19, 2008 for alleged tremendous delay.
- Demand letters were sent to Mabunay and to respondent surety (UTASSCO); demands unanswered.
- Petitioner filed Request for Arbitration before CIAC (CIAC Case No. 03‑2009), seeking:
- P8,980,575.89 as liquidated damages and
- P2,379,441.53 corresponding to unrecouped down payment/overpayment.
- Petitioner also sought relief against surety under the Performance Bond.
CIAC Proceedings, Defenses and Procedural Rulings
- Mabunay answered alleging delays were caused by retrofitting and revisions ordered by Joo Han Lee and contended the 365‑day period started only on May 2, 2008; he claimed termination was premature and complained of bad faith.
- UTASSCO moved to dismiss claiming petitioner had no cause of action against it; CIAC denied the motion to dismiss and respondent’s motion for reconsideration was likewise denied.
- UTASSCO pleaded that the Performance Bond guaranteed only the 20% down payment and that its obligation under the performance bond was extinguished once contracted work reached a value exceeding the bond amount; it raised counterclaims and cross‑claims and relied on an Indemnity Agreement executed by Mabunay in UTASSCO’s favor.
- Mabunay failed to appear at scheduled hearings and did not present evidence despite due notice; CIAC declared that Mabunay waived his right to present evidence.
CIAC Decision (February 2, 2010) — Award
- CIAC adjudged respondents Mabunay and UTASSCO jointly and severally liable to pay claimant:
- P4,469,969.90 as liquidated damages, plus legal interest at 6% per annum from date of decision until finality, and 12% per annum from finality until fully paid; and
- P2,379,441.53 as unrecouped down payment plus interest at 6% per annum from date of decision until finality, and 12% per annum from finality until fully paid.
- CIAC specified UTASSCO’s liability shall in no case exceed P8.4 million.
- CIAC further ordered Mabunay to pay claimant P98,435.89 as his share in arbitration cost advanced by claimant, with interest from January 8, 2010, and to indemnify UTASSCO for amounts UTASSCO might pay under the decision plus interest and attorney’s fees as to UTASSCO.
Court of Appeals Decision and Reasoning (Assailed Decision)
- CA agreed with CIAC that the Performance Bond provision limiting liability to P8.4 million did not clearly state a limitation on the surety’s obligation and construed obscure provision in favor of petitioner under Article 1377 of the Civil Code.
- CA reasoned that the bond’s P8.4 million was a monetary cap on liability, not a statement that the surety guaranteed only repayment of the down payment; completion percentage by Mabunay (31.39%) did not extinguish UTASSCO’s liability.
- CA reversed the CIAC’s finding that Mabunay incurred delay entitling petitioner to stipulated liqui