Case Summary (G.R. No. 193969-70)
Contractual Agreement and Stipulations
KKCA and Colorite entered into a construction contract for a four-storey residential/commercial building priced at Php33 million. The contract provided:
- Project commencement within seven days of notice to proceed and completion within 365 days calculated from the seventh day after the down payment release.
- Liquidated damages of Php10,000 per calendar day for delay beyond the allowed completion date.
- A maximum allowed slippage of 73 calendar days, beyond which Colorite could terminate the contract.
- Provision for Colorite to take over and complete the project with costs to be deducted from KKCA’s payments.
- Complementary provisions in Addendum #01 and #02, adding excavation and soil protection works within KKCA’s scope.
Excavation Incident and Resulting Delay
Excavation began on January 10, 2004, contracted by Colorite to WE Construction Company (WCC). On January 17, 2004, erosion caused damage to adjacent Hontiveros family property, inciting a formal complaint and the issuance of a Hold Order by Makati City officials on January 22, 2004, halting excavation activities until restoration was complete. Restoration finalized in October 2005. However, the Hontiveros family’s quitclaim necessary for lifting the Hold Order was not executed, resulting in continued suspension of construction and a delay totaling 878 days by the time of Colorite’s damages demand in 2007.
Claims and Counterclaims
Colorite sought:
- Liquidated damages of Php8,780,000 and Php10,000 per additional day of delay,
- Loss of rental income amounting to Php13,345,481,
- Attorney’s fees of Php500,000 and litigation expenses of Php300,000.
KKCA contested:
- That the completion period was suspended due to the Hold Order,
- Colorite’s failure to pay 70% of restoration costs and soil protection expenses,
- Their limited liability as excavation was subcontracted, not directly performed by KKCA,
- Their entitlement to reimbursement for soil protection works, design fee, and maintenance costs,
- Denial of Colorite’s claims for rental loss and liquidated damages as lacking basis.
CIAC Decision
The Construction Industry Arbitration Commission:
- Held Colorite entitled to 50% of the liquidated damages claim (Php4,390,000) due to shared blame for delay.
- Denied claims for rental income loss, attorney's fees, and litigation expenses.
- Recognized KKCA's entitlement to partial reimbursement for soil protection works, design fees, and partial restoration and maintenance costs.
- Denied KKCA’s claims for moral, exemplary damages, and attorney’s fees.
- Ordered parties to bear their arbitration costs respectively.
Court of Appeals Ruling
The Court of Appeals modified and affirmed the CIAC ruling:
- Upheld Colorite’s right to 50% of liquidated damages and denial of other claims.
- Confirmed KKCA’s claims for soil protection works and design fees; denied claims for increased material costs and damages.
- Ordered Colorite to pay Php550,000 towards restoration costs (net of Php150,000 advance), share 50% of maintenance costs, and reimburse KKCA Php50,000 for the Environmental Compliance Certificate (ECC) permit.
- Directed KKCA to complete the project, secure the Hontiveros quitclaim, and assist in lifting the Hold Order.
- Found that Colorite partially contributed to delay by failing to fulfill its restoration cost commitment and not exercising its right to terminate and complete the project by other means.
- Both parties found liable for the delay but without bad faith; thus, moral and exemplary damages, costs, and attorneys' fees were denied.
Supreme Court Analysis on Liability for Erosion
- KKCA accepted responsibility for excavation and soil protection works under Addendum #01, thus liable for erosion damage.
- WCC, although subcontracted by Colorite prior to contract signing, was under KKCA’s supervision from commencement; thus, KKCA liable for WCC's acts per contract.
- Colorite’s presence in restoration meetings does not constitute assumption of WCC’s liabilities or waiver of contract provisions.
- KKCA’s failure to provide adequate soil protection before erosion, and its late remedial works, demonstrate negligence.
- The erosion directly caused the Hold Order and consequent delay.
Cause of Delay and Parties’ Fault
- KKCA’s negligence in soil protection was the proximate cause of erosion and project delay.
- Colorite was partly at fault due to inaction in pursuing contract termination or lifting the Hold Order expeditiously, violating good faith and diligence under Articles 19 and 2203 of the Civil Code.
- The delay extended beyond the time restoration was completed due to KKCA’s failure to secure the Hontiveros quitclaim and lift the Hold Order, obligations under Article XIII of the contract.
- There was no conclusive agreement that Colorite was to share restoration costs; thus, Colorite is not liable for the restoration cost share.
Contractual Scope and Cost Responsibility
- Excavation works and soil protection are part of KKCA’s contractual scope per Addendum #01 notwithstanding prior subcontractor arrangements and pre-bid minutes.
- Stipulated contract terms and addenda control over prior bid proposals, per Civil Code Article 1370 on clear contract terms.
- Colorite must reimburse KKCA for design fees and ECC permit costs, with legal interest.
- KKCA shall bear all maintenance costs up to April 30, 2006; thereafter, maintenance costs shall be shared equally.
Liquidated Damages Award
- Liquidated damages of Php10,000 per calendar day for delay is valid as stipulated under Article V of the contract and Civil Code Article 2226.
- The total delay includes 421 days from March 6, 2005 (original completion deadline plus allowed slippage) to April 30, 2006 (including six months for decision on contract termination), totaling Php4,210,000.
- Further damages for delay beyond April 30, 2006 are not awarded due to Colorite’s contributory fault and inaction.
- No interest on liquidated damages prior to finality of this decision to avoid inequitable enrichment.
Contract Completion and Price Escalation
- KKCA is ordered to complete the project, securing necessary quitclaims and lifting the Hold Order.
- The escalation clause remains applicable as the contract continues in effect; price adjustments beyond contract period are not automatically justified.
- Increase in construction cost due to delay is a compensable actual damage but unquantified.
- Given mutual fault, the parties shall share the increase in constru
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Case Syllabus (G.R. No. 193969-70)
Facts of the Case
- On November 15, 2003, Colorite Marketing Corporation (Colorite) and Architect Ka Kuen Tan Chua, doing business under "Ka Kuen Chua Architectural" (KKCA), entered into a contract for KKCA to construct a four-storey residential/commercial building in Makati City for a contract price of Php33,000,000.00.
- The contract stipulated: commencement within 7 days of a notice to proceed, and completion within 365 days reckoned from the 7th day after the down payment release.
- Liquidated damages were agreed at Php10,000.00 per day for delays beyond the allowed 73 calendar days of slippage (20% of allowed delay).
- Colorite reserved the right to terminate the contract if delay exceeded the maximum allowed and to take over and complete the project deducting costs from KKCA’s due payments.
- Complementary provisions were embodied in Addendum #01 and #02.
- Colorite issued Notice to Proceed and paid a Php6,600,000.00 down payment (20% of contract price).
- Excavation was subcontracted to WE Construction Company (WCC) and started on January 10, 2004.
- On January 17, 2004, excavation caused soil erosion damaging adjacent property owned by the Hontiveros family, who then filed a complaint.
- Makati City Building Officials issued a Hold Order on January 22, 2004, ordering KKCA to stop excavation and restore the eroded property.
- Restoration of Hontiveros property was completed in October 2005, but the required quitclaim was never secured, continuing the project suspension.
- After 878 days delay, Colorite demanded liquidated damages as per contract; KKCA refused, arguing the completion period was suspended by the Hold Order and Colorite’s failure to pay costs related to soil protection and restoration.
- Colorite filed a claim before the Construction Industry Arbitration Commission (CIAC).
Claims of the Parties
- Colorite claimed:
- Liquidated damages of Php8,780,000.00 plus Php10,000.00 per additional day of delay from March 6, 2005 onward.
- Loss of rental earnings amounting to Php13,345,481.00 due to delayed completion.
- Attorney’s fees of Php500,000.00.
- Litigation expenses of Php300,000.00.
- KKCA contended:
- Excavation was done by the subcontractor (WCC), not KKCA; thus, it should not be liable for excavation-induced damage.
- The completion period was suspended by the Hold Order and Colorite’s failure to pay soil protection and restoration costs.
- Colorite had agreed to share 70% of restoration costs of the Hontiveros property but failed to pay, forcing KKCA to advance expenses.
- Denied loss of rental earnings and liquidated damages claims as without basis.
- Filed counterclaims for soil protection works, design fee, ECC permit, restoration costs, maintenance costs, and moral and exemplary damages plus attorney's fees.
Rulings by the CIAC and Court of Appeals
- CIAC (May 27, 2008 Final Award):
- Colorite entitled to 50% of liquidated damages claimed (Php4,390,000.00) due to shared fault.
- No recovery for loss of rental earnings, attorney’s fees, or litigation expenses.
- KKCA entitled to partial soil protection costs and design fees; denied claim for unexcavated soil protection and ECC permit fees.
- Restoration and maintenance costs to be shared 50-50.
- Denied claims for moral damages, exemplary damages, and attorney’s fees.
- Each party to bear its arbitration costs.
- Court of Appeals (CA) (July 28, 2009 Decision):
- Affirmed CIAC’s award with modifications.
- Confirmed Colorite entitled to 50% liquidated damages.
- Declared Colorite must pay KKCA Php550,000 (less Php150,000 advance) as part of restoration costs of Hontiveros property.
- Ordered Colorite to share 50% of maintenance costs and reimburse KKCA’s ECC permit fee payment.
- Directed KKCA to finish construction subject to contract price adjustments.
- KKCA obligated to secure the quitclaim from Hontiveros and lift the Hold Order.
- Held Colorite liable for design fees but not for soil protection works.
- Declined award of moral/exemplary damages, attorney’s fees, or litigation costs to either party.
- Both parties filed motions for reconsideration which were denied (Oct 4, 2010 Resolution).
- Petitions for review on certiorari were filed and consolidated before the Supreme Court.
Issues Presented
- Whether KKCA was responsible for the excavation and soil protection works and the resulting erosion.
- Whether Colorite agreed to share the restoration cost of the Hontiveros property and the extent of such obligation.
- The cause/s of the project’s prolonged delay and the liability of each party.
- The applicability of liquidated damages and whether Colorite was entitled to other damages such as loss of rental income and attorney’s fees.
- Whethe