Case Summary (G.R. No. 193969-193970)
Contractual Agreement and Scope
Colorite and KKCA entered into a construction contract whereby KKCA was to build a four-storey residential/commercial building for Php33,000,000.00. Key provisions included: commencement within seven days after notice to proceed, completion within 365 days from 7 days after down payment, liquidated damages of Php10,000/day for delay, and a maximum permissible slippage of 20% (73 days). Colorite had the right to terminate after excessive delay and to take over the project, deducting costs from payments to KKCA. Addenda broadened project details, specifying excavation and soil protection works. Although excavation initially handled by subcontractor WE Construction Company (WCC), Addendum #01 transferred responsibility for excavation and soil protection to KKCA.
Incident of Erosion and Resultant Delay
Excavation began January 10, 2004, but erosion damaged adjacent Hontiveros family property by January 17, 2004. Makati City issued a Hold Order on January 22, 2004 halting excavation until repair and the Hontiveros’ quitclaim were secured. Restoration concluded October 2005, yet construction remained suspended due to the outstanding quitclaim. The project suffered an 878-day delay, prompting Colorite to demand liquidated damages. KKCA denied liability, arguing suspension of the completion period due to the Hold Order and dispute over costs for soil protection and restoration.
Claims and Counterclaims
Colorite sought liquidated damages (Php8,780,000 plus Php10,000 daily until completion), loss of rental income (Php13,345,481), attorney’s fees and litigation expenses. KKCA denied liability for excavation defects caused by subcontractor WCC, claimed suspension of the construction period, and counterclaimed for costs related to soil protection, design fees, restoration, maintenance, moral and exemplary damages, and attorney’s fees.
Rulings of CIAC and Court of Appeals
CIAC apportioned fault equally, awarding Colorite 50% of liquidated damages (Php4,390,000), denied loss of rental income and attorney's fees, and allowed KKCA partial recovery for soil protection and design fees but disallowed others. The CA affirmed with modification, confirming Colorite’s partial entitlement to liquidated damages, denying rental losses and attorney’s fees, clarifying that soil protection and excavation fell within KKCA’s scope, and ordering Colorite to reimburse certain payments by KKCA. The CA also ordered KKCA to complete the project and secure necessary legal clearances, rejecting claims for moral and exemplary damages for both parties.
Supreme Court’s Findings: Liability for the Erosion
The Court found KKCA primarily liable for the erosion damaging the Hontiveros property due to its failure to provide adequate soil protection before erosions occurred in January and February 2004. KKCA had supervisory control over excavation as per contractual addendum and failed to employ timely protective measures, calling for remedial actions only after damage. Conversely, Colorite was not liable for subcontractor WCC’s negligence as WCC was not KKCA’s employee and excavation was contractually within KKCA’s scope. The principle of estoppel cited by CIAC against Colorite was deemed erroneously applied, with Colorite’s presence in meetings insufficient to imply assumption of liability.
Scope of Excavation and Soil Protection Works
The parties’ original bid proposal excluded excavation from KKCA's responsibility, pending completion by a separate contractor. However, contractual Addendum #01 unambiguously incorporated excavation and mandatory soil protection works within KKCA’s contractual duties, including provision and maintenance of shoring, bracing, and adequate dewatering to prevent settlement and damage to adjoining properties. Contractual clarity and KKCA’s assent rendered previous exclusions inoperative.
Dispute on Sharing Restoration Costs
The Court found no valid and enforceable agreement obliging Colorite to share in restoration costs of the Hontiveros property beyond interim payments. Although the CA considered a Php700,000.00 promise by Colorite to share costs, there was insufficient evidence of a perfected contract to that effect. Hence, the original contract clause exempting Colorite from third-party liabilities remained effective. Colorite’s failure to pay the interim amount did not justify reducing liquidated damages claim by half; thus, Colorite was absolved from restoration cost sharing.
Obligations to Secure Quitclaim and Lift Hold Order
KKCA was held obligated to secure the quitclaim from the Hontiveros family and to facilitate lifting of the Hold Order issued by Makati City. These duties were necessarily implied from the contractual provision requiring KKCA to protect adjacent properties and to indemnify Colorite from third-party claims arising from construction. KKCA’s failure to obtain requisite certifications or legal clearances contributed to the prolonged project suspension and constituted negligence.
Fault for Delay and Non-Exercise of Termination Rights
While KKCA’s negligence was the proximate cause of delay, the Court also found Colorite at fault for protracted delay by failing to exercise its contractual right to terminate the contract after the maximum allowable delay lapsed and to engage another contractor. Colorite’s inactivity weighed against its claims for damages including lost rental income, as it did not mitigate consequences of delay. Nonetheless, absence of bad faith precluded award of exemplary damages or attorney’s fees to either party.
Damages and Liquidated Damages
Colorite was entitled to liquidated damages corresponding to delay from the original completion deadline (March 6, 2005) to October 2005 when property restoration concluded, plus an additional six months (April 30, 2006) to determine project continuation, totaling Php4,210,000.00. Liquidated damages serve as a penalty and need not prove actual loss, but must be equitable and not unconscionable. Extension of damages beyond this period was denied due to inaction attributable to Colorite. Claims for loss of rental income were denied for lack of evidence evidencing actual lease agreements.
Obligation to Complete Project and Contract Price Adjustment
KKCA was ordered to finish the construction project. The Court upheld the binding nature of the contract, disallowing KKCA’s arguments invoking constitutional protection against involuntary servitude, as the contract is a reciprocal one, and the parties voluntarily entered
Case Syllabus (G.R. No. 193969-193970)
Nature and Background of the Case
- The controversy involves a construction contract between Colorite Marketing Corporation (Colorite) and Architect Ka Kuen Tan Chua (Chua), doing business as Ka Kuen Chua Architectural (KKCA), for the building of a four-storey residential/commercial building in Makati City.
- The contract price was Php33,000,000.00 with stipulated deadlines and penalties, including a completion period of 365 days starting seven days after a downpayment and liquidated damages for delay.
- The project was delayed primarily due to erosion caused by excavation activities damaging the adjacent property owned by the Hontiveros family, leading to a Hold Order issued by Makati City, stopping excavation and suspending construction.
- A dispute arose on responsibility for delays, damages, and cost-sharing related to the restoration of the damaged adjacent property.
- Both parties filed claims and counterclaims before the Construction Industry Arbitration Commission (CIAC). The CIAC and subsequently the Court of Appeals (CA) rendered decisions that were later appealed to the Supreme Court.
Contractual Provisions and Obligations
- The contract included the main agreement and two addenda (Addendum #01 and #02) which complemented and modified the terms.
- Stipulations included a project commencement timeline, a penalty of Php10,000 per calendar day of delay, and maximum allowed slippage of 20% (73 days), with termination rights for delay beyond this.
- Addendum #01 specifically placed the responsibility for all excavation works and soil protection within the scope of the general contractor (KKCA).
- The contract provided that the owner (Colorite) shall be indemnified from any liabilities arising from third-party damages related to construction.
- The contract also covered provisions on liquidated damages and escalation clauses for price adjustments.
Cause of Delay and Liability for Erosion
- Excavation started on January 10, 2004, conducted by WE Construction Company (WCC), engaged by Colorite.
- On January 17, 2004, soil erosion caused damage to adjacent property, prompting a Hold Order from Makati City for excavation stoppage and restoration.
- KKCA installed soil protection measures only after erosion occurred; evidence showed lack of adequate initial soil protection.
- The CIAC initially attributed joint fault to both parties for the erosion; however, the Supreme Court found KKCA liable as it had assumed excavation works under the addendum and failed to adequately supervise and provide necessary protection.
- WCC was under KKCA's supervision as the general contractor and not an employee of Colorite; thus, Colorite could not be held liable for WCC’s negligence.
- KKCA’s consultant admitted remedial measures were undertaken only post-erosion, confirming negligence.
Dispute Over Restoration Cost and Contractual Agreements
- KKCA contended Colorite was bound to pay 70% of restoration costs, furnishing evidence of an alleged agreement. Colorite denied the existence of such agreement.
- The CA ruled that Colorite was liable to pay Php700,000.00 toward restoration costs, recharacterizing it as a binding agreement superseding the main contract’s indemnity clause.
- The Supreme Court found no conclusive proof of a perfected contract obligating Colorite to share 70%, rendering the alleged cost-sharing agreement as unproven and unenforceable.
- Consequently, Colorite is not held liable for restoration costs beyond what benefited KKCA, dismissing any sharing of overall restoration costs.
Responsibility to Secure Quitclaim and Lift Hold Order
- The Hold Order’s continuing effect was due to KKCA’s failure to secure a quitclaim or certification of property restoration f