Title
Local Water Utilities Administration vs. R.D. Policarpio and Co., Inc.
Case
G.R. No. 210970
Decision Date
Jul 22, 2024
LWUA and BCWD held liable for non-payment to RDPCI. The CA affirmed CIAC's solidary ruling, imposing attorney's fees and costs for the petitioner's failure to settle claims.
construction contract
solidary liability
financial assistance

Case Summary (G.R. No. 210970)

Factual Background

The LWUA granted a loan to BCWD by a Financial Assistance Contract dated July 26, 1996 to finance the Butuan City Water Supply System Comprehensive Improvement Program. The loan package was sourced in part from the Japan Bank for International Cooperation and the Japan Overseas Economic Cooperation Fund. The Financial Assistance Contract authorized the LWUA, described therein as the lender and agent of the BCWD, to pre-qualify bidders, process and evaluate bids, award the construction contract, release payments to the contractor, green-light construction, inspect and accept work, and engage consultants. After competitive bidding, RDPCI was awarded the construction project and executed the Construction Contract with BCWD on April 18, 1998, a contract that required LWUA approval. The parties later executed an Amendment and a Supplemental Agreement, with LWUA approval, and LWUA issued Notices to Proceed. Construction was temporarily suspended in 1999 for design revisions; work later resumed and RDPCI asserted it completed the project but was not paid in full.

Procedural History

RDPCI filed a complaint before the CIAC seeking monetary recovery for final work accomplishment, retention money, price escalation, interest, attorneys’ fees, and costs. The CIAC constituted an arbitral tribunal on July 8, 2010. The BCWD initially moved to dismiss for lack of jurisdiction but withdrew the motion. The BCWD answered and filed a cross-claim against LWUA; LWUA did not file an answer to RDPCI’s complaint but answered the cross-claim. The CIAC rendered a Final Award on April 1, 2011 granting RDPCI monetary relief in the net amount of PHP 84,439,378.18 and holding LWUA and BCWD solidarily liable. LWUA filed a Petition for Review under Rule 43 with the Court of Appeals, which the CA denied in a Decision dated December 17, 2012. The CA denied LWUA’s motion for reconsideration in a Resolution dated January 15, 2014. LWUA then filed the present Petition for Review on Certiorari under Rule 45 before the Supreme Court.

Issues Presented

The Supreme Court identified and resolved three issues: first, whether LWUA is a party to the Construction Contract including the Supplemental Agreement; second, if LWUA is liable with BCWD, whether such liability is solidary; and third, whether LWUA is liable to pay attorney’s fees and the cost of arbitration.

Parties’ Contentions

LWUA argued that it was merely an agent of BCWD under Presidential Decree No. 198, that it was not a contracting party to the Construction Contract which named only BCWD and RDPCI, and that it therefore could not be held liable for the obligations of BCWD. RDPCI and the CIAC contended that the Financial Assistance Contract, the Construction Contract, the Supplemental Agreement, the MOA, and the parties’ contemporaneous and subsequent conduct showed that LWUA consented to and in fact acted as a party to the Construction Contract and exercised control over the project funds and payments, thereby justifying solidary liability.

Ruling of the CIAC

The CIAC Final Award dated April 1, 2011 granted RDPCI’s monetary claims and held LWUA and BCWD solidarily liable to pay the net amount of PHP 84,439,378.18. The CIAC applied Article 1207 of the Civil Code and concluded that solidarity was not established by express stipulation or by law but that the nature of the obligation required solidarity because LWUA performed acts that are ordinarily those of an owner, including amending the contract, deleting works, disbursing payments to the contractor, and issuing Final Acceptance.

Ruling of the Court of Appeals

The CA affirmed the CIAC Final Award. The CA found that despite contractual language describing LWUA as an agent, LWUA acted not merely as an agent but effectively as a co-owner and disbursing entity throughout the project. The CA concluded that the close interrelation and overlapping functions of LWUA and BCWD made it difficult to delineate separate liabilities and that solidarity was warranted. The CA also upheld the award of attorney’s fees and arbitration costs.

Supreme Court Disposition

The Supreme Court denied the Petition for Review on Certiorari and affirmed both the CA Decision dated December 17, 2012 and the CA Resolution dated January 15, 2014. The Court found the petition without merit and sustained the CIAC and CA findings that LWUA was a party to the Construction Contract and that its liability was solidary with BCWD, and it affirmed the award of attorney’s fees and arbitration costs.

Legal Basis and Reasoning on Procedural Remedy

The Court addressed the mode of judicial review and explained that at the time the CIAC issued its Final Award in 2011 the proper remedy was to file a Petition for Review under Rule 43 with the Court of Appeals. The Court relied on the Global Medical Center doctrine as prospectively applied and concluded that LWUA availed of the proper remedy when it filed a Rule 43 petition before the CA.

Legal Reasoning on Party Status

The Court examined the Financial Assistance Contract, the Construction Contract, the Supplemental Agreement, and the parties’ contemporaneous and subsequent acts. It noted that the Financial Assistance Contract required LWUA approval for the Construction Contract to take effect and designated LWUA as the disbursing authority. The Construction Contract and Supplemental Agreement contained express provisions making their effectiveness contingent on LWUA approval. The Court invoked Civil Code Article 1371 to consider contemporaneous and subsequent acts and concluded that LWUA gave consent and manifested assent to the Construction Contract and the Supplemental Agreement. The Court found the MOA among LWUA, BCWD, and RDPCI, and the contractual design under which LWUA paid the contractor directly, to be decisive indicators that LWUA was a party to the Construction Contract rather than a mere agent acting solely in representation of BCWD.

Application and Interpretation of Article 1207

The Court analyzed Article 1207 of the Civil Code, which presumes joint liability unless solidarity is established by: (a) express stipulation, (b) law, or (c) the nature of the obligation. The Court explained the development of the third exception and articulated three factors to determine whether the nature of the obligation requires solidarity: the intent or purpose behind the obligation, the terms of the contract, and the divisibility of the obligation. The Supreme Court applied these factors and found that they all pointed to solidarity because LWUA financed and controlled the disbursement mechanism, required approval before contract effectivity, and retained practical control over payments such that it would be impossible or impracticable to apportion liability between LWUA and BCWD.

Factual Basis for Solidary Liability

The Court emphasized that the loan arrangement did not involve direct delivery of funds to BCWD; rather, LWUA paid the contractor under the Financial Assistance Contract and Construction Contract provisions. The Court cited Article I, Section 2 of the Financial Assistance Contract and Item No. 15 of the Construction Contract which specified that payments qualifying for OECF funding would be paid directly to the contractor by LWUA. The Court observed that LWUA acted as disbursing office, issued notices, approved contract amendments, entered into the MOA governing payment terms, and required its approval for final acceptance. Given these circumstances and the practical control exercised by LWUA, the Court held that the nature of the obligation was indivisible and required solidarity.

Attorney’s Fees and Arbitration Costs

The Court upheld the CIAC’s award of attorney’s fees in the amount of PHP 750,000.00 and the award of arbitration costs to RDPCI. It reasoned that under Article 2208 attorney’s fees may be awarded when the court deems it just and equitable and that the award required factual, legal, and equitable justification. The CIAC and CA had found that RDPCI was compelled to invoke arbitration after numerous demands were ignored and that RDPCI was the prevailing party. The Court also relied on CIAC Rules Rule 16, Section 16.5 and Rules of Court Rule 142, Section 1 to justify awarding arbitration costs to the prevailing party as a matter of course.

Equity Considerations and Enforcement History

The Court took into account enforcement difficulties and equity concerns. It noted that RDPCI pursued a mon

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