G.R. No. 152545 - R-II Builders Inc. vs. Construction Industry Arbitration Commission

Case Summary (G.R. No. 152545)

Factual Background

On September 3, 1997, R-II and BCDA executed an agreement for the construction, on the specified Fort Bonifacio area, of the Philippine Army Officer’s Quarters Project. Under the agreement, R-II undertook, for P788,973,413.00 inclusive of taxes and fees, the site planning and development and the design/construction of twenty-eight (28) four-storey medium-rise buildings in accordance with architectural and engineering plans and specifications prepared by R-II and approved by BCDA.

Even prior to signing of the main R-II–BCDA agreement, R-II had initiated negotiations for a subcontracting arrangement with Mivan. R-II provided Mivan with advance copies of the drawing plans submitted to BCDA. On August 25, 1997, R-II issued to Mivan the contract drawings and specifications to support Mivan’s estimate and tender of the subcontract price amounting to P459,000,000.00. A “Notice to Proceed” dated September 6, 1997 followed, fixing a one-hundred eighty (180)-day completion period from September 8, 1997 until March 6, 1998. Mivan mobilized and established its labor camp at the job site. By September 26, 1997, its formworks were arriving at the port of Manila.

Mivan’s subcontract award was influenced by its aluminum framework system. That method avoided hollow blocks by utilizing pre-fabricated aluminum formworks into which concrete was poured while multiple floors could be formed if appropriate. The system also permitted multiple reuse, allegedly reducing construction time and costs.

On October 3, 1997, R-II and Mivan executed the formal subcontract agreement (the R-II Mivan Agreement). Under its terms, R-II undertook to pay Mivan a fixed lump sum of P459,000,000.00, plus applicable Value Added Tax (VAT) based on R-II’s contract drawings issued on August 25, 1997. Mivan’s scope included structural, electrical, and finishing works necessary to complete the buildings according to R-II’s plans and specifications. The subcontract divided the project into two categories: (a) twenty (20) M120 Buildings and (b) eight (8) M180 Buildings, differentiated by apartment size and number of apartments per floor.

The subcontract further contained provisions on price escalation/adjustment and allowed variations/alteration orders. It incorporated, by express reference, the provisions of Presidential Decree (P.D.) No. 1594, titled “Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts.” Despite the apparent comprehensiveness of the subcontract, R-II later subcontracted part of the original works—specifically, the supply and erection of formworks for buildings sixteen (16), seventeen (17), and twenty-one (21)—to Rigid Systems, Inc. (RSI). Mivan was then forced either to rework RSI’s defective output or to complete RSI’s unfinished sub-contracted works.

In the course of implementation, R-II, responding to BCDA’s request, asked Mivan to fast-track the completion of five (5) buildings. The original November 1997 deadline was later moved to January 1998. These developments—RSI’s inability to perform, the employment of additional hired hands, acceleration of turnover, and deviations from original plans/specifications—disrupted schedules and increased costs. Mivan nonetheless completed its undertakings, but forty-nine (49) days beyond the original completion date and only after incurring additional costs which Mivan attributed to overhead costs and events causing disruptions/delays, including variations to contract drawings, other change orders, requirements for early completion of certain buildings, repairs of works done by others, and the introduction of other formwork systems into the superstructures.

Because of these circumstances, Mivan demanded additional and/or differential payments itemized as follows: variation claims of P58,477,320.27; escalation claims of P11,027,204.00; disruption claims of P48,273,305.22; for a subtotal of P117,747,829.49, plus ten percent (10%) VAT amounting to P11,774,782.95, for a grand total of P129,522,612.44.

R-II acknowledged liability for variation costs but only up to P15,095,597.20, and for escalation costs amounting to P747,585.82. R-II insisted that P15,095,597.20 was the amount reached after joint quantification and costing of the as-built drawings and contract drawings on December 2–4, 1998, facilitated with BCDA intercession to resolve the quantification issue concerning variation or additional work on substructures and superstructures.

Resort to CIAC and the CIAC Award

When the parties failed to settle the dispute, TECHPIL intervened. In its report dated December 14, 1998 to BCDA, TECHPIL evaluated the quantifying results based on Mivan’s detailed computation and determined that P40,719,802.41—out of Mivan’s P58,477,320.27 variation claim—was valid and legitimate. TECHPIL accordingly recommended that R-II be ordered to pay P40,719,802.41.

R-II refused. Mivan therefore pursued its claims before the CIAC under par. 14.1, Article XIV of the subcontract agreement. The case was docketed as CIAC Case No. 22-99. On November 12, 1999, CIAC Sole Arbitrator Alfredo F. Tadiar rendered a decision awarding Mivan monetary relief as follows: P39,000,000.00 for variation claims; P3,198,170.00 for increased costs of labor, materials, and equipment arising from the accelerated schedule of turnover of five buildings; P3,099,089.76 for reimbursement of an amount overcharged for an additional labor force supplied by R-II; P747,585.82 for escalation claims; and P4,294,575.58 for VAT computed at 10% of the awarded amounts except for reimbursement. The CIAC also imposed interest: six percent (6%) per annum on P46,044,845.58 excluding VAT from the date of decision, and after finality, twelve percent (12%) per annum until full payment, citing Eastern Shipping Lines, Inc. v. Court of Appeals and other authorities.

Appellate Proceedings in the Court of Appeals

R-II sought review in the Court of Appeals via a petition for review under Rule 43, docketed as CA G.R. No. SP No. 56142. Mivan also filed a similar recourse but withdrew it with the appellate court’s approval. On October 26, 2001, the Court of Appeals denied R-II’s petition and affirmed the CIAC award in toto, dismissing the application for injunctive relief. R-II moved for reconsideration, but the Court of Appeals denied the motion on March 6, 2002.

The Execution Dispute and CA G.R. SP No. 68178

Before the Court of Appeals could resolve the Rule 43 petition, Mivan moved for execution of the CIAC decision dated November 23, 1999. Sole Arbitrator Tadiar denied execution by Orders dated July 9, 2001 and October 15, 2001. Mivan then challenged the denial orders before the Court of Appeals through a petition for certiorari and mandamus under Rule 65, docketed as CA G.R. SP No. 68178.

In a decision dated June 14, 2004, the Court of Appeals granted the petition. It annulled the July 9, 2001 and October 15, 2001 orders and directed the public respondent to issue a writ of execution of the CIAC decision dated November 23, 1999 in CIAC Case No. 22-99. The Court of Appeals denied R-II’s motion for reconsideration through a Resolution dated September 28, 2004.

Supreme Court Petitions and Consolidation

Following the Court of Appeals denial of reconsideration, R-II filed the present Supreme Court petition G.R. No. 165687, later consolidated with G.R. No. 152545. Meanwhile, after the Court of Appeals ruling on execution, the Sole Arbitrator changed course and directed on August 23, 2004 the issuance of a writ of execution conditioned upon Mivan’s posting of a bond. Mivan posted the bond on December 17, 2004, and the Sole Arbitrator approved it on January 11, 2005, then ordered the writ of execution to issue. On R-II’s motion, CIAC stayed release of the writ upon R-II’s posting of a counter-bond within ten days, which R-II eventually did.

The developments effectively rendered moot and academic the execution issue raised in G.R. No. 165687, namely, whether a CIAC arbitral award is immediately executory. Mivan emphasized in its comment dated March 21, 2005 that no writ had been issued as of that date, and R-II sought to arrest execution. Nonetheless, the Supreme Court observed that the stay sought in G.R. No. 165687 had already been granted through CIAC’s subsequent action. Accordingly, only G.R. No. 152545 remained for resolution.

The Parties’ Contentions in G.R. No. 152545

R-II’s remaining challenge in G.R. No. 152545 attacked the CIAC and Court of Appeals determinations on three fronts. First, it contested the variation claims awarded to Mivan, insisting that its liability should be limited to P15,095,597.20, consistent with its position on the proper quantification of variations. Second, it argued that Mivan’s other monetary claims were barred by provisions in the subcontract, particularly those requiring written notice and cost impact submission under par. 7.4 and those stating that no contract price adjustment would be valid unless ordered in writing, under par. 4.2. Third, it assailed the award of VAT, contending that VAT was not within the issues agreed upon during the preliminary arbitral conference and thus not included in the Terms of Reference (TOR).

Legal Basis and Reasoning

On the variation claims, the Supreme Court stressed that R-II’s arguments were directed to a factual determination made by the Court of Appeals and affirmed from CIAC. The Court reiterated the settled rule that, in a petition for review on certiorari, the Supreme Court generally does not entertain factual matters except for recognized exceptions, such as when the findings are drawn from a vacuum, are arbitrarily reached, are based on speculation or conjecture, or are manifestly mistaken or absurd. The Court found no compelling reason to depart from the appellate court’s factual conclusions.

The Court noted that the Court of Appeals had specifically referenced Mivan’s detailed documentation of variation costs and the TECHPIL report’s quantificat

Case Syllabus (G.R. No. 152545)

Parties and Procedural Posture

R-II Builders, Inc. (R-II) filed two consolidated petitions for review on certiorari under Rule 45 to nullify CIAC and appellate rulings involving CIAC Case No. 22-99.
In G.R. No. 152545, R-II assailed the Court of Appeals (CA) Decision dated October 26, 2001 affirming CIAC Sole Arbitrator Alfredo F. Tadiar’s Decision dated November 23, 1999, and the CA Resolution dated March 6, 2002 denying reconsideration.
In G.R. No. 165687, R-II assailed the CA Decision dated June 14, 2004 which annulled the CIAC Orders dated July 9, 2001 and October 15, 2001 and directed issuance of a writ of execution of the CIAC Decision dated November 23, 1999, and the CA Resolution dated September 28, 2004 denying reconsideration.
The petitions were consolidated, yet the Court treated as moot the central execution issue in G.R. No. 165687 due to subsequent developments in CIAC execution proceedings.
The Court ultimately proceeded to resolve G.R. No. 152545, and it denied both petitions, thereby affirming the CA ruling that confirmed CIAC’s award.
The Court held that the arbitral award execution controversy in G.R. No. 165687 had ceased to present a justiciable controversy because execution had already been arrested as sought by R-II, and a writ had not been issued as of R-II’s cited positions.

Background Contracts and Project Setup

On September 3, 1997, R-II and Bases Conversion Development Authority (BCDA) entered into an agreement for the Philippine Army Officer’s Quarters Project involving a seven-hectare area in Fort Bonifacio, Taguig, Metro Manila.
Under the R-II–BCDA Agreement, R-II undertook site planning and development and the design/construction of twenty-eight (28) four-storey medium-rise buildings for P788,973,413.00, inclusive of taxes and fees.
Techpil, Inc. (TECHPIL) was appointed by BCDA as the project construction manager.
Before the R-II–BCDA Agreement was signed, R-II and Mivan Builders, Inc. (Mivan) pursued subcontracting arrangements, including that R-II provided Mivan advance copies of drawing plans submitted to BCDA.
On August 25, 1997, R-II issued Mivan contract drawings and specifications used for Mivan’s September 3, 1997 estimate and tender of a subcontract price of P459,000,000.00.
A “Notice to Proceed” dated September 6, 1997 addressed to Mivan required completion within one hundred eighty (180) days, reckoned from September 8, 1997, or until March 6, 1998.
Mivan mobilized and established a labor camp at the job site, and by September 26, 1997, its formworks had started arriving in the port of Manila.
The subcontracting advantage credited to Mivan was its advanced aluminum framework system, which used reusable pre-fabricated aluminum formworks that eliminated hollow blocks for superstructures and promoted savings in time and costs.
On October 3, 1997, R-II and Mivan executed the formal subcontract agreement (the R-II Mivan Agreement) covering construction of the twenty-eight (28) buildings under the R-II–BCDA Agreement.

Subcontract Scope and Contract Price Provisions

The R-II Mivan Agreement fixed payment to Mivan at a lump sum total of P459,000,000.00 plus applicable value added tax (VAT) based on R-II’s contract drawings issued on August 25, 1997.
Mivan’s scope covered structural, electrical, and finishing works necessary to complete the buildings in accordance with R-II’s plans and specifications.
The project was categorized into twenty (20) “M120 Buildings” and eight (8) “M180 Buildings,” distinguished by apartment counts and floor areas.
The subcontract expressly referenced P.D. No. 1594 and contained provisions on escalation/adjustment and on variations/alteration orders.
The subcontract included provisions invoked by R-II to resist monetary claims, including:
- Paragraph 7.4, requiring a subcontractor who encounters delay to request time extension in writing within five (5) days, stating causes, requested time adjustment, and/or cost impact, and making noncompliance a reason for denial of adjustment and/or cost impact.
- Paragraph 4.2, stating that no claims for addition or deduction to the contract price due to extra work or alterations are valid unless ordered in writing by the contractor, and that adjustments follow P.D. 1594 relating to extra work costing for extra work or alterations ordered in writing by the contractor.
The subcontract also contained Article III, paragraph 3.1, which stipulated that Mivan’s quoted contract price was exclusive of VAT.

Performance Disruptions and Additional Subcontracting

Despite an apparently comprehensive subcontract arrangement, R-II later further subcontracted part of Mivan’s original scope, specifically the supply and erection of formworks for buildings #16, 17, and 21, to Rigid Systems, Inc. (RSI).
RSI was allegedly unable to satisfactorily perform, which prompted Mivan to rework defective accomplishments or complete unfinished RSI works.
During implementation, R-II, responding to BCDA requests, asked Mivan to fast-track the completion of five (5) buildings, with the deadline later moved to January 1998.
The engagements and failures, additional hired manpower, accelerated turnover, and deviations from original plans or specifications allegedly distorted construction schedules and increased overall construction costs.
Mivan completed its undertakings, but forty-nine (49) days beyond the original completion date, and only after incurring additional costs attributable to overhead and disruption/delay events, including variations and change orders, accelerated completion requirements, repairs of works performed by others, and the introduction of other formwork systems.

Nature of Mivan’s Monetary Claims

Mivan demanded additional and/or differential payments, itemized as follows:
- Variation Claims of P58,477,320.27.
- Escalation Claims of P11,027,204.00.
- Disruption Claims of P48,273,305.22.
- A Total of P117,747,829.49, with 10% VAT of P11,774,782.95.
- A Grand Total of P129,522,612.44.
R-II admitted liability for variation cost only up to P15,095,597.20, and for escalation up to P747,585.82, while contesting the remainder.
R-II insisted that its variation figure of P15,095,597.20 followed joint quantification and costing of as-built versus contract drawings made on December 2–4, 1998, upon BCDA’s intercession.

TECHPIL Evaluation and CIAC Referral

TECHPIL entered into the accounting dispute as BCDA’s project construction manager and evaluated cost quantification results based on Mivan’s detailed computation.
TECHPIL’s report dated December 14, 1998 found P40,719,802.41 of Mivan’s P58,477,320.27 variation claim valid and legitimate and recommended that R-II pay that amount.
R-II refused to comply, prompting Mivan to pursue arbitration before CIAC pursuant to paragraph 14.1, Article XIV of the subcontract agreement.
The CIAC case was docketed as CIAC Case No. 22-99.

CIAC Award and Appellate Review

On November 12, 1999, CIAC Sole Arbitrator Alfredo F. Tadiar rendered a decision awarding Mivan monetary claims as follows:
- P39,000,000.00 for variation claims.
- P3,198,170.00 for increased costs of labor, materials, and equipment due to accelerated turnover of five buildings.
- P3,099,089.76 for reimbursement for overcharged additional labor force supplied by R-II.
- P747,585.82 f
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