Case Summary (G.R. No. 205007)
Key Dates
• March 17, 1997 – Main Contract executed between Rockwell and DLCI.
• July 30, 1997 – Notice to Proceed (NTP) issued to Altech.
• September 5, 1997 – Performance Bond issued by Mercantile for PhP90,448,941.60.
• September 5, 1999 & March 5, 2000 – Extensions of bond effectivity.
• November 9, 1998 – DLCI’s letter detailing Altech’s poor progress.
• September 3, 1999 to March 3, 2000 – DLCI’s repeated “First Call” demands on Mercantile.
• February 21, 2000 – DLCI terminates the Sub-Contract.
• May 29, 2003 – CIAC Complaint filed by DLCI.
• November 7, 2003 – CIAC dismisses DLCI’s complaint.
• July 30, 2012 – Court of Appeals reverses CIAC decision.
• January 7, 2013 – CA denial of reconsideration.
• February 20, 2013 – Petition for review filed with the Supreme Court.
• September 16, 2019 – Supreme Court decision.
Applicable Law
• 1987 Philippine Constitution (1987 Constitution applies post-1990 decisions).
• Rules of Court, Rule 45 (Certiorari).
• Civil Code provisions on suretyship and obligations (Arts. 1167, 1179, 2047, 2080, 2208).
• CIAC arbitration rules and Uniform General Conditions for Private Construction (CIAP Doc. 102).
Factual Background
Rockwell appointed DLCI as general contractor for its condominium project. DLCI, in turn, subcontracted glazed aluminum and curtain-wall works to Altech, which procured a performance bond from Mercantile. Altech persistently fell behind schedule and delivered substandard work. DLCI repeatedly intervened, rectified defects at Altech’s expense, and finally terminated Altech’s subcontract in February 2000. DLCI then demanded bond liquidation from Mercantile, which deferred evaluation pending Altech negotiations and ultimately denied liability, citing bond expiration on March 5, 2000.
CIAC Proceedings and Ruling
DLCI filed for arbitration before the Construction Industry Arbitration Commission (CIAC) in May 2003, seeking PhP31,618,494.81 for completion costs. The CIAC tribunal dismissed the claim on grounds that DLCI:
- Filed beyond a “reasonable time” after dispute (laches).
- Deprived Mercantile of subrogation rights (Civil Code, Art. 2080).
- Made an invalid First Call lacking a specific amount.
- Wrongfully terminated the subcontract, as 95% completion constituted substantial performance.
- Sought post-termination expenses beyond bond coverage.
Court of Appeals Decision
The CA reversed the CIAC, holding that:
• The May 29, 2003 arbitration demand was within a reasonable time (four months after settlement efforts failed).
• Laches did not apply as the ten-year prescriptive period under the Performance Bond remained unexpired.
• Mercantile’s liability attached upon DLCI’s First Call, notwithstanding lack of a detailed amount.
• Bond expiration defense failed since Mercantile itself delayed evaluation.
• Termination was justified by Altech’s delays and poor workmanship, regardless of percentage accomplished.
• DLCI’s completion costs fell squarely within the bond’s guarantee of full and faithful subcontract performance.
• Attorney’s fees and litigation costs were properly denied for lack of bad faith.
Issue on Review
Whether Mercantile is liable under the Performance Bond to pay DLCI PhP31,618,494.81 plus stipulated interest, and whether DLCI’s claims were validly presented and timely pursued.
Timely Filing of Arbitration Demand
Pursuant to Sub-Contract Section 2.25, arbitration demand must follow failed amicable settlement within a reasonable period. All settlement efforts ceased on January 27, 2003. The May 29, 2003 demand—four months later—complied with the “reasonable time” requirement.
Validity of the First Call
Under the Performance Bond, Mercantile’s obligation “attaches immediately upon the obligee’s first demand…notwithstanding any dispute…[or] amount demanded.” As a surety under Civil Code Art. 2047, Mercantile’s liability became primary and absolute upon receipt of DLCI’s First Call on September 3, 1999. Failure to specify the exact sum did not vitiate the demand, since the bond capped liability at PhP90,448,941.60 and over-payment adjustments could follow.
Mercantile’s Liability under the Performance Bond
The bond guaranteed Altech’s full performance of the subcontract. Altech’s deficiencies entitled DLCI to recover all costs of completion under Civil Code Art. 1167 (“failure to do shall be executed at his cost”). Mercantile, as surety, stands “solidarily liable” and cannot invoke defenses available only to guarantors (Civil Code Art. 2080).
Calculation of DLCI’s Claim
After adjustments for additional works, dollar fluctuations, and owner-incurred damages, the subcontract price stood at PhP391,003,715.71. DLCI incurre
Case Syllabus (G.R. No. 205007)
Facts and Contractual Background
- On March 17, 1997, Rockwell Land Corporation (“Rockwell”) contracted DMCI-Laing Construction, Inc. (“DLCI”) as general contractor for glazed aluminum and curtain walling works in Rockwell Center, Makati City.
- Rockwell nominated Altech Fabrication Industries, Inc. (“Altech”) as DLCI’s subcontractor for those works under a Sub-Contract Agreement.
- On July 30, 1997, Rockwell issued a conforming Notice to Proceed to Altech; Altech then secured Performance Bond No. G(13)-1500/97 from Mercantile Insurance Co., Inc. (“Mercantile”) for PhP90,448,941.60 in favor of Rockwell and DLCI.
Performance Bond Terms and Endorsements
- The bond, dated September 5, 1997, guaranteed Altech’s faithful performance of its scope.
- Endorsements corrected the effective date to September 5, 1999, limited the obligee to DLCI alone, and extended coverage to March 5, 2000.
- Bond conditions: upon DLCI’s first demand, Mercantile must indemnify DLCI immediately—up to the bond sum—with 2% monthly interest from demand.
Subcontractor Default and Termination
- Beginning November 9, 1998, DLCI notified Altech of severe delays and poor workmanship; progress reports showed actual accomplishments far below planned.
- DLCI often completed and rectified Altech’s defective works at Altech’s expense.
- On September 3, 1999, DLCI first demanded bond liquidation; reiterated calls on September 30 & October 18, 1999, and March 3, 2000, without specifying claim amount.
- Altech disclosed financial difficulty on January 20, 2000; DLCI terminated the Sub-Contract on February 21, 2000 for default under clause 17.
Claims and Procedural History
- Mercantile referred DLCI to Altech and held evaluation in abeyance pending settlement.
- After settlement talks failed, DLCI reiterated its demand on November 28, 2000; Mercantile denied the claim on February 26, 2001, citing bond expiration on March 5, 200