Case Summary (G.R. No. 106063)
Factual Background
The parties contracted for the construction of 54 residential units in the Horizon‑Westridge Project in Tagaytay Midlands Complex, Talisay, Batangas. Highlands Prime, Inc. engaged Werr Corporation International as contractor under a lump sum contract price of P271,797,900.00. Werr received a 20% downpayment of P54,359,580.00 and the Agreement provided for ten percent retention in the form of a retention bond, a right of HPI to set off costs for rectification, and liquidated damages at 1/10 of 1% of the contract price per day of delay. Work commenced after the downpayment, but the project missed its initial and extended completion dates. HPI approved a Direct Payment Scheme in May 2006 for supplier obligations, partially funded against retention, and as of the last billing on October 25, 2006 HPI had paid P232,940,265.85 and retained P25,738,258.01 as retention. No progress billings were produced for the period from October 28, 2006 to termination. HPI terminated the contract on November 28, 2006; Werr accepted the termination on November 30, 2006.
Initiation of Arbitration and Claims
Werr demanded payment of outstanding amounts and filed a Complaint for arbitration before the CIAC seeking the balance of its retention money as reflected in its financial status report. HPI answered and set off amounts it had paid to suppliers and incurred for rectification and other costs, asserting that the retention had been applied under the Direct Payment Scheme and other deductions, and counterclaimed for liquidated damages, actual damages, attorney’s fees, and litigation expenses.
CIAC Proceedings and Findings
The CIAC adjudicated the parties’ claims and allowed Werr the balance of retention money in the amount of P10,955,899.79 and awarded liquidated damages to HPI in the amount of P2,535,059.01 based on its computation that Werr incurred 9.327 days of delay to reach substantial completion from the last admitted accomplishment of 93.18% on October 27, 2006. The CIAC disallowed several of HPI’s claims against the retention for being incurred after termination, for lack of documentary proof, or for failure to show prior notice as required by the Agreement, and it denied Werr’s claim for actual damages, attorney’s fees, and litigation expenses. The CIAC ordered respondent to reimburse arbitration costs to claimant.
Court of Appeals’ Ruling
HPI petitioned the Court of Appeals under Rule 43, and the CA modified the CIAC Decision. The CA affirmed the CIAC’s findings on allowable charges against the retention but disagreed on the computation of liquidated damages and arbitration costs. The CA held that delay should be computed from October 27, 2006 until the termination of the contract on November 28, 2006, or 33 days, because the contract governed and the Agreement did not incorporate an industry practice limiting liquidated damages to the date of substantial completion. The CA thus increased liquidated damages to P8,969,330.70 and apportioned arbitration costs equally between the parties.
Parties’ Contentions on Review
Werr contended before the Supreme Court that the CA erred by refusing to apply the prevailing construction industry practice, as reflected in CIAP Document No. 102, that liquidated damages do not accrue after substantial completion, and by substituting its own factual findings for those of the CIAC. Werr argued that the CIAC’s expertise and factual findings should prevail. HPI urged affirmance of the CA’s computation, argued that the direct payments and other expenses charged against the retention were proper and that Werr was not entitled to additional relief, and maintained that arbitration costs should not be borne by HPI alone.
Issues Presented
The Court framed the issues as: whether payments made to suppliers and contractors after termination are chargeable against the retention money; whether the industry practice of computing liquidated damages only up to substantial completion applies and thus whether delay should be computed to termination or to substantial completion; whether arbitration costs should be shared; and whether HPI is entitled to attorney’s fees and litigation expenses.
Standard of Review and Finality of CIAC Awards
The Court emphasized that the petitions were filed under Rule 45, thereby limiting review to questions of law. The Court reiterated the finality of CIAC arbitral awards under Executive Order No. 1008, and explained that factual findings by the CIAC are binding when supported by substantial evidence. The Court summarized recognized exceptions permitting review of factual findings, including awards procured by fraud, evident partiality, refusal to hear material evidence, disqualifications not disclosed, excess of powers, grave abuse of discretion affecting jurisdiction, contradictory findings between the CA and CIAC, and deprivation of administrative due process.
Charges Against the Retention Money — Conclusion
Applying the foregoing standard, the Court found that the issues whether the post‑termination payments were prior obligations and whether HPI incurred expenses warranting actual damages were factual matters beyond review under Rule 45. The Court held that HPI failed to demonstrate any of the exceptions to finality and that the CIAC’s findings, as affirmed by the CA, were supported by the record. The Court therefore affirmed the CIAC and CA conclusions that the direct payments made in 2007 and 2008 were for materials supplied after termination, that certain post‑termination works were for the account of the new contractor, and that HPI failed to prove payment for rectification works and prior notice of defects; accordingly, the balance of the retention money remained P10,955,899.79.
Computation of Liquidated Damages — Legal Reasoning and Ruling
The Supreme Court treated the computation of liquidated damages as a question of law and reviewed whether the construction industry practice should supplement the parties’ Agreement. The Court recognized that parties may stipulate contract terms under Art. 1306 and that general provisions of the Civil Code, notably Art. 1234 and Art. 1376, and customary industry practice may supplement contractual omissions. The Court held that CIAP Document No. 102 has suppletory effect for private construction contracts and that the industry practice that substantial completion (95% performance per Article 20.11) excuses the contractor from liquidated damages may supplement an agreement silent on the period during which liquidated damages run. Nevertheless, the Court ruled that the equitable effect of substantial completion applies only where the contractor proves by substantial evidence that it actually achieved 95% completion before or at termination. The Court found that Werr failed to prove accomplishment of 95% at termination and failed to show that it was industry practice to project the date of substantial completion and compute delay based on prior billing rates. The Court further held that the CIAC erred in assuming continued p
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Case Syllabus (G.R. No. 106063)
Parties and Procedural Posture
- Werr Corporation International and Highlands Prime, Inc. were opposing parties in an arbitration before the Construction Industry Arbitration Commission in CIAC Case No. 09-2008.
- Werr filed a petition for review on certiorari under Rule 45 to the Supreme Court from the Court of Appeals decision in CA-G.R. SP No. 105013 and Highlands Prime filed a separate petition which the Court consolidated.
- Highlands Prime initially sought review of the CIAC award by petition under Rule 43 to the Court of Appeals, which rendered the assailed decision dated February 9, 2009 and resolution dated April 16, 2009.
- The petitions to this Court challenged the CA’s modification of the CIAC award on liquidated damages and arbitration costs and raised questions of law and factual findings rendered by the CIAC.
Key Facts
- Highlands Prime, Inc. as owner awarded construction of three five-storey condominium clusters to Werr Corporation International by Notice of Award/Notice to Proceed dated July 22, 2005 and by a General Building Agreement executed November 17, 2005.
- The contract price was P271,797,900.00 with a completion time of 210 calendar days from July 22, 2005, or until February 19, 2006, and a payment scheme providing a 20% downpayment and a 10% retention bond.
- Werr commenced work after receiving the 20% downpayment of P54,359,580.00, and by the last billing dated October 25, 2006 the owner had paid P232,940,265.85 representing 93.18% accomplishment and retained P25,738,258.01 as retention money.
- Extensions were granted up to October 15, 2006, but the project was not completed and the contract was terminated by Highlands Prime on November 28, 2006, which Werr accepted on November 30, 2006.
- Werr demanded payment on October 3, 2007 for a conditional net payable P36,078,652.90, while Highlands Prime maintained that the amount actually due as of December 31, 2006 was P14,834,926.71, which Werr confirmed.
- Werr filed a complaint for arbitration to recover the balance of its retention money, and Highlands Prime counterclaimed for liquidated damages, actual damages, attorney’s fees, and litigation expenses.
CIAC Decision
- The CIAC awarded Werr the balance of the retention monies in the amount of P10,955,899.79 and ordered Werr to pay liquidated damages in the amount of P2,535,059.01 for 9.327 days of delay.
- The CIAC denied Highlands Prime’s counterclaim for actual damages, attorney’s fees, and litigation expenses.
- The CIAC disallowed direct payments charged by Highlands Prime for materials and services supplied after termination for lack of correspondence to the supplier list and failure to show post-termination instruction by Werr.
- The CIAC disallowed payments for waterproofing in the amount of P629,702.24 and rectification works in the amount of P3,040,000.00 because the works were performed after termination and the owner failed to prove payment and prior notice as required by the Agreement.
- The CIAC computed delay by reference to industry usage under Article 1376 and past billings, concluding that the remaining 1.82% of work would take 9.327 days based on an observed rate of 5.128 days per 1% accomplishment.
Court of Appeals Decision
- The Court of Appeals affirmed the CIAC’s findings on allowable charges against retention money and on attorney’s fees and litigation expenses.
- The CA disagreed with the CIAC on the period of delay and held that delay should be computed from October 27, 2006 until termination on November 28, 2006, or 33 days, thereby increasing liquidated damages to P8,969,330.70.
- The CA ruled that arbitration costs should be apportioned equally between the parties because both parties prevailed in part and neither acted in bad faith.
Issues
- Whether payments made to suppliers and contractors after termination of the contract are chargeable against the retention money.
- Whether the construction industry practice