G.R No 147614 Jan.

29,2004

H.L Carlos Construction Inc. (P) V.S. Marina Properties Corporation, Jesus Typoco Sr. & Tan Yu (R)

FACTS:

 On May 10, 1988 Marina Properties Corporation (MPC) entered into a contract with H.L. Carlos Construction Inc.
(HLC) to construct phase III of condominium complex called “marina bay homes condominium project”
o Project: Townhouses & Villas totaling 31 housing units, for a total consideration of ₱38,580,609.00 within a
period of 365 days from receipt of “NOTICE TO PROCEED”
o The original completion date was MAY 16, 1989, but was extended to October 31, 1989 with a grace period
until November 30,1989
o Contract was signed by Jovencio F. Cinco (president of MPC) and Honorio L. Carlos (president of HLC)
 On December 15, 1989, HLC instituted this case for sum of money against not only MPC but also against the latter’s
alleged president, Jesus K. Typoco Sr. and Tan Yu (RESPONDENTS) seeking the payment of various sums with an
aggregate amount of ₱14 million pesos
 Respondents filed separate answers alleging they are not parties to the Construction Contract and Amendatory
Contract and are therefore not liable to HLC. MPC on the other hand alleged that the petitioner has no cause of
action against it and that HLC is not entitled to its various claims. MPC interposed a counterclaim in the aggregate
sum of ₱68,296,227.14 for actual and compensatory damages, liquidated damages, unliquidated advances, and
attorney’s fees.
 RTC ruled in favor of the respondents and ordered HLC to pay MPC. The counterclaim for liquidated damages are
hereby dismissed for lack of evidence.

CA RULING

 CA held that respondents were not liable for escalations in the cost of labor and construction materials, because of
the following reasons: (1) the contract between the parties was for a lump sum consideration, which did not allow
for cost escalation; and (2) petitioner failed to show any basis for the award sought.
 CA further failed to find any basis for the release of the 10 percent retention fee. The Construction Contract had
provided that such release would be made only under certain conditions, none of which was complied with, as
petitioner failed to complete the work required. Furthermore, MPC was not held liable for detained or withheld
construction materials, since petitioner had eventually withdrawn them.
 CA ruled that petitioner was liable for actual and liquidated damages. The latter had abandoned the project prior to
its completion; hence, MPC contracted out the work to another entity and incurred actual damages in excess of the
remaining balance of the contract price. In addition, the Construction Contract had stipulated payment of liquidated
damages in an amount equivalent to 1/1000 of the contract price for each calendar day of delay.

ISSUE:

 Whether petitioner is entitled to (a) a price escalation for labor and material cost, (b) the cost of change orders and
extra work, (c) the release of the 10 percent retention money, (d) the cost of illegally detained materials, and (e)
attorney’s fees. (In general the issue is Liability for additional costs)
 Whether Typoco and Tan are solidarily liable with MPC
 Whether petitioner is liable for actual and liquidated damages
SC RULING

1st Issue (Liability of additional costs in general)

 Petitioner argues that it is entitled to price escalation for both labor and materials, because MPC was delayed in
paying for its obligations. The former admits that it is normally not entitled to any price increase for labor and
materials, because a contractor is expected to build into its price a contingency factor to protect it from cost
increases that may occur during the contract period. It justifies its claim, however, on the ground that a contractor
cannot be expected to anticipate price increases beyond the original contract period.
 Respondents, on the other hand, aver that it was delayed in finishing the project; hence, it is not entitled to any
price increase.
 The reason for the CA’s denial of petitioner’s claim was that the contract between the parties was for a lump sum
consideration, and petitioner was guilty of delay in completing the project.

(A) Labor and Material Cost

 The court agreed with the petitioner that it is entitled to price escalation but only for labor component since their
contract allows escalation only of the labor component, the implication is that material cost escalations are barred.
 Progress Billing No. 24 contains no claim for material cost escalation. The other unsettled bills claimed by petitioner
are those for change orders or extra work, which have not been shown to be related to the increase in cost of
materials.
 MPC admits that the labor cost escalation clause was adopted by the parties to safeguard the contractor against
losses in the event that, during the execution of the Contract, the government would order a minimum wage
adjustment, which would then inflate the labor cost. Respondents deny liability for this added expense because,
according to the Contract, the allowance for labor cost escalation is available only within the duration of the original
construction period.
o A legislated wage increase became effective after the expiration of the original period, therefore the
respondents are liable for increase in labor cost since they allowed the petitioner to work beyond the
agreed date.
 MPC argues that to allow the claim for labor cost escalation would be to reward petitioner for incurring delay,
thereby breaching a contractual obligation.
o contention is untenable. Before the expiration of the extended period, petitioner was not yet in delay. It was
granted by MPC an extension to complete the project until November 30, 1989. Moreover, despite the
expiration of the extended period, MPC allowed it to continue working on the project until the former took
over and awarded that project to another contractor. Hence, labor costs were actually incurred by petitioner
until April 20, 1990. It was thus entitled to reimbursement for labor cost escalation until that date
 To allow MPC to acquire the partially accomplished project without paying for labor cost escalation validly incurred
would constitute unjust enrichment at the expense of petitioner. There is unjust enrichment under Article 22 of the
Civil Code when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with
damages to another. Since petitioner had rendered services that were accepted by MPC, then the former should be
compensated for them. Labor cost escalation, in this case, has already been earned by petitioner.

(B) Change Order & Extra work

 Petitioner claims entitlement to compensation for change orders and extra work that were covered by construction
memoranda. MPC counters, however, that the former never presented any cost estimate for additional work.
 Under the principle of Quantum meruit, a contractor is allowed to recover the reasonable value of the thing or
services rendered despite the lack of a written contract, in order to avoid unjust enrichment.
 Quantum meruit means that in an action for work and labor, payment shall be made in such amount as the plaintiff
reasonably deserves. To deny payment for a building almost completed and already occupied would be to permit
unjust enrichment at the expense of the contractor.
(C) Retention Money

 the Petitioner avers that conditions for claiming the retention money were deemed fulfilled under Article 1186 of
the Civil Code because, when its contract was terminated, MPC prevented the fulfillment of those conditions.
o In the construction industry, the 10 percent retention money is a portion of the contract price automatically
deducted from the contractor’s billings, as security for the execution of corrective work -- if any -- becomes
necessary. This amount is to be released one year after the completion of the project, minus the cost of
corrective work
 Therefore, CA was correct in forfeiting the retention fee. The completion of the work was stipulated in the Contract
to be within 365 days from the issuance of a Notice to Proceed or until May 16, 1989. Then the period was extended
up to November 30, 1989. Petitioner worked on the project till April 20, 1990. It was given by MPC ample time and
two extensions to complete the project. The simple truth is that in failing to finish the project, the former failed to
fulfill a prerequisite for the release of the retention money.

(D) Detained Materials

 Petitioner claims cost reimbursement of illegally detained materials, as it was allowed to withdraw them from the
site only after two years from the unilateral termination of the Contract. By 1992, only 30 percent of the materials
detained were salvageable, while the rest had depreciated.
 there was absolutely no attempt to remove the materials from the construction site. Moreover, in a specifically
designated yard inside the construction site, petitioner maintained a warehouse that was guarded by its own
security complement and completely inaccessible to MPC personnel. It therefore had control over those materials
and should have made provisions to keep them safe from the elements and from pilferage.

(E) Attorney’s Fee

 Petitioner argues that it is entitled to attorney’s fees based on Article 2208 of the Civil Code
 The grant of some of the claims of petitioner does not change the fact that it did not finish the project. Attorney’s
fees are not granted every time a party prevails in a suit, because no premium should be placed on the right to
litigate. Petitioner is not, after all, blameless in the present controversy. Just because MPC withheld some payments
from petitioner does not mean that the former was in gross or evident bad faith. MPC had claims that it wanted to
offset with those of the latter.

2nd Issue (Typoco and Tan’s Liabilities)

 Petitioner claims that Respondents Jesus Typoco and Tan Yu are solidarily liable with MPC.
 SC concur with the CA that these two respondents are not liable. Section 31 of the Corporation Code (Batas
Pambansa Blg. 68) provides:
o Section 31. Liability of directors, trustees or officers. Directors or trustees who willfully and knowingly vote
for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith x
x x shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders and other persons."
 The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful act of
the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c) they incur
conflict of interest, resulting in damages to the corporation, its stockholders or other persons.
 The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable negligence, or that
he acted outside the scope of his authority as company president. and Respondent Tan is not an officer or a director
of MPC. His participation is limited to an alleged conversation between him and Engineer Mario Cornista,
petitioner’s project manager. Therefore, no satisfactory evidence to show respondent’s alleged solidary liability to
petitioner.
(D) 3rd Issue (Liability for Acual and Liquidated Damages)

 Petitioner avers that it should be exonerated from the counterclaims for actual and liquidated damages, because its
failure to complete the project was due to respondents’ acts
 Central to this issue is which party was in delay?
 Since the petitioner did not fulfill its contractual obligations. It could not totally pass the blame to MPC for hiring a
second contractor, because the latter was allowed to terminate the services of the contractor.
o The OWNER shall have the right to terminate this Contract in the event that the CONTRACTOR incurs a
fifteen percent (15%) or greater slippage in the prosecution of the overall work evaluated against the Project
schedule as indicated by the critical path of the approved PERT/CPM network for the Project or as amended
by Art. II herein.
 As of November 30, 1989, petitioner accomplished only approximately 80 percent of the project. In other words, it
was already in delay at the time. In addition, Engineer Miranda testified that it would lose money even if it finished
the project; thus, respondents already suspected that it had no intention of finishing the project at all.
 Petitioner is also liable for liquidated damages as provided in the Contract the pertinent portion of which is quoted
as follows:
o "4.1 Time is an essential feature of this Contract and in the event that the CONTRACTOR fails to complete the
contracted work within the stipulated time inclusive of any granted extension of time, the CONTRACTOR shall
pay the OWNER, as liquidated damages, the amount of one over one thousand (1/1000) of the value of the
contract price for each and every calendar day of delay (Sundays and Holidays included), not to exceed 15%
of [the] Contract amount, in the completion of the work as specified in Article II above. It is understood that
the liquidated damages herein provided are fixed, agreed upon and not by way of penalty, and as such, the
OWNER shall not be further required to prove that he has incurred actual damages to be entitled thereto. In
the case of such delays, the OWNER is hereby authorized to deduct the amount of liquidated damages from
any money due or which may become due the CONTRACTOR in this or any other contract or to collect such
amount from the CONTRACTOR’s performance bond whichever is convenient and expeditious to the
OWNER."

Conclusion

the amount agreed upon answers for damages suffered by the owner due to delays in the completion of the project.
Under Philippine laws, these damages take the nature of penalties. A penal clause is an accessory undertaking to assume
greater liability in case of a breach. It is attached to an obligation in order to ensure performance.

Thus, as held by the CA, petitioner is bound to pay liquidated damages for 92 days, or from the expiration of the grace
period in the Amended Contract until February 1, 1990, when it effectively abandoned the project.

WHEREFORE, the Petition is partly GRANTED and the assailed Decision MODIFIED. Petitioner is AWARDED labor cost
escalation in the sum of ₱1,196,202 and cost of extra work in the sum of ₱79,340.52. In all other respects, the appealed
Decision is AFFIRMED.