CIAP DOCUMENT 102

UNIFORM GENERAL CONDITIONS OF CONTRACT FOR PRIVATE CONSTRUCTION

ANNOTATIONS WITH CASE SYNOPSES AND JURISPRUDENCE

This document offers descriptions and explanations on the provisions in CIAP

Document 102—the Uniform General Conditions of Contract for Private Construction
in the Philippines, citing relevant jurisprudence on the practical application of the
laws and construction industry practices, with synopses of cases decided by the
Supreme Court.

The purpose of this document is to familiarize the readers with the key provisions in
construction contracts, highlighting the respective rights and obligations of the
contracting parties and providing the procedures, guidelines, and the criteria to be
used in situations that normally arise or may possibly happen during project
implementation. Each section contains the gist of the provisions offered therein
underscoring the importance of each of them and citing relevant jurisprudence to
guide the readers on how to ascertain, prevent, and manage risks and issues in
construction projects. The case briefs are presented to give the readers a grasp of
the circumstances surrounding the issues and to give them insights on the practical
application of the laws, the industry practice, and the provisions in CIAP Document
102, in the interpretation of ambiguities of the contract and filling in the omission of
provisions which are ordinarily established.
 CIAP DOCUMENT 102: Annotations with Case Synopses and Jurisprudence

CIAP DOCUMENT 102

UNIFORM GENERAL CONDITIONS OF CONTRACT FOR PRIVATE CONSTRUCTION

This document specifies general conditions of contract between a private Owner and
Contractor applicable to the construction of any type of structure or works as
contemplated in Republic Act No. 4566 otherwise known as the Contractors’ License
Law.

CIAP Document 102 contains conditions or stipulations ordinarily established in

construction contracts in the Philippines, which reflect the usages and customs in the
Philippine construction industry. It is envisaged for a traditional contract whereby the
contractor is not responsible for the design, meaning, the Project Owner hire
Consultants, who can be an Engineer, an Architect, or Construction Manager or
Project Manager, to prepare the contract documents such as the plans,
specifications, bill of quantities, the construction agreement, and others, and bids out
the project to pre-qualified Contractors. It is intended to have suppletory application
to private construction contracts to resolve apparent conflicts in the provisions of
contract documents or to be used as general conditions in the absence of one.

Section I Definitions and Documents

Article 1 Definitions
This provision contains the customary definition of the terms used in
the Contract documents.
Words that are capitalized or begin with a capital letter refer to a
specific term, name, expression or document which shall have no
other meaning other than the meaning as provided for in this article,
and which shall be used and referred to as such in all of the Contract
documents.
Article 2 Execution, Correlation, Meaning of Terms, and Intent of
Documents
The purpose of this article is to provide the correlation, meaning, and
intent of the contract documents pertaining to all labor, materials,
and equipment necessary for the proper execution of the Work and
the rules in the interpretation of the provisions of Contract
documents in cases where there is an ambiguity, conflict, error, or
omission in any of them.

This provision highlights the duties and responsibilities of the Owner

and the Contractor with regards to the accuracy of all the drawings,
specifications, and all documents comprising the Contract. Any

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inconsistency or omission in any of the Contract documents should

be properly addressed, clarified and corrected in a timely manner to
insure the efficient and timely execution of the works. It underscores
the implied duty of good faith and fair dealing expected upon the
parties in the exercise of their duties and responsibilities under the
Contract. Since this document contemplates a traditional or build
contract where all the Contract documents are provided by the
Owner, the Contractor has the duty to report to the Owner any error or
discrepancy or omission in the Contract documents, and the Owner to
resolve in a timely manner taking due regard of the construction
schedule and Contract Completion Time.

The principle of good faith and fair dealing is often applied by the
Courts in ascertaining the facts and circumstances surrounding the
issues brought before them for decision. The Supreme Court defined
“good faith” as:
“an intangible and abstract quality with no technical meaning
or statutory definition, and it encompasses, among other
things, an honest belief, the absence of malice and the
absence of design to defraud or to seek an unconscionable
advantage. It implies honesty of intention, and freedom from
knowledge of circumstances which ought to put the holder
upon inquiry. The essence of good faith lies in an honest
belief in the validity of one’s right, ignorance of a superior
claim and absence of intention to overreach another.”

Where due to errors, omission, or discrepancy in the Drawings,

Specifications, or any of the Contract documents extra work, would
be necessary, the Owner is required to issue a Change Order
indicating the corresponding adjustments of Contract Time and
Contract Price. This should be read in conjunction with Articles 20.7
[Changes in the Work] and 21.04 [Extension of Time].

Section II Laws, Regulations, Site Conditions, Permits & Taxes

This section delineates the duties and responsibilities of the Owner

and the Contractor in doing the preliminary works necessary for the
project to ensure compliance with all laws that are binding upon or
affect the parties to the Contract and to the Work, such as the
provision of utilities for construction (water, electricity, gas, and
communication), survey of site conditions prior to commencement of
the works, and securing and payment of construction permits,
licenses and taxes.

It is expected that the Contractor has complied with the requirement

for bidding which is to visit the site before the bidding and assess the

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physical conditions based on the survey results furnished by the

Owner, such that its estimate or bid would have already included the
costs of the facilities and other contingencies and incidental
expenses deemed necessary. The Owner is liable for any damage
suffered or cost incurred by the Contractor due to errors in the data
furnished to it. In case of variations in the physical or subsurface
conditions from those shown in the Drawings or in the Specifications
or in any of the Contract Documents, and if such would entail change
in the work, whether as deductive or additive work, the Owner shall
issue a Change Order covering such change and the Contractor shall
be entitled to adjustments in Completion Time and Contract Price as
provided for under Articles 20.06 [Increased or Decreased Quantities
of Work], 20.07[B] [Change of Sub-surface Conditions], and 21.04
[Extension of Time].

This section delineates the responsibility of the parties in securing

and paying construction permits, licenses, and taxes, and balances
the parties’ risks and accountabilities in case of delay, default, or
neglect in performance. The duty of the Contractor is to assist the
Owner in securing the permits and licenses necessary for the Work,
but it is the Owner who shall pay for the costs.

Section III Equipment and Materials

This section sets-out the requirements of the Contract as to the

quality of materials and equipment necessary for the Work, ensuring
strict compliance with the Specifications and all statutory and
regulatory laws that are in force and applicable during the period of
construction.

Samples of all materials, equipment, fixtures, appliance and fittings

necessary for the Work shall be approved by the Owner, such that no
materials and equipment shall be used or installed without passing
the tests required in the Contract [Article 10.03, Testing Samples of
Materials] and without the expressed approval of the Owner. Such
requirement is also applicable for substitute materials and
equipment where written notice of approval by the Owner is required.
The Owner’s action/approval on the samples shall be made within
seven (7) working days after submission by the Contractor. Said
samples shall be available at the site for inspection by the Owner.

The Contractor shall be responsible for materials and equipment

which were used or installed without the approval of the Owner; and
if such were found to be not conforming with the Specifications,
under Article 20.03, they shall be considered defective. The Owner

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may, as provided for under Article 20.04, examine the work done and
require tests to ensure compliance by the Contractor with the
Specifications. In Deiparine vs. CA and Trinidad [1], it was held that
though the Contract documents do not require concrete stress test,
the Owner has the right to require a test to verify the structural
soundness of the building constructed, in view of the Contractor’s
disregard of the Owner’s instruction to get approval of the samples of
the cement mixture prior to pouring and the inconsistencies in the
results of the cylinder tests. The Supreme Court ruled that it was
rational for the Owner to require such test as it was the only means
by which it could ascertain the Contractor’s faithful compliance with
the Specifications and the integrity of the building constructed. The
structure failed in the concrete core test, thus, justifying Owner’s
rescission of the Contract.

Section IV Premises and Temporary Structures

This section defines the responsibilities of the Contractor in

maintaining the safety and sanitation of the work premises and in
providing temporary facilities for storage of materials and apparatus,
temporary office, and housing for workers with basic utilities for
water, electricity and lighting, telephone, and sanitary facilities.

All temporary facilities, signages and structures must be approved by

and must be done in the manner acceptable to the Owner. Strict
compliance with Republic Act No. 11058 (An Act Strengthening
Compliance with Occupational Safety and Health Standards and
Providing Penalties for Violations Thereof) and its Implementing
Rules and Regulations (IRR), should be the main consideration in this
section as it provides the guidelines for ensuring safety and health in
the work environment and in preventing loss or damage to lives and
properties during construction. This should be read in conjunction
with Article 30 [Contractor’s Responsibility for Accidents and
Damages].

The removal of these temporary facilities and structures is provided

in Article 20.09 [Cleaning up at Completion of Work]. Under this
article, the Contractor is required to remove all these temporary
facilities and structures. The Owner may opt to keep any of these
temporary facilities and structures, subject to appropriate
compensation and as stipulated in the Contract.

[1] Deiparine vs. CA and Trinidad, G.R. No. 96643, April 23, 1993

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Section V Protection of Work and Property

This section defines the obligations of the Contractor to protect the

Work and the Owner’s property and any existing and adjacent
properties, utilities, vegetation and waterways or drainage. The
Contractor shall be liable for all damages which may result from its
act or neglect.

This shall be read in conjunction with Article 30 [Contractor’s

Responsibility for Accidents and Damages] and Section II on the
requirement for survey of site condition.

Section VI Labor, Work and Payments

The purpose of this section is to ensure that appropriate and efficient

methods are used to ensure completion of the Work of the required
quality within the completion time, and that the Contractor is paid for
work accomplished.

Article 19 Labor
Under this article, the Contractor is required to employ only qualified
and competent workers for the project to ensure the quality of the
Work.

Article 20 Work
The purpose of this article is to ensure that the Contractor is paid for
Work completed and for the Owner to retain a portion of the Contract
Price, when the retained amount and the Performance Bond, are not
sufficient to complete the Work without additional cost to the Owner.

Presented in detail under this article are the conditions affecting the
scope of Work, the quality of the Work, and the effects on Contract
Price and Completion Time if there are changes in the Work.

On the scope of the Work:

This provides that any change in the Work shall be covered by a

Change Order which shall indicate the costs involved and the
corresponding adjustments in Contract Price and Completion Time, if
necessary. If the Work is increased by such changes, a proportionate
additional Performance Bond is required. Whether the changes are
for the deletion, addition or alteration of work, the aggregate value of
the such changes should not exceed twenty-five percent (25%) of the
original Contract Price of the particular pay item and shall be
determined by the Owner using any or more of the following ways:

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a) By lump sum acceptable to the Contractor;

b) By unit prices either stipulated in the Contract or
subsequently agreed upon, provided the aggregate value of
changes does not exceed 25% of the original Contract Price
of the particular pay item;
c) By actual direct cost plus value added tax, if any, plus fifteen
percent (15%) for Contractor’s profit and overhead. In this
case, the Contractor shall keep and present, in such form as
the Owner may direct, a correct account of the direct cost
together with vouchers and other supporting documents.

Overruns exceeding 25% shall be covered by a Supplemental

Contract in which the Contractor shall not be obliged to execute the
changes using the unit rate specified in its Bid, a Supplemental
Contract being treated as one separate from and independent of the
Contract. If the Contractor executes the changes without demanding
the execution of a Supplemental Contract, the value of the changes
shall be determined based on item (b) above.

For deductive change order initiated by the Owner for the purpose of
transferring certain work items or part of the scope of work to
another Contractor or for the Owner to supply certain construction
materials, the Contractor shall be entitled to fifteen percent (15%) of
the amount deducted in the change order to recover overhead
expenses and profit.

Adjustment of prices due to escalation or reduction of costs of

executing the work and peace and order problem, is covered by
Article 20.16 and its sub-articles. The adjustment of prices shall be
determined using a parametric formula agreed upon by the Owner
and the Contractor. If the project is delayed by more than 15% and
such delay is not excused, the rate to be used for the work affected
by such delay should be the rate applicable during the period it
should have been accomplished.

On the quality of the Work:

Article 20.04 provides the procedure for the inspection of the Work,
stipulating the responsibility of the Owner to inspect and examine
ongoing works including works which were covered up or already
completed but were purportedly done not in accordance with the
Drawings and Specifications, and assigning to the Contractor all the
costs of examination and of satisfactory reconstruction of works
found to be defective. A Supplemental Agreement is required for
special test or inspection instructed by the Owner to be performed

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after the date of substantial completion [Article 20.14, Special Test

and Inspection].

If the Owner accepts defective or non-conforming works, instead of

requiring its removal and replacement, such shall be covered by a
Change Order as provided for in Article 20.15 [Acceptance of Non-
Conforming Work] reflecting the corresponding reduction in the
Contract Price by an amount not exceeding the value of unfinished
work as determined in the Breakdown of Work and Corresponding
Value.

If the works were found to be done in accordance with the Drawings

and Specifications, the Contractor shall be entitled to the actual cost
of labor and materials involved in the examination plus fifteen
percent (15%) and shall be granted a suitable extension of time if
completion of the work has been delayed on account of such
examination and the additional work involved.

Article 20.10 Use of Completed Portions of Work

This article provides the conditions for the Owner in taking
possession of and use of completed or partially completed portion of
the Work prior to overall completion. Such partial possession is
deemed practical completion of that portion of the Work, covered by
Articles 20.11 [Substantial Completion and its Effect], 20.12 [Period
of Making Good of Known Defects or Faults], 20.13 [Making Good of
Known Defects or Faults], 20.14 [Special Test and Inspection] and
20.15 [Acceptance of Non-Conforming Work]. The Owner shall issue
a Certificate of Completion for that portion of the Work taken
possession of. The Owner is required to release to the Contractor the
retention for that portion of the Work and the defects liability period
begins to run on that portion. Such, however, shall not be deemed an
acceptance of the remaining works, neither shall it be deemed a
waiver by the Owner of its right to claim damages for delay in the
completion of the Work.

The Contractor is entitled to extra cost or extension of time or both if

such partial possession of the Work increases the cost or delays the
completion of the uncompleted works.

Article 20.11 Substantial Completion and Its Effect

Under this article the Contractor is paid for Work completed although
the Owner retains a portion of the Contract price, if the Performance
Bond and the retention are not sufficient to complete the Work
without additional cost to the Owner.

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Unless the Contract provides otherwise, there is substantial

completion when the Contractor completes 95% of the Work,
provided that the remaining work and the performance of the work
necessary to complete the Work shall not prevent the normal use of
the completed portion. The Supreme Court has applied the 95%
threshold in determining what constitutes substantial completion in
the absence of an agreement to the contrary.

Substantial completion is a milestone in construction which sets the

limit for the imposition of liquidated damages and triggers other
events or obligations as provided for in this document, viz:
- Inspection and Tests on completed works [Article 20.04];
- Punchlist shall be issued within 30 days from date of
substantial completion [Article 20.11(C)];
- Retention shall be released within 60 days from date of
substantial completion upon posting of Contractor’s
Guarantee Bond [Article 20.11(C)];
- Works ordered by the Owner to be performed after the date
of substantial completion shall be covered by a
supplemental agreement [Article 20.14].

The Owner shall be deemed to have recognized substantial

completion of the Work through:
- the approval of the Contractor's billing for completing at
least 95% of the Work; or
- the issuance of a Certificate of Substantial Completion or
equivalent document; the date of said document, however,
shall not be controlling if substantial completion is shown to
have been made at an earlier date, unless the Contractor
accepts the certificate without taking exceptions thereto in
writing within fifteen (15) days from receipt, conditioned
upon successful test-run of the Facility. Delay in the test run
through no fault of the Contractor shall automatically extend
the Completion Time for a period equal to the period of
delay.

Once the Contractor achieves 95% project completion, it is excused

from the payment of further liquidated damages. The Contractor must
prove by substantial evidence that it actually achieved 95%
completion of the project. The rules[2] are intended to balance the
allocation and burden of costs between the Contractor and the
project Owner so that the Contractor still achieves a return for its
completed work, and the project Owner will not incur further costs.

[2] Article 20 [Work]

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Article 21 Time of Completion of Work

The purpose of this article is to ensure that the Contract is completed
within the original or extended Completion Time due to changes both
directed and constructive.

The Time of Completion of the Work starts and ends on the date
stipulated in the Contract, in the absence of which, from the date the
Contractor commences the Work and ends on the stipulated date of
completion of the Work, or by a specific date.

When the time for completion of the Work is contingent upon the
date when the Contractor actually commences the Work, the
commencement date is normally indicated in the Notice to Proceed
(NTP) issued by the Owner as within seven (7) days or more days from
receipt of the NTP or on the fixed date indicated in the NTP. The
commencement date is significant in reckoning the Completion Time
or in computing liquidated damages in case there is delay in the
execution or completion of the Work. Likewise, there are obligations
of the Owner and the Contractor which are to be performed reckoned
from the commencement date of the Contract, such as Article 32.01
[Advance Payment] and Section II [Laws, Regulations, Site
Conditions, Permits and Taxes]. If the Contract does not provide for
the issuance of a Notice to Proceed, the Contractor should get
consent from the Owner for it to commence the Work on a date it so
specified.

Article 21.03 [Schedule of Construction Work] providing for

acceleration of work in case of slippage provides that, if the delay is
due to the fault of the Contractor, the additional cost for the
acceleration of work shall be borne by the Contractor, but if the
acceleration of work is for the benefit or convenience of the Owner or
due to its fault or delay, then, it shall be the Owner who shall be
responsible for the cost thereof. The acceleration work should be
covered by a Change Order as extra work.

Article 21.04 Extension of Time

This article enumerates the causes or events that obstruct or delay
the execution or completion of the Work and which may or may not
allow an adjustment of Contract Completion Time.

For delay caused by events not due to the fault or neglect of the
Contractor, the Owner shall determine the reasonable adjustment of
Completion Time corresponding to such delay within fifteen (15) days
from receipt of the Contractor’s request. If the delay is authorized by

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the Owner or caused by the act, neglect, delay or fault of the Owner,
the adjustment is based on the period of delay caused by such
event/factor, and the Contractor may be entitled to additional costs
(See Article 20.08 [Claims for Extra Cost]). This provision should be
interpreted in conjunction with Articles 26 [Termination and
Suspension] and 29.06 [Liquidated Damages].

In DPWH v. FSI[3], the Supreme Court affirmed the finding of CIAC that
the delay of FSI was caused by DPWH for which it was awarded
extended rental costs of various equipment and standby rental cost
and overhead costs during the period those equipment went idle. In
addition, it was relieved of the liability for liquidated damages, as the
delay was caused by DPWH which failed to the right-of-way and to
turn over to FSI possession of the site free of obstructions.

Article 22 Payments
This article provides the conditions relative to payments, including
the release of retention.

The Breakdown of Work and Corresponding Value submitted by the

Contractor upon commencement of the Work and as approved by the
Owner, shall be the basis for all the Requests for Payment and for
determining the value of uncompleted work or corrective works. The
Request for Payment shall be computed from the work completed on
all items listed in the Breakdown of Work and Corresponding Value,
less a retention of 10% of the progress payment to the Contractor.
The Owner is authorized to deduct from any payment due the
Contractor the cost of defective works not remedied, the amount of
unpaid claims by Sub-contractors and suppliers of materials and
labor, and the amount which has accrued as liquidated damages.
The Owner shall evaluate, certify, and pay the amount of the
Contractor’s accomplishment within thirty (30) days after receipt of
the Contractor’s Request for Payment. Owner’s delay in the payment
of the amount due shall entitle the Contractor to payment of interest
at a rate prevailing on due date and who may exercise its right as
provided for under Article 26(b).

The conditions for the release of Final Payment to the Contractor is

provided in this article. This release renders the Owner free from any
unpaid labor and unpaid claims of Sub-Contractors and suppliers,
including payment of all taxes and obligations due in connection with
the Contract. The Owner may require the Contractor to submit a
sworn statement with proof of full payment to Sub-Contractors,

[3] Department of Public Works and Highways vs. Foundation Specialists, Inc., G.R. No. 191591, June 17, 2015

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suppliers, and appropriate government agencies. If there are still

unpaid claims, the Contractor may be required to furnish the Owner
an indemnity bond as provided for in Articles 31.04 [Contractor’s
Performance and Payment Bonds] and 33.01 [Liens]. The
Contractor’s acceptance of Final Payment shall constitute a waiver of
all its claims against the Owner, subject to the exceptions in Article
22.09 [Acceptance and Final Payment].

Article 22.11 Release of Retention

The 10 percent retention is a portion of the contract price which the
Owner deducts from the contractor’s billings, as security for the
execution of corrective work or completion of work -- if any -- becomes
necessary. This amount is to be released one year after the
completion of the project, minus the cost of corrective and/or
completion work undertaken.[4]

The Owner’s obligation to release the retention money arises after

the conditions for its release have been complied with. [5]

Section VII Contractor-Separate Contractor-Subcontractors

Relationship

This section provides the conditions for the Owner to engage a

Separate Contractor to do works outside of the Contractor’s scope of
work, and the conditions for the Contractor’s engagement of a Sub-
Contractor, and the relationship amongst them.

These provisions are important to make clear to the parties their

respective obligations in respect of the Work commissioned to them
by the Owner, as well as their respective accountabilities in case of
nonfulfillment. Such provisions should also be covered in the
Owner’s contract with a Separate Contractor and in the Contractor’s
contract with its Sub-Contractor.

In this section, the Owner is responsible for the coordination of the

work of the Separate Contractor with the work of the Contractor. The
Contractor is not liable for any damage caused by the Separate
Contractor. On the other hand, the Contractor shall be responsible
for the acts and omissions of its Sub-Contractor. The Owner may or
may not allow subcontracting. The Owner’s consent, however, shall

[4] H.L. Carlos Construction, Inc. v. Marina Properties Corporation, Jesus K. Typoco, Sr. and Tan Yu, G.R. No.
147614, January 29, 2004; Empire East Land Holdings, Inc. v. Capitol Industrial Construction Groups, Inc., G.R.
No. 168074, September 26, 2008
[5] Empire East Land Holdings Inc. v. Capitol Industrial Construction Groups, Inc., G.R. No. 168074, September
26, 2008

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not create any contractual relation between the Sub-Contractor and

the Owner. Article 33.03 [Subcontracting] provides the conditions for
subcontracting of works.

Section VIII Suspension of Work and Termination of Contract

Article 26 Contractor’s Right to Suspend Work or Terminate Contract

The Contractor may suspend the Work or terminate the Contract.

The Contractor is required to give fifteen (15)-days written notice to

the Owner of its decision to suspend or terminate the Contract for any
of the grounds specified in this article. For suspension of work, the
Contractor shall be entitled to an equitable adjustment of Completion
Time and/or Contract Price under any of the circumstances herein
provided.

Article 27 Owner’s Right to Suspend the Work

This provision allows the Owner to suspend the Work with or without
cause.

A written notice to the Contractor is required.

For suspension without cause, the notice of suspension shall indicate

the date the work shall be resumed. The period of suspension shall
be not more than the aggregate period of fifteen (15) days, unless
the Contractor agrees to an additional period.

For suspension with cause, the Owner shall issue written order to the
Contractor to stop the work or any portion thereof until the cause
thereof has been eliminated.

Suspension of work due to the act, neglect, delay or fault of the

Owner or any other Contractor employed by the Owner or those
beyond the control or fault of the Contractor, shall entitle the
Contractor to an adjustment of Completion Time and Contract Price.
These causes are described in Article 27.02 as follows:
- unsuitable weather or other conditions considered
unfavorable for the prosecution of the work;
- necessity for adjusting the Drawings to suit site conditions
found during construction, or in case of a change in
Drawings and Specifications;
- failure of the Owner to supply Owner-supplied/furnished
materials on time, where such failure is due to causes
beyond the reasonable control of the Owner;

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- delay by the Owner in obtaining a right-of-way, where such

obligation is assumed by the Owner under the Contract, and
the delay is not due to the fault or negligence by the Owner;
- force majeure or fortuitous event;
- peace and order problems; or
- any condition similar to the above beyond the control of the
Owner.

For unsuitable weather conditions, the Contractor shall be entitled to

an adjustment of Completion Time and Contract Price only for the
period in excess of that taken into account in the Bid Documents.

Article 28 Owner’s Right to Terminate Contract

The Owner has the right to terminate the Contract with or without
cause. This provision should be read together with Articles 29.02,
29.03, 29.04, 29.05, and 29.06.

The Owner may terminate the Contract for cause even without prior
notice to the Contractor by reason of the economic status of the
Contractor as described in Article 28.01.

The Owner may for cause also terminate the Contract upon fifteen
(15)-day written notice to the Contractor and to its Surety upon
occurrence of any event caused by the Contractor’s act, delay, fault
or neglect. The Owner has the right to exclude the Contractor from
the site and take possession of the Work and all of the Contractor’s
tools, appliances, equipment, machinery, and materials left at the
site. The Owner may take over and finish the Work and withhold any
payment due the Contractor until the Work is finished.

The Owner may terminate the Contract without cause upon fifteen
(15)-day written notice to the Contractor. This is known as
termination for the convenience of the Owner. In such case, the
Contractor shall be paid for all work accomplished and any expense
sustained as a consequence of the termination plus reasonable
termination costs.

In G.R. No. 96643[6], the Supreme Court defined the right of

rescission of contracts as provided for in Articles 1381 and 1191 of
the Civil Code. Article 1381 enumerates what are “rescissible
contracts”. Under Article 1385, it is provided that he who demands
rescission should return whatever he may be obliged to restore.
Evidently, this provision does not include construction contracts.

[6] Deiparine vs. CA and Trinidad, G.R. No. 96643, April 23, 1993

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Construction contract falls squarely under the coverage of Article

1191[7] providing for the right of rescission under the law on
obligations. The Supreme Court said:
Article 1191, unlike Article 1385, is not predicated on
economic prejudice to one of the parties but on breach of
faith by one of them that violates the reciprocity between
them. Article 1725[8], on the other hand, contemplates a
voluntary withdrawal by the owner without fault on the part of
the contractor, who is therefore entitled to indemnity, and
even damages, for the work he has already commenced.

In Angel V. Talampas, Jr. v. Moldex Realty. Inc., G.R. No. 170134[9],

the Supreme Court pegged the cost of opportunity lost due to the
Owner’s unilateral termination of the Contract at 20% of the value of
unfinished work. It was ruled that the “cost of opportunity lost must
represent only the profits that the Contractor failed to obtain due to
the contract’s early termination”.

Article 29 Owner’s Right to Proceed with the Work after Reduction in

Contractor’s Scope of Work; Partial Takeover from
Contractor
The Owner has the right to carry out the work, without terminating the
Contract, by reason of Contractor’s failure to perform its obligations
under any of the circumstance described in Article 29.01. Written
notice shall be given to the Contractor and the Owner is required to
issue a Change Order covering that portion of the Work taken over as
deductive works.

Such taking over of the Work shall not prevent the Owner from
recovering damages against the Contractor and its sureties, which
shall include liquidated damages and additional costs incurred in
completing the Work. The Owner is required to assess the value of
the work completed by the Contractor and the value of all usable
materials taken over, which shall be deducted from any amount
found to be due as damages from the Contractor.

[7] Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.
[8] Art. 1725. The owner may withdraw at will from the construction of the work, although it may have been
commenced, indemnifying the contractor for all the latter's expenses, work, and the usefulness which the
owner may obtain therefrom, and damages.
[9] Angel V. Talampas, Jr. v. Moldex Realty, Inc., G.R. No. 170134, June 17, 2015

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Article 29.06 Liquidated Damages

The Contractor is liable to pay the Owner liquidated damages by
reason of delay in the completion of the Work within the Contract
Completion Time, including the time adjustment duly granted.

The Supreme Court defined liquidated damages as: “the amount that
the parties agree to be paid in case of a breach, which shall answer
for damages suffered by the owner due to delays in the completion of
the project.”[10] “As long as the contractor fails to finish the works
within the period agreed upon without justifiable reason and after the
owner makes a demand, then liability for damages as a consequence
of such default arises.[11] They are in the nature of penalties. A penal
clause is an accessory undertaking to assume greater liability in case
of a breach. It is attached to the obligation in order to ensure
performance.”[12]

Liquidated damages accrues from the first day of delay in completing

the project until the date of substantial completion, but in no case
shall the total sum exceed ten percent (10%) of the total contract
price. The amount of liquidated damages for delay shall be reduced
in proportion to the value of the portions of the Work which have
been certified as complete or occupied or used by the Owner prior to
the overall completion of the Work. Such amount of liquidated
damages shall be deducted from any money due or which may
become due the Contractor or from the retention money or other
securities posted by the Contractor, whichever is convenient to the
Owner.

Section IX Responsibilities and Liabilities of the Contractor and

the Owner

This section embodies the purpose of Republic Act No. 11058 (An
Act Strengthening Compliance with Occupational Safety and Health
Standards and Providing Penalties for Violations Thereof) on ensuring
the safety and health in the work environment and in preventing loss
or damage to lives and properties during construction. It delineates
the responsibilities and liabilities of the Contractor and the Owner by
requiring both of them to secure and maintain (a) insurance coverage
as will protect them from claims for injury or death or damage to
property which may arise from the implementation of the Contract,
and (b) the bonds that will guarantee faithful performance of the

[10] H.L. Carlos Construction, Inc. v. Marina Properties Corporation, 466 Phil. 182, 199-200 (2004)
[11] Atlantic Erectors, Inc. vs. Herbal Cove Realty Corporation, G.R. No. 170732, October 11, 2012
[12] H.L. Carlos Construction, Inc. v. Marina Properties Corporation, 466 Phil. 182, 199-200 (2004)

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Work. The mandatory conditions for the bonds provided in Article

31.07 shall form part of the bonds and as such, shall be deemed
accepted by the surety issuing the bonds.

Article 32.01 requires Owner to give the Contractor an Advance Payment (also
referred to as down payment), to help with the start-up of
construction, such as mobilization and procurement of materials,
conditioned upon the Contractor’s posting of an Advance Payment
Bond or surety bond to guarantee its repayment. The amount of
advance payment is a percentage of the contract price agreed upon
by the parties which shall be recouped pro rata from payment of
approved progress billings.

Article 32.04 allows the Contractor to request the Owner to furnish the Contractor
reasonable evidence that it is ready and able to fulfill its obligations
under the Contract, and unless such reasonable evidence is
provided, the Contractor may not be required to execute the Contract
or to commence or continue the Work.
Article 33.01 Liens
The purpose of this article is to ensure that the Work is free of any
legal liens prior to the release of the Final Payment to the Contractor.
The Owner may require the Contractor to execute sworn statement
and submit proof of payment of claims of sub-contractor and
suppliers and settlement of its obligations with government agencies
in regard to taxes due in connection with the Contract, the
employees’ contributions, and withholding tax on the employees’
wages, as provided for in Article 22.09 [Acceptance and Final
Payment].

Article 33.02 Assignment

This article provides, without exception, that the Contractor is not
allowed to assign to another party any part or the whole of the
Contract. If the Owner discovers that such assignment was made
without its consent, the Owner may remove from the Contractor’s
scope of work that part which was assigned and give it to another
contractor or terminate the Contract.

Article 33.03 Subcontracting

Subcontracting is allowed subject to the prior consent of the Owner.
As conditions for its approval, the Owner may require the Contractor
to submit copy of the subcontract and that the subcontract should
require the same bonds and insurances required of the Contractor
and furnish the Owner copies thereof. The Owner’s consent to the

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engagement of a Sub-Contractor, however, shall not, by itself, create

any contractual relation between the Sub-Contractor and the Owner,
as stipulated in Section VII [Contractor-Separate Contractor-
Subcontractors Relationship].

Article 33.04 Disputes

This provision requires the Owner and the Contractor to settle their
disputes amicably. Any dispute not so settled shall be submitted for
arbitration by the Construction Industry Arbitration Commission (CIAC)
which, under Executive Order No. 1008, has an original and exclusive
jurisdiction to settle construction disputes (See Article 33.05
[Settlement of Disputes]).

Section X Owner’s Representative

The Owner’s representative is a person appointed by the Owner to act

for and on its behalf in all matters affecting the Contract and to
ensure that the Contract is properly implemented. The Owner’s
representative may be the Architect, Engineer or Construction/Project
Manager. In this section, the Owner’s representative has full and
unqualified authority, unless the Owner issued a written notice to the
Contractor stating the limits of such authority granted.

In complex or large scale projects where the Owner hires an Architect

or an Engineer or a Construction or Project Manager, a distinction
and delineation of their duties and responsibilities shall be provided
in the Contract to ensure that any or all of the issues that may arise
from the implementation of the Contract will be properly addressed
and resolved without delay.

In G.R. Nos. 176439 and 176718[13], the Architect was authorized

under the Contract to act on the Contractor’s request for time
extension and to determine the period of extension he deems
reasonable. The Supreme Court, in view of the conflicting findings of
the Construction Industry Arbitration Commission (CIAC) and the
Court of Appeals on the extent of Contractor’s delay in the project,
adopted the computation of the Architect, citing the practice in the
construction industry in this regard, and the provision in the Contract

[13]The Church of Jesus Christ of Latter Day Saints v. BTL Construction Corporation, G.R. No. 176439, and BTL
Construction Corporation v. The Manila Mission of the Church of Jesus Christ of Latter Day Saints and BPI-MS
Insurance Corporation, G.R. No. 176718, January 15, 2014

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specifically providing the Architect the authority to act/grant requests

for time extension.

Section XI Schedule of Time Limits

This section summarizes the prescribed time limits for the execution of
the Contract conditions as provided in this document.

CASE SYNOPSES

LIQUIDATED DAMAGES
Empire East Land Holdings Inc. v. Capitol Industrial Construction Groups, Inc., G.R.
No. 168074, September 26, 2008

As justification for its claim for liquidated damages against the Contractor, the Owner
alleged that the Contractor was in default in the performance of its obligations at the
start and for the entire duration of the construction due to insufficient manpower and
lack of technical know-how. On the other hand, the Contractor argued that the delay
in the completion of the project was attributed to the Owner’s fault, viz., (a) delayed
issuance of building permit; (b) additional works ordered by the Owner; (c) delayed
payment of progress billings; (d) delayed delivery of owner-supplied construction
materials; and (e) limitation of monthly accomplishment. Both the CIAC and the CA
found these to be the causes of the Contractor’s failure to complete the project on
time.

The Supreme Court held:

Liquidated damages are those that the parties agree to be paid in case of a
breach. As worded, the amount agreed upon answers for damages suffered
by the owner due to delays in the completion of the project. Under
Philippine laws, they are in the nature of penalties. They are attached to the
obligation in order to ensure performance. As a pre-condition to such
award, however, there must be proof of the fact of delay in the performance
of the obligation.

As the Contractor is not guilty of breach of its obligation under the Contract, it cannot
be held liable for liquidated damages.

Atlantic Erectors, Inc. v. Herbal Cove Realty Corporation, SC G.R. No. 170732,
October 11, 2012, 684 SCRA 55

At issue here is whether by the Owner’s termination of the Contract the Contractor
was prevented it from completing the project, thereby releasing it from liability for
liquidated damages.

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It is not disputed that the Contractor reneged on its obligation to complete the project
on schedule despite the extensions granted by the Owner. The Contractor did not
seek additional time after the expiration of the extended period despite its claim of
the existence of circumstances that entitle it to an extension of time, which it,
however, failed to document. Although there was a commitment from the Contractor
to complete the project, its proposed date of completion was way beyond the
extended completion date agreed upon. The Contractor argued further that the
Owner’s termination of the contract prevented it from fulfilling its commitment to
complete the project.

The Supreme Court held:

Respondent’s (Herbal Cove’s) entitlement to liquidated damages is distinct

from its right to terminate the contract. Petitioner’s (Atlantic Erector’s)
liability for liquidated damages is not inconsistent with respondent’s
takeover of the project. What is decisive of such entitlement is the fact of
delay in the completion of the works. Stated in simple terms, as long as the
contractor fails to finish the works within the period agreed upon by the
parties without justifiable reason and after the owner makes a demand,
then liability for damages as a consequence of such default arises.

The Supreme Court further noted that while the contractor cited grounds which fairly
entitled it to additional time to complete the works, it never sent to the owner a
request for extension of time to finish the work. Assuming these reasons to be valid,
still the contractor is not excused from making this request, and should bear the
consequences for the delay for it deprived the owner of the right to determine the
length of extension to be given to it and, consequently adjust the period to finish the
work.

The rights to liquidated damages and to terminate the contract are distinct remedies
available to the Owner under the Contract. What is decisive of the Owner’s
entitlement to liquidated damages is the fact of delay in the completion of the works.
The Contractor’s accomplishment as of the last billing was only 62.57%. Thus,
liquidated damages in the maximum amount of 10% of the Contract price was
awarded to the Owner against the Contractor.

EFFECTS OF SUBSTANTIAL COMPLETION ON THE CLAIM

FOR LIQUIDATED DAMAGES
Werr Corporation International v. Highlands Prime, Inc., G.R. No. 187543, February 8,
2017; Highlands Prime, Inc. v. Werr Corporation International, G.R. No. 187580,
February 8, 2017, 805 Phil. 415

Issues: Whether delay should be computed until actual termination of the contract or
until substantial completion of the project.

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The project was not completed on the initial completion date, hence, several
extensions were granted, but still, the project was not completed on the final
extension granted. The Contractor’s accomplishment after the expiration of the
extended completion time was only at 93.18%, thus, the Owner terminated the
Contract.

The Supreme Court held:

The contracting parties are free to stipulate as to the terms and conditions
of the contract for as long as they are not contrary to law, morals, good
customs, public order or public policy. Corollary to this rule is that laws are
deemed written in every contract. Deemed incorporated into every contract
are the general provisions on obligations and interpretation of contracts
found in the Civil Code.

While the Contract provides for liquidated damages of 1/10 of 1% of the contract
price for every day of delay, it does not, however, provide for the period until when
such liquidated damages shall run. In this instant case, the Supreme Court said that
such omission may be supplemented by the provisions of the Civil Code (Arts. 1234
and 1376), the industry practice, and the CIAP Document 102 which have suppletory
effect on private construction contracts, provided that the Contractor successfully
proved by substantial evidence that it actually achieved 95% completion. The
Contractor, however, failed to present evidence to show what it had accomplished
from the time of the last billing up to the time the contract was terminated, and also
failed to prove that it is a practice in the construction industry to project the date of
substantial completion of a project and to compute the period of delay based on the
rate in past progress billings.

The rules are intended to balance the allocation and burden of costs
between the contractor and the project owner, so that the contractor still
achieves a return for its completed work and the project owner will not incur
further costs. To compute the period of delay when substantial compliance
is not yet achieved but merely on the assumption that it will eventually be
achieved would result in an iniquitous situation where the project owner will
bear the risks and additional costs for the period excused from liquidated
damages.

Thus, the Contractor cannot be excused from the payment of liquidated damages for
it failed to meet the condition precedent, that is, that it actually achieved 95%
completion rate.

Filinvest Land, Inc. v. The Honorable Court of Appeals, Philippine American General
Insurance Company and Pacific Equipment Corporation, G.R. No.
138980, September 20, 2005, 470 SCRA 57

Issues: Whether or not the liquidated damages agreed upon by the parties should
be reduced considering that: (a) time is of the essence of the contract; (b) the

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liquidated damages was fixed by the parties to serve not only as penalty in case the
Contractor fails to fulfill its obligation on time, but also as indemnity for actual and
anticipated damages which the Owner may suffer by reason of such failure; and (c)
the total liquidated damages equivalent to 32% of the total contract price was freely
and voluntarily agreed upon by the parties.

The Contractor admitted that it failed to complete the contracted work despite the
three extensions granted by the Owner because of inclement weather and Owner’s
alleged refusal to accept and pay its accomplished work and change order. The
Owner took over the project and held the Contractor liable for damages which it had
incurred and will incur to finish the project in the amount of ₱15,000 per day of delay
as stipulated in the Contract. According to the Owner, such provision in the Contract
is intended to recover from the Contractor actual anticipated and liquidated
damages, and it is not just merely for penalizing breach of the contract. It argued
that had the project been completed on time, it could have sold the lots sooner and
earned its projected income that would have been used for its other projects.

The Supreme Court held:

A penal clause is an accessory undertaking to assume greater liability in

case of breach. It is attached to an obligation in order to insure
performance and has a double function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach.

Article 1226 of the Civil Code provides:

In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid
if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment
of the obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

The Supreme Court said:

A distinction between a penalty clause imposed essentially as penalty in

case of breach and a penalty clause imposed as indemnity for damages
should be made in cases where there has been neither partial nor irregular
compliance with the terms of the contract. In cases where there has been
partial or irregular compliance, as in this case, there will be no substantial
difference between a penalty and liquidated damages insofar as legal
results are concerned. Thus, there is no justification for the Civil Code to
make an apparent distinction between a penalty and liquidated damages
because the settled rule is that there is no difference between penalty and
liquidated damages insofar as legal results are concerned and that either

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may be recovered without the necessity of proving actual damages and

both may be reduced when proper.

As a general rule, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as they
are not contrary to law, morals, good customs, public order or public policy.
Nevertheless, courts may equitably reduce a stipulated penalty in the
contract in two instances: (1) if the principal obligation has been partly or
irregularly complied; and (2) even if there has been no compliance if the
penalty is iniquitous or unconscionable [Article 1229, Civil Code].

The question of whether a penalty is reasonable or iniquitous can be partly

subjective and partly objective as its resolution would depend on such
factors as, but not necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of
the parties, and the like, the application of which, by and large, is addressed
to the sound discretion of the court.

The penalty charge of ₱15,000/day which totals to an amount equivalent to 32% of

the contract price was unconscionable as the construction was already not far from
completion at 94.53% accomplishment rate. There was no evidence presented to
prove that the delay was due to the negligence of, or that there was bad faith on the
part of, the Contractor. It was held that the 94.53% completion at the time of
termination of the contract is a substantial compliance in good faith which renders
unconscionable the application of the full amount of liquidated damages as penalty
for delay. Likewise, the Owner’s right to indemnity was cancelled as it failed to do
what was incumbent upon it when it failed to pay the Contractor for work
accomplished. The Owner’s claim for liquidated damages was dismissed.

Urban Consolidated Constructors Philippines v. The Insular Life Assurance Co.,

Inc., G.R. No. 180824, August 28, 2009

The construction was beset by several delays. As such, the parties entered into a
second contract increasing the contract price and extending the deadline for
completion of the project. The Owner, likewise, agreed to extend financial assistance
to the Contractor by paying directly the suppliers of construction materials. Despite
such, however, the Contractor still failed to meet the target completion date. Hence,
the Owner took over the project.

The Contractor alleged that the delay was due to the Owner’s delay in the approval
and payment of monthly billings; delivery of materials; and execution of a formal
written construction agreement. The project was already 97% complete when the
Owner took over, which at that time, the Contractor was already delayed by 294 days.

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The Supreme Court held:

There was no bad faith on the part of the Contractor as it had in fact completed 97%
of the project. The delay in the delivery of materials cannot be attributed to the
Owner as the payment of materials directly by the Owner is only an accommodation to
ensure the timely completion of the project, but the obligation to procure and have
the materials delivered on time remains with the Contractor. It was held that the total
amount of ₱11,432,190.00 as liquidated damages (1/10 of 1% of the contract price
or ₱38,885.00 per day for 294 days of delay) is unconscionable.

As a general rule, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as they
are not contrary to law, morals, and good custom, public policy or public
order. Nevertheless, (t)he judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable. [Art. 1229, Civil
Code]

The amount of liquidated damages was reduced from ₱38,885.00 to ₱10,000.00

per day of delay for a total of ₱2,940,000.00, and was further reduced to
₱1,940,000.00 due to the Owner’s failure to release the retention money and the
payment for change orders which could have been used by the Contractor to
purchase construction materials and expedite the completion of the project.

Transcept Construction and Management Professionals, Inc. v. Teresa C. Aguilar,

G.R. No. 177556, December 8, 2010, 637 SCRA 574

The Contractor failed to complete the works on time. The Owner hired an accredited
testing laboratory to assess the Contractor’s quality of work and accomplishment
rate, and it was discovered that there were substandard works and that substandard
materials were used in the project. The parties then agreed to execute a second
contract to cover the necessary corrective works and to extend the deadline for
completion of the project. Despite such, however, the Contractor still failed to finish
the project within the extended time indicated in the second contract. At that time,
the Contractor’s accomplishment was determined at 98.16%.

The Supreme Court held:

The Owner is not entitled to liquidated damages since the Contractor already
accomplished more than 95% required under CIAP Document 102 [Art. 20.11(A)(a)]
which is considered substantial completion of the project, and instead, awarded the
cost of the remaining works in accordance with Article 1234 of the Civil Code – “If the
obligation had been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by
the obligee”.

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PROLONGATION COSTS
Department of Public Works and Highways vs. Foundation Specialists, Inc., G.R. No.
191591, June 17, 2015

The Contractor demanded from the Owner the payment of extended rental costs of
various equipment, standby rental cost, and overhead costs which it incurred during
the period of delay caused by the Owner’s failure to remove all obstructions and
secure road right-of-way along the stretch of construction.

The Supreme Court held:

The Owner’s denial of the Contractor’s claims for extended rental and overhead costs
was not justified absent any document to prove that such claims are prohibited. The
Owner failed to present the modified Contract provision which allegedly contain such
prohibition. Moreover, such modified Contract provision was not even mentioned in
the Owner’s letters to the Contractor granting the latter’s requests for time extension.
Thus, it was concluded that no such modified version existed, and that the Owner had
no basis to deny Contractor’s claims for extended rental and overhead costs, which
the CIAC and the Court of Appeals have exhaustively deliberated upon. Hence, the
award to the Contractor of the costs of standby rental cost and overhead costs were
affirmed, but the award of the extended rental costs of various equipment was
ordered to be recomputed by the CIAC to cover only the period such various
equipment were idle due to the Owner’s delay.

PRICE ESCALATION
Hanjin Heavy Industries and Construction Co., Ltd. v. Dynamic Planners and
Construction Corp., G.R. Nos. 149408 & 170144, April 30, 2008

Among the issues resolved in this case is the legality of the award of price escalation
in favor of the Sub-Contractor.

The Sub-Contractor accomplished only 84% of the subcontracted works on the

scheduled project completion date. The Contractor advised the Sub-Contractor that
no payment shall be forthcoming after that date. When the project was at 94%
completion, the Sub-Contractor allegedly abandoned the project, hence, the
Contractor took over. The Sub-Contractor argued that it did not abandon the project
as it was already nearing completion, but it admitted that it suspended the work on
account of the Contractor’s act of withholding the release of the down payment and
non-payment of its progress billings, which caused delay in the project and rendered
its timely completion impossible. The Sub-Contractor then demanded for payment of
its claims against the Contractor, which include its claim for price escalation.

The Contractor admitted that the Sub-Contractor is entitled to escalation cost for the
local portion of the project, but it argued that it should be computed using the 52

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formulas and price indexes from the National Statistics Office and the National
Statistical Coordination Board, or at 35% of the price index only.

The Supreme Court held:

The Contractor failed to present any of the supposed 52 formulas and price indexes
which it claimed would give a more precise price escalation amount, and it also failed
to support its assertion that it should only be at 35% of the price index. The
Subcontract Agreement provides that the Sub-Contractor is entitled to both price
adjustment and price escalation. Thus, the award of the Court of Appeals which was
pegged on the local portion of the contract price which is 65% of the Sub-Contractor’s
billings and accomplishments prior to the Contractor’s takeover, multiplied by 100%
price index was affirmed.

LABOR AND MATERIAL COST ESCALATION

H.L. Carlos Construction, Inc. vs. Marina Properties Corporation, G.R. No. 147614,
January 29, 2004

The parties executed an Amended Contract extending the contract period plus a
grace period of 30 days. The Contractor failed to complete the works within the
stipulated completion period and abandoned the project. The Owner, thus, contracted
out the remaining works to another entity and demanded from the Contractor the
damages it incurred. The Contractor, on the other hand, claimed for payment of its
unpaid billings, change orders and extra work, labor and material price escalation,
release of retention, and the value of materials left at site. On the Contractor’s claim
for cost escalation, the Owner averred that the Contractor is not entitled to any price
increase since it was delayed in the completion of the project, and entitling it to such
claim would be to reward it for its breach of contractual obligation.

The Supreme Court held:

The Contract prohibited claims for cost escalation except on the labor component of
the work.

The Contractor failed to present evidence, such as an official economic data, that
would show the increases in material costs during the period covered in its claim.
Further, its unpaid billings for change orders and extra work were not subject to
increases since they were not included in the agreed contract price and the materials
for these additional works are to be purchased only when the work was contracted or
agreed upon. Thus, the Contractor is not entitled to material cost escalation.

The labor cost escalation clause in the Contract shall cover government mandated
wage adjustment during the period of construction. The Contractor is entitled to labor
cost escalation even after the expiration of the extended completion period since the
Owner allowed it to continue with the works, and since the Owner accepted and paid

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the Contractor’s accomplishments, labor cost escalation has already been earned
and should be paid for.

CLAIM FOR ADDITIONAL COSTS DUE TO ACCELERATION OF

WORK
R-II Builders, Inc. v. Mivan Builders, Inc., G.R. Nos. 152545 & 165687, November 15,
2005

On Contractor’s request, the Sub-Contractor fast-tracked the completion of a number

of buildings comprising the project and thereafter demanded payment for additional
costs incurred therefor consisting of increased costs of labor, materials, and
equipment. The Contractor did not contest the Sub-Contractor’s computation but
denied liability arguing that the order for acceleration of work came from the Owner
and that the procedural requirement of a timely submission of cost impact has not
been complied with.

The Supreme Court held:

The Contractor is very much aware that such acceleration of work necessarily entails
additional costs, thus, its silence about the lack of explicit agreement on who should
bear such additional costs contradicts the principles of fair dealing which should be
the norm of all transactions (Art. 19, Civil Code). On the other hand, the Sub-
Contractor’s similar silence cannot be presumed that it agreed to bear the increased
costs as such would result in unjust enrichment which the law abhors (Art. 2142, Civil
Code). The Sub-Contractor’s compliance with the Contractor’s request for early
completion was in effect a binding modificatory novation of the Contract. The
reasonable inference on the parties’ silence on who should bear the costs involved
was that the parties had impliedly agreed to charge the increased costs to the Sub-
Contract as a Change Order. The Contractor did not offer any compelling reason to
reverse the ruling of the Construction Industry Arbitration Commission (CIAC) on this
claim. Thus, the Court affirmed the CIAC’s ruling and award of additional costs
incurred for early completion of portion of the project covering the increased costs of
labor, materials, and equipment, which were held to be not only legally tenable, but
equitable considerations also support it.

CLAIM AGAINST THE BONDS UPON TERMINATION OF THE

CONTRACT DUE TO DELAYS IN THE PROJECT
J Plus Asia Development Corporation v. Utility Assurance Corporation, G.R. No.
199650, June 26, 2013

The Contractor in this case incurred tremendous delay in executing the works for the
project. Under the Contract, the project is supposed to be completed in December
2008 but the Contractor has completed only 31.39% of the works as of 14 November

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2008 as per the joint evaluation conducted by the parties. The Contractor did not
ask for an extension of time to complete the project. The Owner thus terminated the
Contract, and demanded from the Contractor the payment of liquidated damages and
the return of the unrecouped down payment and overpayment. The Owner also made
a claim against the Performance Bond to recover the damages it suffered caused by
such delay. The Contractor, on the other hand, contends that the Performance Bond
merely guaranteed the 20% down payment and not the entire obligation under the
Contract, and that since its accomplishment already exceeded such amount, its
obligation under the bond had been fully extinguished.

The Supreme Court held:

Default or mora on the part of the debtor is the delay in the fulfillment of the
prestation by reason of a cause imputable to the former. It is the
nonfulfillment of an obligation with respect to time. It is a general rule that
one who contracts to complete certain work within a certain time is liable
for the damage for not completing it within such time, unless the delay is
excused or waived.

While the Contract contemplates delay in the completion of the project, such,
however, does not defeat the Owner’s right to claim for damages or the Contractor’s
liability under the Performance Bond. The Contract stipulates that the Owner shall be
entitled to confiscate the performance bond to compensate for all the damages it
suffered due to delay in the completion of the Project by more than thirty (30) days.
Such stipulation depicts the nature of a penalty clause, which is recognized by law as
“an accessory undertaking to assume greater liability on the part of the obligor in
case of breach of an obligation. It functions to strengthen the coercive force of
obligation and to provide, in effect, for what could be the liquidated damages
resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach. It is well-settled that so long as such stipulation
does not contravene law, morals, or public order, it is strictly binding upon the
obligor”. The Surety was ordered to pay the Owner the full amount of the
Performance Bond with interest.

Philippine Charter Insurance Corporation vs. Central Colleges of the Philippines and
Dynamic Planners and Construction Corporation, G.R. No. 180631-33, February 22,
2012

The Owner terminated the Contract for failure of the Contractor to complete the
project on time. The Contractor’s accomplishment at the time of termination was only
at 57.33%. The Owner claimed against the Performance Bond and the Surety Bond
for the unrecouped down-payment. The Surety denied its liability under the bonds it
issued arguing that the reglementary period within which to file a claim against the
bonds had already expired. It contends that the claim should have been filed ten
days from the occurrence of the default.

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The Supreme Court held:

The civil law concept of delay or default commences from the time the
obligor demands, judicially or extrajudicially, the fulfillment of the obligation
from the obligee. In legal parlance, demand is the assertion of a legal or
procedural right. It is the obligor’s culpable delay, not merely the time
element, which gives the obligee the right to seek the performance of the
obligation.

In this case, the default commenced when the Owner informed the Contractor and
the Surety in writing prior to expiration of the bonds of the breach in the contract and
its plan to claim against the bonds. Upon such notice, the Surety’s liability had
already attached pursuant to Article 2047 of the Civil Code, thus, it is duty bound to
perform what it has guaranteed under the Performance and Surety Bonds, all of
which are callable on demand. The Surety and the Contractor were ordered to jointly
and severally pay the Owner the total amount of the Surety and Performance Bonds.

RELEASE OF RETENTION UPON TERMINATION OF THE

CONTRACT
The President of the Church of Jesus Christ of Latter Day Saints v. BTL Construction
Corporation, G.R. No. 176439, January 15, 2014; BTL Construction Corporation v.
The President of the Manila Mission of the Church of Jesus Christ of Latter Day Saints
and BPI-MS Insurance Corporation, G.R. No. 176718, January 15, 2014

In issue is the Contractor’s entitlement to the release of retention upon the

termination of the Contract.

Due to the Contractor’s financial difficulties and losses, and upon the request of the
Contractor, the Owner and the Contractor executed a deed of assignment in favor of
the Contractor’s suppliers for the project so that they may collect directly from the
Owner. A few months thereafter, the Contractor ceased its operations for lack of
funds to pay for the cost of labor and other items necessary to complete the project.
Consequently, the Owner terminated the Contract and engaged the services of
another contractor to complete the project. The Contractor claimed for payment of its
work accomplishment and the release of retention. The Owner, however, refused to
release the retention since they have already agreed that such amount will answer for
the payment to the Contractor’s suppliers.

The Supreme Court held:

The nature of the 10% retention money is that it is a portion of the contract
price withheld from the contractor to function as a security for any
corrective work to be performed on the infrastructure covered by a
construction contract. As such, the 10% retention money should not be
treated as a separate and distinct liability as it merely forms part of the
contract price.

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 CIAP DOCUMENT 102: Annotations with Case Synopses and Jurisprudence

While the retention will be eventually released to the Contractor, such amount should
be automatically deducted from the Contractor’s billings. Thus, the award to the
Contractor of the unpaid balance of the contract price inclusive of the 10% retention.

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