P D R C I - Updates on Arbitration in the Philippines

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

During the construction period, changes in circumstances arose prompting the parties to make adjustments in the initial terms of their contract. These included deletion of items of work and the consequent reduction of the contract a change in the completion date of the contract. Empire East Land Holdings, Inc. [“Empire East”], the owner directed the contractor, Capitol Industrial Construction Groups, Inc. [“Capitol”] to reduce the monthly target accomplishment to P1 million worth of work and up to one (1) floor only. In view of this, Capitol asked that the topping-off be moved to a later date. It likewise requested a price adjustment with respect to overhead and equipment expenses and legislated labor cost. These requests were not acted upon by Empire East. After the completion of the side trimmings and excavation of the building’s foundation, Capitol demanded the payment of P2,248,507.70 and P1,805,225.90, respectively. Instead of paying the amount, Capitol agreed with Empire East to reduce the claim for side trimming to P900,000.00. Capitol’s claim for foundation excavation was not acted upon. During the construction period, Empire East granted, on separate occasions, Capitol’s request for payroll and material accommodations.

On March 13, 1999, Capitol submitted its final billing amounting to P4, 442,430.90 representing work accomplishment and retention, less all deductions. Empire East, on the other hand, refused to issue a certificate of completion. It instead sent a letter to Capitol informing the latter that it was already in default. Thus, Capitol was constrained to file a Request for Adjudication.

CIAC found for capitol. On appeal, the Court of Appeals reduced the amount of the award.

The first issue was whether Capitol was entitled to the release of the 10% retention money. This is a portion of the contract price deducted from the contractor’s billings as security for the execution of corrective works – if any becomes necessary. Among the contractual pre-conditions for release of this amount to Capitol are: (a) to submission of the Contractor’s sworn statement showing that all taxes due from the Contractor, and all obligations on materials used and labor employed in connection with the contract have been duly paid; (b) the issuance by the Contractor of a Guarantee Bond to answer for faulty and/or defective materials or workmanship; and (c) original and signed and sealed “as built drawings” in three sets. Both CIAC and the CA held that the non-issuance by Empire East of the certificate of completion – which was a prerequisite to the issuance of a Guarantee Bond – this condition was deemed fulfilled because Empire East voluntarily prevented its fulfillment. The Supreme Court agreed. But this rule, the Court said, cannot apply to conditions (a) and (c). Since there was no proof that these conditions (a) and (c) were complied with, Empire East’s obligation to release the retention money had not yet arisen. The Court added that: “We would like to emphasize that this is without prejudice to Capitol’s compliance with the unfulfilled conditions, after which, the release of the retention money must, perforce, follow.”

The second issue concerned the right of Capitol to overhead costs. Capitol claimed P13,976,427.00 as additional overhead expenses brought about by the delay in the completion of the project due to acts attributable to Empire East. On this point, the Court said: “It is undisputed that the only piece of evidence presented by respondent (Capitol) in support of its claim for additional overhead cost was its own computation of the said expense. It failed to adduce actual receipts, invoices, contracts and similar documents. To be sure, respondent’s claim for overhead cost may be classified as a claim for actual damages. Actual damages are those damages which the injured party is entitled to recover for the wrong done and injuries received when none were intended. They indicate such losses as are actually sustained and are susceptible of measurement.. As such, they must be proven with a reasonable degree of certainty.