G.R. No. 180824

THIRD DIVISION

URBAN CONSOLIDATED G.R. No. 180824

CONSTRUCTORS PHILIPPINES,

INC.,

Petitioner, Present:

Ynares-Santiago, J. (Chairperson),

- versus - Chico-Nazario,

Velasco, Jr.,

Nachura, and

Peralta, JJ.

THE INSULAR LIFE

ASSURANCE CO., INC., Promulgated:

Respondent.

August 28, 2009

x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

The only issue in this petition for review on certiorari is whether petitioner Urban Consolidated Constructors Philippines, Inc. (Urban) is liable to pay liquidated damages to respondent Insular Life Assurance Co., Inc. (Insular).

The facts show that on October 13, 1989, respondent Insular engaged the services of Urban to construct a six-storey building within a period not to exceed 365 days at a contract price of P30,498,689.00. On February 19, 1991, the parties executed a General Construction Agreement (GCA),[1] which, among others, extended the deadline for the completion of the project to June 30, 1991, and increased the contract price to P38,885,000.00. The parties thereafter agreed to move the deadline to September 30, 1991, but the construction was beset by several delays. When Urban tendered the building for acceptance on July 21, 1992, Insular refused to accept the same.

On February 11, 1993, Urban filed an action for collection of sum of money and damages[2] against Insular contending that Insular caused the delay in the completion of the project and that, as a consequence of said delay, Urban suffered damages. Insular allegedly failed to inform Urban about the government road widening project which necessitated alterations/revisions in the plans and specifications and delayed the issuance of the building permit, as well as the boundary dispute which Insular had with the adjoining lot owner. Insular also allegedly incurred delay in the approval/payment of monthly billings; in the delivery of materials to the construction site; and in the execution of a formal written construction agreement.

Urban also alleged that on September 7, 1992, Insular took over the project and occupied the building without justifiable cause. Urban thus prayed that it be awarded (1) P4 Million as excess construction costs for the increase in the cost of materials during the period of the delay; (2) P250,000.00 for increase in financing costs; (3) P250,000.00 for the illegal take over of the project; (4) P1,454,799.50 for unpaid change orders or additional works; (5) P554,972.51 for unpaid progress billings; (6) P2,134,908.80 representing the amount retained by Insular; (7) P1 Million for lost opportunities to enter into other construction contracts; (8) P1 Million as attorney’s fees; (9) liquidated damages to be determined by the court; and (10) the costs of suit.

In its Answer with Compulsory Counterclaim,[3] Insular alleged that the delay in the construction of the building was due to Urban’s failure to timely procure the building permit and not the road widening project and the boundary dispute with the adjacent owner. Insular further averred that although it agreed to directly pay the suppliers of material by way of accommodation to Urban which always lacked funds, however the obligation to have the materials delivered to the construction site still remained with Urban. Moreover, the obligation to directly pay the suppliers arise only after the delivery of the materials, and evaluation by Insular’s project manager.

Insular claimed that in the execution of the GCA on February 19, 1991, the parties took into consideration the problems that arose after October 13, 1989. Thus, (1) the deadline for the completion of the project was moved to June 30, 1991 and the contract price was increased to P38,885,000.00; (2) Insular extended financial assistance to Urban by directly paying the suppliers of construction materials; and (3) the construction deadline was further extended to September 30, 1991. However, Urban still failed to meet the target completion date.

As regards the change orders, Insular explained that these were freely agreed upon by the parties and the resultant delays were sufficiently compensated by the extension of the completion date. Insular also averred that when it took over the construction of the building on September 3, 1992, Urban was already behind the original schedule by one year; and that it applied the retention money to the expenses it incurred in the completion of the substandard and unfinished work of Urban. By way of compulsory counterclaim, Insular claimed liquidated damages in the amount of P19,014,765.00; moral damages; exemplary damages; attorney’s fees; and litigation costs.

On May 5, 1989, the Regional Trial Court of Makati City, Branch 145 rendered its decision, the dispositive portion of which, reads:

WHEREFORE, premises considered judgment is hereby rendered in favor of plaintiff Urban Consolidated Constructors Phils., Inc. and as against defendant, Insular Life Assurance Co., Ltd., ordering the latter to pay the former the following actual damages:

[a.] P4,000,000.00 as amount representing the excess construction costs;

[b.] P1,454,799.90 representing the unpaid construction costs of all completed change orders;

[c.] P2,134,908.80 representing the amount for over-due and unpaid retention money;

[d.] P500,000.00 as the amount representing opportunity losses; and

[e.] P100,000.00 as reasonable attorney’s fees.

Cost against defendant.

SO ORDERED.[4]

Insular appealed to the Court of Appeals which found that the increase in the costs claimed by Urban was already covered and taken into consideration when the parties executed the GCA, which among others, increased the contract price from P30,498,689.00 to P38,885,000.00. The appellate court debunked the claim of Urban that Insular caused the delay in the completion of the project, holding that it was Urban, as contractor, which has the obligation to procure the construction materials and that Insular’s commitment was only to give financial assistance.

The appellate court thus found Insular entitled to an award of liquidated damages. Under the GCA, the liquidated damages is set at 1/10 of 1% of P38,885,000.00, which is P38,885.00 per day or P11,432,190.00 for the 294 days of delay from October 1, 1991 to July 21, 1992 when Urban turned over the building. For equitable considerations, however, the Court of Appeals reduced the same to P2,940,000.00 computed at a penalty of P10,000.00 per day.

Likewise, the Court of Appeals directed Insular to pay Urban P1,144,030.94 representing the balance of the costs of several change orders or modification of the plan for which no payment was proven to have been made. Insular was also ordered to release to Urban the P2,134,908.80 retention money, considering that it failed to substantiate the works it purportedly performed to improve the building.

Offsetting[5] the amounts decreed against Urban with the amount payable by Insular, the latter is still liable to pay Urban P338,939.40. The dispositive portion of the decision of the Court of Appeals, reads:

WHEREFORE, in view of the above considerations, the instant appeal is GRANTED. The assailed decision dated May 5, 1999 is REVERSED and SET ASIDE and a new one is hereby rendered ORDERING:

I. Insular Life Assurance, Co., Ltd TO PAY Urban Consolidated Contractors Philippines, Inc.

1) P1,144,030.94 representing the balance on the change orders; and

2) P2,134,908.80 representing the unpaid retention money.

II. Urban Consolidated Contractors Philippines, Inc. TO PAY Insular Life Assurance, Co., Ltd. P2,940,000.00 as liquidated damages.

The amounts due from both parties shall be subject to offsetting pursuant to Section 2, Article XIV of the General Construction Agreement.

ORDERED.[6]

Both parties respectively filed motions for reconsideration but were denied on December 5, 2007.[7] Insular no longer assailed the decision of the Court of Appeals directing it to pay the balance of the change orders and to return to Urban the balance of the retention money.

On the other hand, Urban filed the present petition contending that it cannot be made liable for liquidated damages for the completion of the project beyond the September 30, 1991 deadline because the delay was caused by Insular who requested several change orders and who failed to procure all the major construction materials it undertook to provide.

The sole issue for resolution is whether Urban is liable to pay liquidated damages.

We rule in the affirmative.

The Court sustains the finding of the Court of Appeals that the communications between Insular and Urban prior to and after the execution of the GCA on February 19, 1991 never varied the obligation of Urban to provide the materials for the construction of the building. Section 1, Article V of the GCA reads:

Section 1 – x x x For this purpose, the CONTRACTOR [Urban] shall furnish and supply all necessary materials, labor, equipment and tools, plant, supervision for the complete works and all other facilities needed, and shall accordingly perform everything necessary for the complete and successful construction of the aforesaid office building and facilities.[8] (Emphasis supplied)

While Insular’s January 14, 1991 letter[9] to Urban stated that the former will purchase in advance the major construction materials, the same was never reflected in the January 28, 1991 minutes of the meeting which culminated in the execution of the aforequoted provision vesting Urban the obligation to supply and furnish all the construction materials. Pertinent portion of said minutes of meeting provides:

9. It was also agreed that cost of major materials purchase[d] by Urban shall be paid directly by Insular Life upon presentation of Invoice duly certified and verified by TAP Resident Engineer.[10]

It was never agreed that Insular would assume the obligation of procuring the materials from the suppliers and delivering them at the construction site. Moreover, Insular’s March 14, 1991 letter[11] to Urban approved only a direct payment scheme and not an undertaking to provide the construction materials. As explained by Insular in its September 30, 1991 letter, the support it extended to Urban was not a commitment to furnish the materials but merely to pay the same in the agreed scheme. Thus:

We would like to point out that the above extension of deadline and financial assistance on the part of Insular Life are mere accommodations and are extended to Urban in our desire to have the building completed as early as possible. This should not be misconstrued that Insular Life is committed to supply all major materials in order finish the building.[12]

Moreover, the nature of said accommodation of Insular as a financial assistance was confirmed by Urban’s president, Benjamin F. Almario in his letters dated –

(1) February 14, 1991:

“Thank you for granting us price adjustment of P8,386,302.00 and agreeing to provide financial assistance in the form of direct payment to suppliers for major materials required for the project.”[13]

(2) October 11, 1991:

“In view of our common interest to complete the above subject project soonest, we wish to appeal to your good office to provide us with financial assistance through direct payments to our suppliers for the remaining major materials to complete the project in the amount of P1,963,920.83.[14]

As correctly held by the Court of Appeals, Urban as the contractor, has the obligation to furnish the materials and Insular’s commitment is to provide financial assistance only by way of direct payment to the suppliers after the materials have been procured by Urban and delivered to construction site.

As for the change orders of Insular which allegedly delayed the construction of the building, suffice it to state that the trial court (which attributed the delay, although erroneously, to the alleged failure of Insular, to procure the construction materials), never pronounced that the cause of such delay was the change orders of Insular. At any rate, the period for completion for said change orders was already considered by the parties when they moved the deadline from June 30, 1991 to September 30, 1991. Also, the delay in the construction of the building was caused by Urban’s lack of necessary funds and its failure to facilitate the delivery of materials at the construction site as provided in the GCA.

The Court of Appeals therefore correctly held that the delay in the completion of the construction of the subject building cannot be attributed to Insular.

Anent the award of liquidated damages, Article 2227 of the Civil Code provides that liquidated damages , whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. In the case at bar, the liquidated damages computed on the basis of the GCA is P11,432,190 (1/10 of 1% of P38,885,000.00, which is P38,885.00 per day for the 294 days from October 1, 1991 to July 21, 1992). However, finding said amount to be unconscionable and citing Filinvest Land, Inc. v. Court of Appeals,[15] the appellate court set the liquidated damages at P2,940,000.00 or at P10,000.00 per day.

In Filinvest, the penalty for the delay in the completion of the project was P3,990,000.00 or P15,000.00 per day but the Court affirmed the reduction of said amount to P1,881,867.66 considering that the project was already 94.53% complete and that Filinvest agreed to extend the period of completion, which extensions Filinvest included in computing the amount of the penalty. The Court also noted that the contractor did not act in bad faith and that Filinvest was not free of blame as it failed to pay the costs of work actually performed by the contractor in the amount of P1,881,867.66. Thus–

In herein case, the trial court ruled that the penalty charge for delay – pegged at P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- was excessive and accordingly reduced it to P1,881,867.66 “considering the amount of work already performed and the fact that [Filinvest] consented to three (3) prior extensions.” The Court of Appeals affirmed the ruling but added as well that the penalty was unconscionable “as the construction was already not far from completion.” x x x

x x x x

We are hamstrung to reverse the Court of Appeals as it is rudimentary that the application of Article 1229 is essentially addressed to the sound discretion of the court. As it is settled that the project was already 94.53% complete and that Filinvest did agree to extend the period for completion of the project, which extensions Filinvest included in computing the amount of the penalty, the reduction thereof is clearly warranted.

x x x x

Finally, Filinvest advances the argument that while it may be true that courts may mitigate the amount of liquidated damages agreed upon by the parties on the basis of the extent of the work done, this contemplates a situation where the full amount of damages is payable in case of total breach of contract. In the instant case, as the penalty clause was agreed upon to answer for delay in the completion of the project considering that time is of the essence, “the parties thus clearly contemplated the payment of accumulated liquidated damages despite, and precisely because of, partial performance.” In effect, it is Filinvest’s position that the first part of Article 1229 on partial performance should not apply precisely because, in all likelihood, the penalty clause would kick in in situations where Pecorp had already begun work but could not finish it on time, thus, it is being penalized for delay in its completion.

The above argument, albeit sound, is insufficient to reverse the ruling of the Court of Appeals. It must be remembered that the Court of Appeals not only held that the penalty should be reduced because there was partial compliance but categorically stated as well that the penalty was unconscionable. Otherwise stated, the Court of Appeals affirmed the reduction of the penalty not simply because there was partial compliance per se on the part of Pecorp with what was incumbent upon it but, more fundamentally, because it deemed the penalty unconscionable in the light of Pecorp’s 94.53% completion rate.

In Ligutan v. Court of Appeals, we pointed out that 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.

In herein case, there has been substantial compliance in good faith on the part of Pecorp which renders unconscionable the application of the full force of the penalty especially if we consider that in 1979 the amount of P15,000.00 as penalty for delay per day was quite steep indeed. Nothing in the records suggests that Pecorp’s delay in the performance of 5.47% of the contract was due to it having acted negligently or in bad faith. Finally, we factor in the fact that Filinvest is not free of blame either as it likewise failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp for work actually performed by the latter in the total amount of P1,881,867.66. Thus, all things considered, we find no reversible error in the Court of Appeals’ exercise of discretion in the instant case.[16]

In the present case, the factors considered by the Court of Appeals were the absence of bad faith on the part of Urban and the fact that the project was 97% complete at the time it was turned over to Insular. In addition, we noted that Insular is likewise not entirely blameless considering that it failed to pay Urban P1,144,030.94 representing the balance of unpaid change orders and to return the retention money in the amount of P2,134,908.80, or a total of P3,578,939.74. Had Insular released said amount upon demand, the same could have been used by Urban to comply with its obligation to purchase the needed construction materials and to expedite the completion of the project. Under the circumstances, we find that this omission on the part of Insular justifies a further reduction of the liquidated damages decreed against Urban from P2,940,000.00 to P1,940,000.00.

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 courts may equitably reduce a stipulated penalty in the contract where, as in the instant case, the principal obligation has been partly performed (97%) and where the penalty is iniquitous.[17] Article 1229 of the Civil Code, states:

Art. 1229. The 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.

WHEREFORE, the petition is PARTIALLY GRANTED. The June 8, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 652332 which reversed and set aside the May 5, 1999 Decision of the Regional Trial Court of Makati City, Branch 145, is AFFIRMED with MODIFICATION that the award of liquidated damages is REDUCED from P2,940,000.00 to P1,940,000.00.

SO ORDERED.

CONSUELO YNARES-SANTIAGO

Associate Justice

WE CONCUR:

MINITA V. CHICO-NAZARIO

Associate Justice

PRESBITERO J. VELASCO, JR. ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

DIOSDADO M. PERALTA

Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

[1] Exhibit “48,” Folder of Exhibits for the Defendant, p. 73.

[4] Rollo, pp. 27-28; penned by Judge Oscar B. Pimentel.

[5] Section 2, Article XIV of the GCA, reads: Section 2 – Any sum which may be payable to the OWNER for such liquidated damages may be deducted from the amounts retained under Article VII or retained by the OWNER from any balance of whatsoever nature which may be due or become due to the CONTRACTOR when any particular works called for under this agreement shall have been finished or completed.

[6] Rollo, p. 114; penned by Associate Justice Rosalinda Asuncion-Vicente and concurred in by Associate Justices Remedios A. Salazar-Fernando and Enrico A. Lanzanas.

[8] Exhibit “48,” Folder of Exhibits for the Defendant, p. 78.

[11] Pertinent portion thereof, states: “We are pleased to inform you that Insular Life has approved the direct payment scheme for major materials to be used for the above project…“(Exhibit “J,” Records, p. 281)

[12] Exhibit “1,” Folder of Exhibits for the defendant, p. 1.

[13] Exhibit “12,” Folder of Exhibits for the defendant, p. 21.

[14] Exhibit “19,” Folder of Exhibits for the defendant, p. 34.

[15] G.R. No. 138980, September 20, 2005, 470 SCRA 260.

[17] Titan Construction Corporation v. Uni-Field Enterprises, Inc., G.R. No. 153874, March 1, 2007, 517 SCRA 180, 189-190; Filinvest Land, Inc. v. Court of Appeals, G.R. No. 138980, September 20, 2005, 470 SCRA 260, 269-270, citing Lo v. Court of Appeals, G.R. No. 141434, September 23, 2003, 411 SCRA 523.