7 J Plus Asia Development Corporation vs. Utility Assurance Corporation

2/19/2016 SUPREMECOURTREPORTSANNOTATEDVOLUME700

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G.R. No. 199650.June 26, 2013.*

J PLUS ASIA DEVELOPMENT CORPORATION,petitioner, vs. UTILITY ASSURANCE CORPORATION,respondent.

Remedial Law Courts Appeals Republic Act No. 9285 R.A.No. 9285 did not confer on regional trial courts jurisdiction toreview awards or decisions of the Construction IndustryArbitration Commission (CIAC) in construction disputes.We holdthat R.A. No. 9285 did not confer on regional trial courtsjurisdiction to review awards or decisions of the CIAC inconstruction disputes. On the contrary, Section 40 thereofexpressly declares that confirmation by the RTC is not required,thus: SEC. 40. Confirmation of Award.The confirmation of adomestic arbitral award shall be governed by Section 23 of R.A.876. A domestic arbitral award when confirmed shall be enforcedin the same manner as final and executory decisions of theRegional Trial Court. The confirmation of a domestic award shallbe made by the regional trial court in accordance with the Rulesof Procedure to be promulgated by the Supreme Court. A CIACarbitral award need not be confirmed by the regional trialcourt to be executory as provided under E.O. No. 1008.

Administrative Agencies Construction Industry ArbitrationCommission (CIAC) Jurisdiction Executive Order (EO) No. 1008vests upon the Construction Industry Arbitration Commission(CIAC) original and exclusive jurisdiction over disputes arisingfrom, or connected with, contracts entered into by parties involvedin construction in the Philippines, whether the dispute arisesbefore or after the completion of the contract, or after theabandonment or breach thereof.Executive Order (EO) No. 1008vests upon the CIAC original and exclusive jurisdiction overdisputes arising from, or connected with, contracts entered into byparties involved in construction in the Philippines, whether thedispute arises before or after the completion of the contract, orafter the abandonment or breach thereof. By express provision ofSection 19 thereof, the arbitral award of the CIAC is final andunappealable, except on questions of law, which are appealable to



the Supreme Court. With the amend

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*FIRST DIVISION.

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J Plus Asia Development Corporation vs. Utility AssuranceCorporation

ments introduced by R.A. No. 7902 and promulgation of the 1997Rules of Civil Procedure, as amended, the CIAC was included inthe enumeration of quasijudicial agencies whose decisions orawards may be appealed to the CA in a petition for review underRule 43. Such review of the CIAC award may involve eitherquestions of fact, of law, or of fact and law.

Civil Law Obligations Default Default or mora on the partof the debtor is the delay in the fulfillment of the prestation byreason of a cause imputable to the former. It is the nonfulfillmentof an obligation with respect to time.Default or mora on the partof the debtor is the delay in the fulfillment of the prestation byreason of a cause imputable to the former. It is the nonfulfillmentof an obligation with respect to time. Article 1169 of the CivilCode provides: ART. 1169. Those obliged to deliver or to dosomething incur in delay from the time the obligee judicially orextrajudicially demands from them the fulfillment of theirobligation. xxxx It is a general rule that one who contracts tocomplete certain work within a certain time is liable for thedamage for not completing it within such time, unless the delay isexcused or waived.

Same Same Same Requisites in Order for the Debtor toIncur in Default.In this jurisdiction, the following requisitesmust be present in order that the debtor may be in default: (1)that the obligation be demandable and already liquidated (2) thatthe debtor delays performance and (3) that the creditor requiresthe performance judicially or extrajudicially.

Same Contracts Interpretation of Contracts Article 1374 ofthe Civil Code requires that the various stipulations of a contractshall be interpreted together, attributing to the doubtful ones thatsense which may result from all of them taken jointly.We cannotsustain the appellate courts interpretation as it is inconsistent



with the terms of the Construction Agreement. Article 1374 of theCivil Code requires that the various stipulations of a contractshall be interpreted together, attributing to the doubtful ones thatsense which may result from all of them taken jointly. Here, thework schedule approved by petitioner was intended, not only toserve as its basis for the payment of monthly progress billings,but also for evaluation of the progress of work by the contractor.Article 13.01 (g) (iii) of the Construction Agreement provides thatthe contractor shall be deemed in

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default if, among others, it had delayed without justifiable causethe completion of the project by more than thirty (30) calendardays based on official work schedule duly approved by theOWNER.

Same Damages Liquidated Damages A stipulation forliquidated damages is attached to an obligation in order to ensureperformance and has a double function: (1) to provide forliquidated damages, and (2) to strengthen the coercive force of theobligation by the threat of greater responsibility in the event ofbreach.A stipulation for liquidated damages is attached to anobligation in order to ensure performance and has a doublefunction: (1) to provide for liquidated damages, and (2) tostrengthen the coercive force of the obligation by the threat ofgreater responsibility in the event of breach. The amount agreedupon answers for damages suffered by the owner due to delays inthe completion of the project. As a precondition to such award,however, there must be proof of the fact of delay in theperformance of the obligation.

Same Obligations Default Where a party to a buildingconstruction contract fails to comply with the duty imposed by theterms of the contract, a breach results for which an action may bemaintained to recover the damages sustained thereby, and ofcourse, a breach occurs where the contractor inexcusably fails toperform substantially in accordance with the terms of thecontract.The contractors default in this case pertains to hisfailure to substantially perform the work on account oftremendous delays in executing the scheduled work activities.



Where a party to a building construction contract fails to complywith the duty imposed by the terms of the contract, a breachresults for which an action may be maintained to recover thedamages sustained thereby, and of course, a breach occurs wherethe contractor inexcusably fails to perform substantially inaccordance with the terms of the contract.

Same Contracts Construction Contracts Such stipulationallowing the confiscation of the contractors performance bondpartakes of the nature of a penalty clause.The plain andunambiguous terms of the Construction Agreement authorizepetitioner to confiscate the Performance Bond to answer for allkinds of damages it may suffer as a result of the contractorsfailure to complete the building. Having elected to terminate thecontract and expel the contractor from the project site underArticle 13 of the said Agreement, petitioner is

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clearly entitled to the proceeds of the bond as indemnification fordamages it sustained due to the breach committed by Mabunay.Such stipulation allowing the confiscation of the contractorsperformance bond partakes of the nature of a penalty clause. Apenalty clause, expressly recognized by law, is an accessoryundertaking to assume greater liability on the part of the obligorin case of breach of an obligation. It functions to strengthen thecoercive force of obligation and to provide, in effect, for what couldbe the liquidated damages resulting from such a breach. Theobligor would then be bound to pay the stipulated indemnitywithout the necessity of proof on the existence and on themeasure of damages caused by the breach. It is wellsettled thatso long as such stipulation does not contravene law, morals, orpublic order, it is strictly binding upon the obligor.

Same Same Same Performance Bond By its nature, aperformance bond guarantees that the contractor will perform thecontract, and usually provides that if the contractor defaults andfails to complete the contract, the surety can itself complete thecontract or pay damages up to the limit of the bond.Respondent,however, insists that it is not liable for the breach committed byMabunay because by the terms of the surety bond it issued, its



liability is limited to the performance by said contractor to theextent equivalent to 20% of the down payment. It stresses thatwith the 32.38% completion of the project by Mabunay, itsliability was extinguished because the value of suchaccomplishment already exceeded the sum equivalent to 20%down payment (P8.4 million). The appellate court correctlyrejected this theory of respondent when it ruled that thePerformance Bond guaranteed the full and faithful compliance ofMabunays obligations under the Construction Agreement, andthat nowhere in law or jurisprudence does it state that theobligation or undertaking by a surety may be apportioned. x x xWhile the above condition or specific guarantee is unclear, therest of the recitals in the bond unequivocally declare that itsecures the full and faithful performance of Mabunays obligationsunder the Construction Agreement with petitioner. By its nature,a performance bond guarantees that the contractor will performthe contract, and usually provides that if the contractor defaultsand fails to complete the contract, the surety can itself completethe contract or pay damages up to the limit of the bond. Moreover,the rule is that if the language of the bond is ambiguous oruncertain, it will be construed most strongly against acompensated surety and in favor of the obligees or

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beneficiaries under the bond, in this case petitioner as the ProjectOwner, for whose benefit it was ostensibly executed.

PETITION for review on certiorari of the decision andresolution of the Court of Appeals.

The facts are stated in the opinion of the Court. Nisce, Mamuric, Guinto, Rivera & Alcantara Law

Offices for petitioner. Buag & Lotilla Law Offices for respondent.

VILLARAMA, JR.,J.:Before the Court is a petition for review on certiorari

under Rule 45 of the 1997 Rules of Civil Procedure, asamended, assailing the Decision1 dated January 27, 2011and Resolution2 dated December 8, 2011 of the Court of



Appeals (CA) in CAG.R. SP No. 112808.The Facts

On December 24, 2007, petitioner J Plus AsiaDevelopment Corporation represented by its Chairman, JooHan Lee, and Martin E. Mabunay, doing business underthe name and style of Seven Shades of Blue Trading andServices, entered into a Construction Agreement3 wherebythe latter undertook to build the formers 72roomcondominium/hotel (Condotel Building 25) located at theFairways & Bluewaters Golf & Resort in Boracay Island,Malay, Aklan. The project, costing P42,000,000.00, was tobe completed within one year or 365 days reckoned fromthe first calendar day after signing of the

_______________1Rollo, pp. 5768. Penned by Associate Justice Samuel H. Gaerlan with

Associate Justices Hakim S. Abdulwahid and Ricardo R. Rosarioconcurring.

2Id., at pp. 6973.3Id., at pp. 8799.

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Notice of Award and Notice to Proceed and receipt of downpayment (20% of contract price). The P8,400,000.00 downpayment was fully paid on January 14, 2008.4 Payment ofthe balance of the contract price will be based on actualwork finished within 15 days from receipt of the monthlyprogress billings. Per the agreed work schedule, thecompletion date of the project was December 2008.5Mabunay also submitted the required Performance Bond6issued by respondent Utility Assurance Corporation(UTASSCO) in the amount equivalent to 20% downpayment or P8.4 million.

Mabunay commenced work at the project site onJanuary 7, 2008. Petitioner paid up to the 7th monthlyprogress billing sent by Mabunay. As of September 16,2008, petitioner had paid the total amount ofP15,979,472.03 inclusive of the 20% down payment.However, as of said date, Mabunay had accomplished only

27.5% of the project.7



27.5% of the project.7In the Joint Construction Evaluation Result and Status

Report8 signed by Mabunay assisted by Arch. ElwinOlavario, and Joo Han Lee assisted by Roy V. Movido, thefollowing findings were accepted as true, accurate andcorrect:

III]STATUS OF PROJECT AS OF 14 NOVEMBER 20081)After conducting a joint inspection and evaluation of the project to

determine the actual percentage of accomplishment, thecontracting parties, assisted by their respective technical groups,SSB assisted by Arch. Elwin Olavario and JPLUS assisted byEngrs. Joey Rojas and Shiela Botardo, concluded and agreed thatas of 14 November 2008, the project is only Thirty Onepoint Thirty Nine Percent (31.39%) complete.

_______________4Id., at pp. 962967.5Id., at pp. 101103, 606.6Id., at p. 184.7Id., at p. 109.8Id., at pp. 109110.

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2)Furthermore, the value of construction materials allocated for thecompletion of the project and currently on site has beendetermined and agreed to be ONE MILLION FORTY NINETHOUSAND THREE HUNDRED SIXTY FOUR PESOS ANDFORTY FIVE CENTAVOS (P1,049,364.45).

3)The additional accomplishment of SSB, reflected in its reconciledand consolidated 8th and 9th billings, is Three point Eighty FivePercent (3.85%) with a gross value of P1,563,553.34 amountcreditable to SSB after deducting the withholding tax isP1,538,424.84.

4)The unrecouped amount of the down payment is P2,379,441.53after deducting the cost of materials on site and the net billableamount reflected in the reconciled and consolidated 8th and 9thbillings. The uncompleted portion of the project is 68.61% with anestimated value per construction agreement signed isP27,880,419.52.9 (Emphasis supplied.)



On November 19, 2008, petitioner terminated thecontract and sent demand letters to Mabunay andrespondent surety. As its demands went unheeded,petitioner filed a Request for Arbitration10 before theConstruction Industry Arbitration Commission (CIAC).Petitioner prayed that Mabunay and respondent be orderedto pay the sums of P8,980,575.89 as liquidated damagesand P2,379,441.53 corresponding to the unrecouped downpayment or overpayment petitioner made to Mabunay.11

In his Answer,12 Mabunay claimed that the delay wascaused by retrofitting and other revision works ordered byJoo Han Lee. He asserted that he actually had until April30, 2009 to finish the project since the 365 days period ofcompletion started only on May 2, 2008 after clearing theretrofitted

_______________9 Id., at p. 110.10Id., at pp. 7686.11Id., at p. 82.12Id., at pp. 189197.

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old structure. Hence, the termination of the contract bypetitioner was premature and the filing of the complaintagainst him was baseless, malicious and in bad faith.

Respondent, on the other hand, filed a motion to dismisson the ground that petitioner has no cause of action andthe complaint states no cause of action against it. TheCIAC denied the motion to dismiss. Respondents motionfor reconsideration was likewise denied.13

In its Answer Ex Abundante Ad Cautelam WithCompulsory Counterclaims and Crossclaims,14 respondentargued that the performance bond merely guaranteed the20% down payment and not the entire obligation ofMabunay under the Construction Agreement. Since thevalue of the projects accomplishment already exceeded thesaid amount, respondents obligation under theperformance bond had been fully extinguished. As to the



claim for alleged overpayment to Mabunay, respondentcontended that it should not be credited against the 20%down payment which was already exhausted and suchapplication by petitioner is tantamount to reviving anobligation that had been legally extinguished by payment.Respondent also set up a crossclaim against Mabunay whoexecuted in its favor an Indemnity Agreement wherebyMabunay undertook to indemnify respondent for whateveramounts it may be adjudged liable to pay petitioner underthe surety bond.

Both petitioner and respondent submitted theirrespective documentary and testimonial evidence.Mabunay failed to appear in the scheduled hearings and topresent his evidence despite due notice to his counsel ofrecord. The CIAC thus declared that Mabunay is deemed tohave waived his right to present evidence.15

_______________13Id., at pp. 115121, 132136, 163164.14Id., at pp. 165183.15Id., at pp. 211212.

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On February 2, 2010, the CIAC rendered its Decision16and made the following award:

Accordingly, in view of our foregoing discussions anddispositions, the Tribunal hereby adjudges, orders and directs:

1.Respondents Mabunay and Utassco to jointly and severallypay claimant the following:

a)P4,469,969.90, as liquidated damages, plus legalinterest thereon at the rate of 6% per annumcomputed from the date of this decision up to thetime this decision becomes final, and 12% per annumcomputed from the date this decision becomes finaluntil fully paid, and

b)P2,379,441.53 as unrecouped down payment plusinterest thereon at the rate of 6% per annumcomputed from the date of this decision up to the



time this decision becomes final, and 12% per annumcomputed from the date this decision becomes finaluntil fully paid[.]

It being understood that respondent Utasscos liability shall inno case exceed P8.4 million.

2.Respondent Mabunay to pay to claimant the amount ofP98,435.89, which is respondent [Mabunays] share in thearbitration cost claimant had advanced, with legal interestthereon from January 8, 2010 until fully paid.

3.Respondent Mabunay to indemnify respondent Utassco ofthe amounts respondent Utassco will have paid to claimant underthis decision, plus interest thereon at the rate of 12% per annumcomputed from the date he is notified of such payment made byrespondent Utassco to claimant until fully paid, and to payUtassco P100,000.00 as attorneys fees.

SO ORDERED.17

_______________16Id., at pp. 600614.17Id., at pp. 614 to 614A.

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Dissatisfied, respondent filed in the CA a petition forreview under Rule 43 of the 1997 Rules of Civil Procedure,as amended.

In the assailed decision, the CA agreed with the CIACthat the specific condition in the Performance Bond did notclearly state the limitation of the suretys liability.Pursuant to Article 137718 of the Civil Code, the CA saidthat the provision should be construed in favor of petitionerconsidering that the obscurely phrased provision wasdrawn up by respondent and Mabunay. Further, theappellate court stated that respondent could not possiblyguarantee the down payment because it is not Mabunaywho owed the down payment to petitioner but the otherway around. Consequently, the completion by Mabunay of31.39% of the construction would not lead to theextinguishment of respondents liability. The P8.4 millionwas a limit on the amount of respondents liability and not



a limitation as to the obligation or undertaking itguaranteed.

However, the CA reversed the CIACs ruling thatMabunay had incurred delay which entitled petitioner tothe stipulated liquidated damages and unrecouped downpayment. Citing Aerospace Chemical Industries, Inc. v.Court of Appeals,19 the appellate court said that not allrequisites in order to consider the obligor or debtor indefault were present in this case. It held that it is only fromDecember 24, 2008 (completion date) that we should reckondefault because the Construction Agreement provided onlyfor delay in the completion of the project and not delay on amonthly basis using the work schedule approved bypetitioner as the reference point. Hence, petitionerstermination of the contract was premature since the delayin this case was merely speculative the obligation was notyet demandable.

_______________18ART. 1377.The interpretation of obscure words or stipulations in

a contract shall not favor the party who caused the obscurity.19G.R. No. 108129, September 23, 1999, 315 SCRA 92.

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The dispositive portion of the CA Decision reads:

WHEREFORE, premises considered, the instantpetition for review is GRANTED. The assailed Decisiondated 13 January 2010 rendered by the CIAC ArbitralTribunal in CIAC Case No. 032009 is hereby REVERSEDand SET ASIDE. Accordingly, the Writ of Execution dated24 November 2010 issued by the same tribunal is herebyANNULLED and SET ASIDE.

SO ORDERED.20

Petitioner moved for reconsideration of the CA decisionwhile respondent filed a motion for partial reconsideration.Both motions were denied.

The IssuesBefore this Court petitioner seeks to reverse the CA



insofar as it denied petitioners claims under thePerformance Bond and to reinstate in its entirety theFebruary 2, 2010 CIAC Decision. Specifically, petitioneralleged that

A.THE COURT OF APPEALS SERIOUSLY ERRED IN NOTHOLDING THAT THE ALTERNATIVE DISPUTERESOLUTION ACT AND THE SPECIAL RULES ONALTERNATIVE DISPUTE RESOLUTION HAVE STRIPPEDTHE COURT OF APPEALS OF JURISDICTION TO REVIEWARBITRAL AWARDS.B.THE COURT OF APPEALS SERIOUSLY ERRED INREVERSING THE ARBITRAL AWARD ON AN ISSUE THATWAS NOT RAISED IN THE ANSWER. NOT IDENTIFIED INTHE TERMS OF REFERENCE, NOT ASSIGNED AS ANERROR, AND NOT ARGUED IN ANY OF THE PLEADINGSFILED BEFORE THE COURT.

_______________20Rollo, p. 67.

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C.THE COURT OF APPEALS SERIOUSLY ERRED INRELYING ON THE CASE OF AEROSPACE CHEMICALINDUSTRIES, INC. v. COURT OF APPEALS, 315 SCRA 94,WHICH HAS NOTHING TO DO WITH CONSTRUCTIONAGREEMENTS.21

Our RulingOn the procedural issues raised, we find no merit in

petitioners contention that with the institutionalization ofalternative dispute resolution under Republic Act (R.A.)No. 9285,22 otherwise known as the Alternative DisputeResolution Act of 2004, the CA was divested of jurisdictionto review the decisions or awards of the CIAC. Petitionererroneously relied on the provision in said law allowing anyparty to a domestic arbitration to file in the Regional TrialCourt (RTC) a petition either to confirm, correct or vacate adomestic arbitral award.

We hold that R.A. No. 9285 did not confer on regionaltrial courts jurisdiction to review awards or decisions of the



CIAC in construction disputes. On the contrary, Section 40thereof expressly declares that confirmation by the RTC isnot required, thus:

SEC.40.Confirmation of Award.The confirmationof a domestic arbitral award shall be governed by Section 23of R.A. 876.

A domestic arbitral award when confirmed shall beenforced in the same manner as final and executorydecisions of the Regional Trial Court.

The confirmation of a domestic award shall be made bythe regional trial court in accordance with the Rules ofProcedure to be promulgated by the Supreme Court.

_______________21Id., at p. 23.22Approved on April 2, 2004.

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A CIAC arbitral award need not be confirmed bythe regional trial court to be executory as providedunder E.O. No. 1008. (Emphasis supplied.)

Executive Order (EO) No. 1008 vests upon the CIACoriginal and exclusive jurisdiction over disputes arisingfrom, or connected with, contracts entered into by partiesinvolved in construction in the Philippines, whether thedispute arises before or after the completion of the contract,or after the abandonment or breach thereof. By expressprovision of Section 19 thereof, the arbitral award of theCIAC is final and unappealable, except on questions of law,which are appealable to the Supreme Court. With theamendments introduced by R.A. No. 7902 andpromulgation of the 1997 Rules of Civil Procedure, asamended, the CIAC was included in the enumeration ofquasijudicial agencies whose decisions or awards may beappealed to the CA in a petition for review under Rule 43.Such review of the CIAC award may involve eitherquestions of fact, of law, or of fact and law.23

Petitioner misread the provisions of A.M. No. 071108SC (Special ADR Rules) promulgated by this Court and



which took effect on October 30, 2009. Since R.A. No. 9285explicitly excluded CIAC awards from domestic arbitrationawards that need to be confirmed to be executory, saidawards are therefore not covered by Rule 11 of the SpecialADR Rules,24 as they continue to be governed by EO No.1008, as amended and the rules of procedure of the CIAC.The CIAC Revised Rules of Procedure GoverningConstruction Arbitration25 provide for the manner andmode of appeal from CIAC decisions or awards in Section18 thereof, which reads:

_______________23 Metro Construction, Inc. v. Chatham Properties, Inc., G.R. No.

141897, September 24, 2001, 365 SCRA 697, 718719 & 794.24A.M. No. 071108SC, effective October 30, 2009.25As amended by CIAC Resolution Nos. 152006, 162006, 182006, 19

2006, 022007, 072007, 132007, 022008, and 032008, which took effecton December 15, 2005.

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SECTION18.2Petition for review.A petition forreview from a final award may be taken by any of theparties within fifteen (15) days from receipt thereof inaccordance with the provisions of Rule 43 of the Rules ofCourt.

As to the alleged error committed by the CA in decidingthe case upon an issue not raised or litigated before theCIAC, this assertion has no basis. Whether or not Mabunayhad incurred delay in the performance of his obligationsunder the Construction Agreement was the very first issuestipulated in the Terms of Reference26 (TOR), which isdistinct from the issue of the extent of respondents liabilityunder the Performance Bond.

Indeed, resolution of the issue of delay was crucial uponwhich depends petitioners right to the liquidated damagespursuant to the Construction Agreement. Contrary to theCIACs findings, the CA opined that delay should bereckoned only after the lapse of the oneyear contractperiod, and consequently Mabunays liability for liquidated



damages arises only upon the happening of such condition.We reverse the CA.Default or mora on the part of the debtor is the delay in

the fulfillment of the prestation by reason of a causeimputable to the former. It is the nonfulfillment of anobligation with respect to time.27

Article 1169 of the Civil Code provides:

ART.1169.Those obliged to deliver or to do somethingincur in delay from the time the obligee judicially orextrajudicially demands from them the fulfillment of theirobligation.

xxxx

_______________26Rollo, pp. 202210.27 IV Arturo M. Tolentino, COMMENTARIES AND JURISPRUDENCE ON THE

CIVIL CODE OF THE PHILIPPINES, 101 (1987 ed.).

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It is a general rule that one who contracts to completecertain work within a certain time is liable for the damagefor not completing it within such time, unless the delay isexcused or waived.28

The Construction Agreement provides in Article 10thereof the following conditions as to completion time forthe project

1.The CONTRACTOR shall complete the works called for under thisAgreement within ONE (1) YEAR or 365 Days reckoned from the1st calendar day after signing of the Notice of Award and Notice toProceed and receipt of down payment.

2.In this regard the CONTRACTOR shall submit a detailed workschedule for approval by OWNER within Seven (7) days aftersigning of this Agreement and full payment of 20% of the agreedcontract price. Said detailed work schedule shall follow the generalschedule of activities and shall serve as basis for the evaluation ofthe progress of work by CONTRACTOR.29

In this jurisdiction, the following requisites must be



present in order that the debtor may be in default: (1) thatthe obligation be demandable and already liquidated (2)that the debtor delays performance and (3) that thecreditor requires the performance judicially orextrajudicially.30

In holding that Mabunay has not at all incurred delay,the CA pointed out that the obligation to perform orcomplete the project was not yet demandable as ofNovember 19, 2008

_______________2817 Am Jur 2d 387, p. 832.29Rollo, p. 93.30Santos Ventura Hocorma Foundation, Inc. v. Santos, 484 Phil. 447,

457 441 SCRA 472, 481 (2004), citing IV Arturo M. Tolentino,Commentaries and Jurisprudence on the Civil Code of the Philippines, 102(1987 ed.). See also Philippine Export and Foreign Loan GuaranteeCorporation v. V.P. Eusebio Construction, Inc., G.R. No. 140047, July 13,2004, 434 SCRA 202, 218219.

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when petitioner terminated the contract, because theagreed completion date was still more than one monthaway (December 24, 2008). Since the parties contemplateddelay in the completion of the entire project, the CAconcluded that the failure of the contractor to catch up withschedule of work activities did not constitute delay givingrise to the contractors liability for damages.

We cannot sustain the appellate courts interpretationas it is inconsistent with the terms of the ConstructionAgreement. Article 1374 of the Civil Code requires that thevarious stipulations of a contract shall be interpretedtogether, attributing to the doubtful ones that sense whichmay result from all of them taken jointly. Here, the workschedule approved by petitioner was intended, not only toserve as its basis for the payment of monthly progressbillings, but also for evaluation of the progress of work bythe contractor. Article 13.01 (g) (iii) of the ConstructionAgreement provides that the contractor shall be deemed in



default if, among others, it had delayed without justifiablecause the completion of the project by more than thirty(30) calendar days based on official work schedule dulyapproved by the OWNER.31

Records showed that as early as April 2008, or withinfour months after Mabunay commenced work activities, theproject was already behind schedule for reasons notattributable to petitioner. In the succeeding months,Mabunay was still unable to catch up with hisaccomplishment even as petitioner constantly advised himof the delays, as can be gleaned from the following noticesof delay sent by petitioners engineer and constructionmanager, Engr. Sheila N. Botardo:

April 30, 2008Seven Shades of BlueBoracay IslandMalay, Aklan

_______________31Rollo, p. 94.

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Attention:Mr. Martin MabunayGeneral ManagerThru:Engr. Reynaldo GapasinProject:Villa BeatrizSubject:Notice of DelayDear Mr. Mabunay:This is to formalize our discussion with your Engineersduring our meeting last April 23, 2008 regarding the delayin the implementation of major activities based on yoursubmitted construction schedule. Substantial delay wasnoted in concreting works that affects your roof framingthat should have been 40% completed as of this date. Thisdelay will create major impact on your overall schedule asthe finishing works will all be dependent on the enclosure ofthe building.In this regard, we recommend that you prepare a catchupschedule and expedite the delivery of critical materials on



site. We would highly appreciate if you could attend ournext regular meeting so we could immediately address thismatter. Thank you.Very truly yours,Engr. Sheila N. BotardoConstruction Manager LMI/FEPI32October 15, 2008xxxxDear Mr. Mabunay,We have noticed continuous absence of all the Engineersthat you have assigned onsite to administer and superviseyour contracted work. For the past two (2) weeks[,] yourcompany does not have a Technical Representative

_______________32Id., at p. 104.

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manning the jobsite considering the critical activities thatare in progress and the delays in schedule that you havealready incurred. In this regard, we would highlyrecommend the immediate replacement of your ProjectEngineer within the week.We would highly appreciate your usual attention on thismatter.xxxx 33November 5, 2008xxxxDear Mr. Mabunay,This is in reference to your discussion during the meetingwith Mr. Joohan Lee last October 30, 2008 regarding theconstruction of the Field Office and Stock Room forMaterials intended for Villa Beatriz use only. Weunderstand that you have committed to complete itNovember 5, 2008 but as of this date there is noimprovement or any ongoing construction activity on thesaid field office and stockroom.We are expecting deliveries of Owner Supplied Materialsvery soon, therefore, this stockroom is badly needed. Wewill highly appreciate if this matter will be given your



immediate attention.Thank you.xxxx 34November 6, 2008xxxxDear Mr. Mabunay,

_______________33Id., at p. 106.34Id., at p. 107.

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We would like to call your attention regarding the decreasein your manpower assigned on site. We have observed thatfor the past three (3) weeks instead of increasing yourmanpower to catch up with the delay it was reduced to only8 workers today from an average of 35 workers in theprevious months.Please note that based on your submitted revised scheduleyou are already delayed by approximately 57% and this willworsen should you not address this matter properly.We are looking forward for [sic] your cooperation andcontinuous commitment in delivering this project as percontract agreement.xxxx 35

Subsequently, a joint inspection and evaluation wasconducted with the assistance of the architects andengineers of petitioner and Mabunay and it was found thatas of November 14, 2008, the project was only 31.39%complete and that the uncompleted portion was 68.61%with an estimated value per Construction Agreement asP27,880,419.52. Instead of doubling his efforts as thescheduled completion date approached, Mabunay didnothing to remedy the delays and even reduced thedeployment of workers at the project site. Neither didMabunay, at anytime, ask for an extension to complete theproject. Thus, on November 19, 2008, petitioner advisedMabunay of its decision to terminate the contract onaccount of the tremendous delay the latter incurred. This



was followed by the claim against the Performance Bondupon the respondent on December 18, 2008.

Petitioners claim against the Performance Bondincluded the liquidated damages provided in theConstruction Agreement, as follows:

_______________35Id., at p. 108.

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ARTICLE12 LIQUIDATED DAMAGES:12.01Time is of the essence in this Agreement. Should

the CONTRACTOR fail to complete the PROJECTwithin the period stipulated herein or within theperiod of extension granted by the OWNER, plus One(1) Week grace period, without any justifiable reason, theCONTRACTOR hereby agrees

a.The CONTRACTOR shall pay the OWNERliquidated damages equivalent to One Tenth of OnePercent (1/10 of 1%) of the Contract Amount for eachday of delay after any and all extensions and the One(1) week Grace Period until completed by theCONTRACTOR.

b.The CONTRACTOR, even after paying for theliquidated damages due to unexecuted works and/ordelays shall not relieve it of the obligation to completeand finish the construction.

Any sum which maybe payable to the OWNER for suchloss may be deducted from the amounts retained underArticle 9 or retained by the OWNER when the works calledfor under this Agreement have been finished and completed.

Liquidated Damage[s] payable to the OWNER shall beautomatically deducted from the contractors collectibleswithout prior consent and concurrence by theCONTRACTOR.

12.02To give full force and effect to the foregoing, theCONTRACTOR hereby, without necessity of any further actand deed, authorizes the OWNER to deduct any amountthat may be due under Item (a) above, from any and all



money or amounts due or which will become due to theCONTRACTOR by virtue of this Agreement and/or to collectsuch amounts from the Performance Bond filed by theCONTRACTOR in this Agreement.36 (Emphasis supplied.)

_______________36Id., at pp. 9394.

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Liability for liquidated damages is governed by Articles2226 to 2228 of the Civil Code, which provide:

ART.2226.Liquidated damages are those agreed uponby the parties to a contract, to be paid in case of breachthereof.

ART.2227.Liquidated damages, whether intended asan indemnity or a penalty, shall be equitably reduced ifthey are iniquitous or unconscionable.

ART.2228.When the breach of the contract committedby the defendant is not the one contemplated by the partiesin agreeing upon the liquidated damages, the law shalldetermine the measure of damages, and not the stipulation.

A stipulation for liquidated damages is attached to anobligation in order to ensure performance and has a doublefunction: (1) to provide for liquidated damages, and (2) tostrengthen the coercive force of the obligation by the threatof greater responsibility in the event of breach.37 Theamount agreed upon answers for damages suffered by theowner due to delays in the completion of the project.38 As aprecondition to such award, however, there must be proofof the fact of delay in the performance of the obligation.39

Concededly, Article 12.01 of the Construction Agreementmentioned only the failure of the contractor to complete the

_______________37Atlantic Erectors, Inc. v. Court of Appeals, G.R. No. 170732, October

11, 2012, 684 SCRA 55, 65, citing Philippine Charter InsuranceCorporation v. Petroleum Distributors & Service Corporation, G.R. No.



180898, April 18, 2012, 670 SCRA 166, 177 and Filinvest Land, Inc. v.Court of Appeals, G.R. No. 138980, September 20, 2005, 470 SCRA 260,269.

38 Id., citing H.L. Carlos Construction, Inc. v. Marina PropertiesCorporation, 466 Phil. 182, 205 421 SCRA 428, 445 (2004).

39 Id., citing Empire East Land Holdings, Inc. v. Capitol IndustrialConstruction Groups, Inc., G.R. No. 168074, September 26, 2008, 566SCRA 473, 489.

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project within the stipulated period or the extensiongranted by the owner. However, this will not defeatpetitioners claim for damages nor respondents liabilityunder the Performance Bond. Mabunay was clearly indefault considering the dismal percentage of hisaccomplishment (32.38%) of the work he contracted onaccount of delays in executing the scheduled work activitiesand repeated failure to provide sufficient manpower toexpedite construction works. The events of default andremedies of the Owner are set forth in Article 13, whichreads:

ARTICLE13 DEFAULT OF CONTRACTOR:13.01Any of the following shall constitute an Event of Default onthe [part] of the CONTRACTOR.xxxxg.In case the CONTRACTOR has done any of the following:

(i.)has abandoned the Project(ii.)without reasonable cause, has failed to commence theconstruction or has suspended the progress of the Projectfor twentyeight days(iii.)without justifiable cause, has delayed the completionof the Project by more than thirty (30) calendar days basedon official work schedule duly approved by the OWNER(iv.)despite previous written warning by the OWNER, isnot executing the construction works in accordance with theAgreement or is persistently or flagrantly neglecting tocarry out its obligations under the Agreement.(v.)has, to the detriment of good workmanship or in



defiance of the Owners instructions to the contrary, subletany part of the Agreement.

13.02If the CONTRACTOR has committed any of the abovereasons cited in Item 13.01, the OWNER may after giving fourteen(14) calendar days notice in writing to the

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CONTRACTOR, enter upon the site and expel theCONTRACTOR therefrom without voiding this Agreement,or releasing the CONTRACTOR from any of its obligations,and liabilities under this Agreement. Also withoutdiminishing or affecting the rights and powers conferred onthe OWNER by this Agreement and the OWNER mayhimself complete the work or may employ any othercontractor to complete the work. If the OWNER shall enterand expel the CONTRACTOR under this clause, theOWNER shall be entitled to confiscate the performancebond of the CONTRACTOR to compensate for allkinds of damages the OWNER may suffer. Allexpenses incurred to finish the Project shall be charged tothe CONTRACTOR and/or his bond. Further, the OWNERshall not be liable to pay the CONTRACTOR until the costof execution, damages for the delay in the completion, ifany, and all other expenses incurred by the OWNER havebeen ascertained which amount shall be deducted from anymoney due to the CONTRACTOR on account of thisAgreement. The CONTRACTOR will not be compensatedfor any loss of profit, loss of goodwill, loss of use of anyequipment or property, loss of business opportunity,additional financing cost or overhead or opportunity lossesrelated to the unaccomplished portions of the work.40(Emphasis supplied.)

As already demonstrated, the contractors default in thiscase pertains to his failure to substantially perform thework on account of tremendous delays in executing thescheduled work activities. Where a party to a buildingconstruction contract fails to comply with the duty imposedby the terms of the contract, a breach results for which anaction may be maintained to recover the damages



sustained thereby, and of course, a breach occurs where thecontractor inexcusably fails to perform substantially inaccordance with the terms of the contract.41

_______________40Rollo, pp. 9495.4113 Am Jur 2d 72, p. 73.

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The plain and unambiguous terms of the ConstructionAgreement authorize petitioner to confiscate thePerformance Bond to answer for all kinds of damages itmay suffer as a result of the contractors failure to completethe building. Having elected to terminate the contract andexpel the contractor from the project site under Article 13of the said Agreement, petitioner is clearly entitled to theproceeds of the bond as indemnification for damages itsustained due to the breach committed by Mabunay. Suchstipulation allowing the confiscation of the contractorsperformance bond partakes of the nature of a penaltyclause. A penalty clause, expressly recognized by law, is anaccessory undertaking to assume greater liability on thepart of the obligor in case of breach of an obligation. Itfunctions to strengthen the coercive force of obligation andto provide, in effect, for what could be the liquidateddamages resulting from such a breach. The obligor wouldthen be bound to pay the stipulated indemnity without thenecessity of proof on the existence and on the measure ofdamages caused by the breach. It is wellsettled that solong as such stipulation does not contravene law, morals, orpublic order, it is strictly binding upon the obligor.42

Respondent, however, insists that it is not liable for thebreach committed by Mabunay because by the terms of thesurety bond it issued, its liability is limited to theperformance by said contractor to the extent equivalent to20% of the down payment. It stresses that with the 32.38%completion of the project by Mabunay, its liability wasextinguished because the value of such accomplishmentalready exceeded the sum equivalent to 20% down payment



(P8.4 million).The appellate court correctly rejected this theory of

respondent when it ruled that the Performance Bondguaranteed the full and faithful compliance of Mabunaysobligations under

_______________42Suatengco v. Reyes, G.R. No. 162729, December 17, 2008, 574 SCRA

187, 194, citing Ligutan v. Court of Appeals, G.R. No. 138677, February12, 2002, 376 SCRA 560, 567568.

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the Construction Agreement, and that nowhere in law orjurisprudence does it state that the obligation orundertaking by a surety may be apportioned.

The pertinent portions of the Performance Bond provide:

The conditions of this obligation are as follows:Whereas the JPLUS ASIA, requires the principalSEVEN SHADES OF BLUE CONSTRUCTION ANDDEVELOPMENT, INC. to post a bond of theabovestated sum to guarantee 20% down paymentfor the construction of Building 25 (Villa Beatriz)72Room Condotel, The Lodgings inside Fairways andBluewater, Boracay Island, Malay, Aklan.

Whereas, said contract required said Principal to give agood and sufficient bond in the abovestated sum to securethe full and faithful performance on his part of saidcontract.

It is a special provision of this undertaking that theliability of the surety under this bond shall in no case exceedthe sum of P8,400,000.00 Philippine Currency.

Now, Therefore, if the Principal shall well and trulyperform and fulfill all the undertakings, covenants, terms,conditions and agreements stipulated in said contract, thenthis obligation shall be null and void otherwise to remain infull force and effect.43 (Emphasis supplied.)

While the above condition or specific guarantee isunclear, the rest of the recitals in the bond unequivocally



declare that it secures the full and faithful performance ofMabunays obligations under the Construction Agreementwith petitioner. By its nature, a performance bondguarantees that the contractor will perform the contract,and usually provides that if the contractor defaults andfails to complete the contract, the surety can itself completethe contract or pay damages up to the limit of the bond.44Moreover, the rule is that if

_______________43Rollo, p. 100.4417 Am Jur 2d 1, p. 192.

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the language of the bond is ambiguous or uncertain, it willbe construed most strongly against a compensated suretyand in favor of the obligees or beneficiaries under the bond,in this case petitioner as the Project Owner, for whosebenefit it was ostensibly executed.45

The imposition of interest on the claims of petitioner islikewise in order. As we held in Commonwealth InsuranceCorporation v. Court of Appeals46

Petitioner argues that it should not be made to payinterest because its issuance of the surety bonds was madeon the condition that its liability shall in no case exceed theamount of the said bonds.

We are not persuaded. Petitioners argument ismisplaced.

Jurisprudence is clear on this matter. As early asTagawa vs. Aldanese and Union Gurantee Co. andreiterated in Plaridel Surety & Insurance Co., Inc. vs. P.L.Galang Machinery Co., Inc., and more recently, in Republicvs. Court of Appeals and R & B Surety and InsuranceCompany, Inc., we have sustained the principle that if asurety upon demand fails to pay, he can be heldliable for interest, even if in thus paying, its liabilitybecomes more than the principal obligation. Theincreased liability is not because of the contract butbecause of the default and the necessity of judicial



collection.Petitioners liability under the suretyship contract is

different from its liability under the law. There is noquestion that as a surety, petitioner should not be made topay more than its assumed obligation under the suretybonds. However, it is clear from the abovecitedjurisprudence that petitioners liability for the payment ofinterest is not by reason of the suretyship agreement itselfbut because of the delay in the payment of its obligation un

_______________4517 Am Jur 2d 3, p. 193.46466 Phil. 104 421 SCRA 367 (2004).

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der the said agreement.47 (Emphasis supplied citationsomitted.)

WHEREFORE, the petition for review on certiorari isGRANTED. The Decision dated January 27, 2011 andResolution dated December 8, 2011 of the Court of Appealsin CAG.R. SP No. 112808 are hereby REVERSED andSET ASIDE.

The Award made in the Decision dated February 2, 2010of the Construction Industry Arbitration Commission ishereby REINSTATED with the followingMODIFICATIONS:

Accordingly, in view of our foregoing discussions anddispositions, the Tribunal hereby adjudges, orders anddirects:

1)Respondent Utassco to pay to petitioner J Plus AsiaDevelopment Corporation the full amount of thePerformance Bond, P8,400,000.00, pursuant to Art. 13 ofthe Construction Agreement dated December 24, 2007, withinterest at the rate of 6% per annum computed from thedate of the filing of the complaint until the finality of thisdecision, and 12% per annum computed from the date thisdecision becomes final until fully paid and

2)Respondent Mabunay to indemnify respondentUtassco of the amounts respondent Utassco will have paid



to claimant under this decision, plus interest thereon at therate of 12% per annum computed from the date he isnotified of such payment made by respondent Utassco toclaimant until fully paid, and to pay Utassco P100,000.00 asattorneys fees.

SO ORDERED.

With the above modifications, the Writ of Executiondated November 24, 2010 issued by the CIAC ArbitralTribunal in CIAC Case No. 032009 is herebyREINSTATED and UPHELD.

No pronouncement as to costs.

_______________47Id., at pp. 112113 p. 372.

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SO ORDERED.

Sereno (CJ., Chairperson), LeonardoDe Castro,Bersamin and Reyes, JJ., concur.

Petition granted, judgment and resolution reversed andset aside. Award made by Construction IndustryArbitration Commission reinstated with modifications.

Notes.In Leyte v. Cusi, 152 SCRA 496 (1987), theSupreme Court has admonished against precipitate ordersof default because such orders have the effect of denying alitigant the chance to be heard. (Mortel vs. Kerr, 685 SCRA1 [2012])

A party declared in default may at any time after noticethereof and before judgment file a motion under oath to setaside the order of default upon proper showing that hisfailure to answer was due to fraud, accident, mistake orexcusable negligence and that he has a meritoriousdefense. (Magtoto vs. Court of Appeals, 686 SCRA 88[2012])

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Documents

7 J Plus Asia Development Corporation vs. Utility Assurance Corporation