In a construction project dispute between Colorite Marketing Corporation and Ka Kuen Chua Architectural, the Supreme Court addressed the complexities of project delays, shared negligence, and the application of liquidated damages. The Court ruled that both parties contributed to the delay, emphasizing the importance of diligence and good faith in contractual obligations. This decision clarifies how liquidated damages are applied and equitably reduced when both parties are at fault, providing a crucial reference for construction contracts and dispute resolution in the Philippines.

Whose Fault Is It Anyway? Unraveling Delay and Liability in Construction Contracts

This case arose from a construction contract signed on November 15, 2003, between Colorite Marketing Corporation (Colorite) and Architect Ka Kuen Tan Chua (Chua), doing business under the name and style “Ka Kuen Chua Architectural” (KKCA). KKCA agreed to construct a four-story residential/commercial building for Colorite in Makati City. The contract stipulated a full price of Php33,000,000.00 and outlined key terms, including a completion deadline, liquidated damages for delays, and Colorite’s right to terminate the contract if delays exceeded 73 calendar days.

Construction was marred by an unforeseen event: excavation work caused erosion, damaging the adjacent property of the Hontiveros family. This prompted the City Government of Makati to issue a Hold Order, halting construction. The restoration of the Hontiveros property concluded in October 2005, but the Hold Order remained effective due to the lack of a waiver from the Hontiveros family. Colorite demanded damages from KKCA for the delay, while KKCA countered that the Hold Order suspended the completion period and that Colorite failed to cover soil protection costs and restoration expenses.

The Construction Industry Arbitration Commission (CIAC) partially granted Colorite’s claim for liquidated damages but reduced it by 50%, finding both parties equally responsible for the delay. Both parties appealed to the Court of Appeals (CA), which affirmed the CIAC’s decision with modifications. Dissatisfied, both parties elevated the case to the Supreme Court, leading to a consolidated review focusing on determining the factors behind the project’s prolonged delay and the parties’ respective participation in it.

The Supreme Court began by scrutinizing the cause of the erosion that damaged the Hontiveros property. The CIAC initially found both parties at fault, citing Colorite’s presence in meetings and failure to hold WE Construction Company (WCC) accountable for defective excavation. However, the Supreme Court disagreed, stating that Colorite’s presence in meetings did not equate to assuming liability. Further, the Court emphasized that WCC was not an employee of Colorite, and the parties had expressly agreed that all excavation works were included in KKCA’s scope of work as the project’s general contractor.

To support its conclusion, the Supreme Court cited paragraph 21 of Addendum #01, which clearly stated that, “All excavation works as required for, should be included on the scope of works of the Contractor.” This provision, the Court reasoned, placed WCC under KKCA’s supervision and control. The Court noted that KKCA never asserted WCC was to blame for the erosion in its answer to Colorite’s complaint, further strengthening the argument against WCC’s liability. The Court highlighted that KKCA commenced performance of its obligations on December 22, 2003, giving them ample time to install soil protection measures.

The Supreme Court then referred to the testimony of Luis T. Reyes, KKCA’s consultant, who admitted that no soil protection measure was installed before the erosion. The Court also cited paragraph 33 of Addendum #01 and Article XIII of the Main Construction Contract, which collectively stipulated that KKCA was responsible for protecting adjacent properties from erosion. Paragraph 33 of Addendum #01 states: “The Contractor to provide, erect and maintain all necessary bracing, shoring, planking, etc.[,] as required to protect the adjoining property against settlement and damages… The Contractor has the prerogative to choose what type of methodology that he would use for the project but he [has] to make sure that [it] will protect the adjacent properties against erosion and settlement.”

Regarding the factors that delayed the project’s completion, the Supreme Court noted that the project should have been finished by March 5, 2005, but the construction remained suspended even after the restoration of the Hontiveros property in October 2005. KKCA argued that the delay was due to Colorite’s failure to pay for soil protection and its share of restoration costs. The Court disagreed, emphasizing that soil protection was within the contractor’s scope of work and already included in the contract price. The Supreme Court pointed to the clear and unambiguous provisions of paragraphs 21 and 33 of Addendum #01 and invoked Article 1370 of the Civil Code, which mandates that “if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.”

The Court then addressed the alleged agreement that Colorite would contribute Php700,000.00 to the restoration of the Hontiveros property. The Court found that there was no clear agreement on whether Colorite was to contribute Php700,000.00 or 70% of the restoration cost. Absent a clear meeting of minds on an essential term of the purported contract, no subsequent and definitive agreement was perfected. The Court also noted that, other than Chua’s bare assertions, no other evidence was offered to prove that an agreement to share in the restoration cost was perfected. As the Court stated in Pen v. Julian, “the perfection of a contract entails that the parties should agree on every point of a proposition – otherwise, there is no contract at all.”

Regarding the obligation to secure the quitclaim of the Hontiveros family and the lifting of the Hold Order, the Court held that KKCA was under such obligation, citing Article XIII of the construction contract: “The owner shall be held free and harmless from any liability arising from claims of third parties… all of which shall be for the account of the CONTRACTOR.” By express provision of Article 1315 of the Civil Code, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage, and law. The Court found KKCA remiss in this obligation, noting that even if Colorite took it upon itself to secure the quitclaim, KKCA remained adamant that the project would not continue unless Colorite delivered its share of the restoration cost.

In assessing the damages, the Supreme Court acknowledged KKCA’s negligence in failing to ensure that damages would not arise as a result of the excavation, thereby causing the erosion. However, the Court also found Colorite equally at fault for the protracted delay, noting that Colorite failed to exercise its right to terminate the contract and pursue the completion of the project with another contractor. This inaction, the Court reasoned, weighed against the sincerity of Colorite’s claim for unrealized profits and violated Article 2203 of the Civil Code, which requires the injured party to exercise the diligence of a good father of a family to minimize damages.

Regarding Colorite’s claim for compensation for lost earnings, the Court agreed with the tribunals below that it could not be awarded due to insufficient basis. The Court, however, did not deny the claim for liquidated damages. The contract expressly stipulated the payment of liquidated damages in case of delay. Under Article 2226 of the Civil Code, liquidated damages are those agreed upon by the parties to a contract to be paid in case of breach thereof. However, given the inordinate length of the delay, the Court invoked Article 2227 of the Civil Code, which allows for an equitable reduction of liquidated damages if they are iniquitous or unconscionable.

The Court deemed it equitable to award Colorite liquidated damages corresponding to the period from March 6, 2005, to October 2005, when the rehabilitation of the Hontiveros property was completed, plus six months to allow Colorite to determine whether to continue the project. This amounted to Php4,210,000.00 in liquidated damages. The Supreme Court concluded by affirming that KKCA should finish the project. While the contract subsists, the court recognized the original contract price would no longer suffice to cover the cost of completing the project due to the extended delays. However, given that Colorite was equally to blame for the delay, the Supreme Court deemed that the parties should commonly share the amount of the increase in construction cost at a ratio of 40% for Colorite and 60% for KKCA.

FAQs

What was the key issue in this case?	The key issue was determining the responsibility for delays in a construction project and the appropriate application of liquidated damages when both parties were at fault.
Who was responsible for the initial delay?	KKCA was found responsible for the initial delay due to its failure to provide sufficient soil protection measures, which led to erosion and a subsequent Hold Order.
Did Colorite contribute to the delay?	Yes, Colorite contributed to the protracted delay by failing to exercise its right to terminate the contract and take over the project when KKCA failed to complete it on time.
What are liquidated damages?	Liquidated damages are damages agreed upon by the parties in a contract, to be paid in case of a breach. They serve to compensate the injured party for losses incurred due to the breach.
How did the Court adjust the liquidated damages?	The Court equitably reduced the liquidated damages, citing Article 2227 of the Civil Code, because both parties contributed to the project’s delay.
Was there an agreement for Colorite to share in the restoration costs?	The Court found no clear agreement for Colorite to share in the restoration costs of the Hontiveros property, rejecting KKCA’s claim for reimbursement.
Who is responsible for securing the quitclaim from the Hontiveros family?	KKCA is responsible for securing the quitclaim from the Hontiveros family and lifting the Hold Order, as stipulated in Article XIII of the construction contract.
What about the increase in construction costs?	The increase in construction costs, representing the difference between the original contract price and the actual cost to complete the project, is to be shared between Colorite and KKCA at a ratio of 40% and 60%, respectively.

In conclusion, the Supreme Court’s decision in this case underscores the importance of clear contractual terms, diligence, and good faith in construction projects. The ruling provides valuable guidance on the equitable reduction of liquidated damages when both parties contribute to delays, emphasizing the need for parties to take reasonable steps to mitigate damages. The decision serves as a reminder of the complexities of construction contracts and the potential for shared liability when unforeseen events disrupt project timelines.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: KA KUEN CHUA vs. COLORITE MARKETING CORPORATION, G.R. Nos. 193969-193970, July 05, 2017