The Supreme Court affirmed the Department of Public Works and Highways’ (DPWH) right to rescind a contract with ALC Industries, Inc. (ALC) for the Davao-Bukidnon Road project. Even though ALC’s negative slippage was below the 15% threshold stipulated in Presidential Decree (P.D.) 1870, the DPWH validly rescinded the contract due to ALC’s failure to comply with specific obligations outlined in their Reduction in Scope Agreement (RISA). This decision clarifies that contractual breaches, beyond just negative slippage, can justify contract rescission, particularly when a contractor fails to meet agreed-upon milestones. The ruling underscores the importance of adhering to contractual obligations to avoid termination, especially when agreements are modified to address prior performance issues.

Beyond Slippage: When Contractual Obligations Trump Percentage Thresholds

In 1996, the DPWH awarded ALC the construction of a 105-kilometer section of the Davao-Bukidnon Road. A contract was signed in January 1997, and work began in March. However, discrepancies in the original design plans necessitated a redesign of the project. This led to delays, and in July 1998, the parties executed a Reduction in Scope Agreement (RISA), reducing the project’s scope and contract price.

Despite the reduced scope, ALC continued to fall behind schedule, prompting warnings from the DPWH and the project consultant. The DPWH then proposed a Supplemental Agreement, which ALC rejected. Subsequently, the DPWH rescinded the contract in April 1999, citing ALC’s negative slippage exceeding the 15% threshold under P.D. 1870. ALC contested the rescission, attributing the delays to errors in the original design plans and subsequent approval processes. The matter was then submitted to the Construction Industry Arbitration Commission (CIAC) for arbitration.

The CIAC, despite computing ALC’s negative slippage at 22.06%, voided the DPWH’s rescission order, citing mitigating factors like bad weather and the DPWH’s failure to provide ALC an opportunity to address the slippage findings. The CIAC modified the rescission to a mutual termination and awarded ALC P125,623,284.09. Both parties appealed to the Court of Appeals (CA), which upheld the rescission but reduced the award to ALC, ultimately ordering ALC to return P19,044,941.50 to the DPWH. ALC then elevated the case to the Supreme Court.

The first issue addressed by the Supreme Court was whether the CA erred in failing to dismiss the DPWH’s appeal due to it allegedly being filed beyond the reglementary period. The Court found that the DPWH’s appeal was filed within the extended period granted by the CA, thus dismissing ALC’s claim. Secondly, the Court addressed whether the CA erred in upholding the DPWH’s rescission of the contract with ALC. ALC argued that the DPWH’s rescission was solely based on negative slippage, which was found to be below the 15% threshold.

However, the Supreme Court clarified that the DPWH’s rescission order was not solely based on negative slippage. The rescission order cited two reasons: ALC’s failure to comply with Clause 10 of the RISA and ALC’s continuing commission of acts amounting to breaches of contract, resulting in negative slippage. The Court emphasized that negative slippage was an evidence of the breach, not the cause itself. The CA found that ALC failed to perform several obligations under the RISA, including submitting a program of work, providing a cash flow summary, completing the verification survey, and maintaining facilities for the resident engineer.

The Supreme Court found that these breaches were mentioned as the cause of the negative slippage. Furthermore, the DPWH based its rescission on ALC’s failure to comply with Clause 10 of the RISA, which required ALC to achieve 90% of the progress shown on the bar chart program by the end of December 1998. ALC only accomplished 30.80% of the project, falling short of the required 39.52% threshold. Even considering delays due to bad weather, ALC still failed to meet the 90% target.

The Supreme Court held that this failure alone justified the rescission. The 90% progress requirement was a contractual obligation that superseded the threshold imposed by law. Given that the RISA was entered into primarily due to initial delays, the timetable became an integral part of the agreement, ensuring the project’s timely completion. ALC’s failure to maintain the contractually mandated progress constituted a substantial and fundamental breach, entitling the DPWH to terminate the project.

The final issue was whether the CA erred in not allowing ALC to recover stand by costs for equipment and manpower due to delays in the issuance of the notice to proceed, late submittal of redesign works, and inclement weather. ALC sought to recover these costs, but the CA held that ALC had waived its right to recover them by entering into the RISA.

The Supreme Court agreed with the CA’s ruling. The parties executed the RISA to continue the project despite initial setbacks, and both sides waived any claims against each other arising from such delays as a major consideration for entering into the RISA. The Court noted that ALC had created its own problem by mobilizing in July 1996, before the contract was signed and the Notice to Proceed issued, unnecessarily incurring stand by costs.

Regarding the delay caused by redesign works, the CIAC awarded costs equivalent to 50 days. The CA affirmed this award, and the Supreme Court upheld it, denying ALC’s request to increase the amount. Finally, concerning expenses incurred due to non-workable days caused by inclement weather, the Court found that ALC was not entitled to recover such expenses. Clause 12.2 of the Conditions of Contract excluded delays due to climatic conditions. While Clause 44 allowed for time extensions due to weather delays, it did not provide for the recovery of costs.

Ultimately, the Court ruled that ALC could not point to any contractual provision specifically allowing it to recover stand by costs incurred due to inclement weather. Moreover, such costs were incurred without any fault or negligence on the part of the DPWH, considering weather conditions as fortuitous events. The Court reiterated the general rule that each party bears his own loss in such cases.

FAQs

What was the key issue in this case?	The key issue was whether the DPWH validly rescinded its contract with ALC Industries, Inc., despite ALC’s negative slippage being below the 15% threshold, and whether ALC could recover stand by costs.
Why did the DPWH rescind the contract?	The DPWH rescinded the contract due to ALC’s failure to comply with Clause 10 of the Reduction in Scope Agreement (RISA) and ALC’s continuous breaches of contract, which resulted in negative slippage.
What was the significance of the RISA in this case?	The RISA was significant because it outlined specific obligations for ALC, including achieving 90% of the progress by a certain date. Failure to meet this contractual obligation, as stipulated in Clause 10, justified the rescission.
Did the Supreme Court consider weather conditions in its decision?	Yes, the Supreme Court considered weather conditions but determined that while time extensions might be granted due to weather delays, there was no provision in the contract allowing ALC to recover stand by costs incurred due to inclement weather.
What did the Court say about the recovery of stand by costs?	The Court agreed with the CA that ALC had waived its right to recover stand by costs by entering into the RISA, which was intended to address prior setbacks and continue the project.
What is negative slippage and why was it relevant?	Negative slippage refers to the extent to which a project falls behind schedule. It was relevant because the DPWH initially cited it as a reason for rescinding the contract, although the Court later clarified that the rescission was also based on other breaches of contract.
What is the legal basis for contract rescission in the Philippines?	Contract rescission is governed by the Civil Code of the Philippines, which allows for the rescission of contracts in cases of substantial breach by one of the parties.
What was the final outcome of the case?	The Supreme Court affirmed the decision of the Court of Appeals in toto, upholding the DPWH’s rescission of the contract and denying ALC’s claim for additional costs.

This case highlights the importance of fulfilling contractual obligations and adhering to agreed-upon timelines in construction projects. Even if a project’s negative slippage is below a statutory threshold, a party can still be held liable for breach of contract if they fail to meet other contractual requirements. Therefore, contractors should ensure they comply with all terms of the agreement to avoid potential rescission and financial losses.

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: ALC Industries, Inc. vs. Department of Public Works and Highways, G.R. Nos. 173219-20, August 11, 2010