In a construction contract dispute between Highlands Prime, Inc. (HPI) and Werr Corporation International (Werr), the Supreme Court clarified the application of industry practices regarding liquidated damages for project delays. The Court ruled that while construction industry practices, such as considering ‘substantial completion’ as a cutoff for liquidated damages, can supplement contract terms, they only apply when the contractor demonstrates actual substantial completion (95% of the work). Werr failed to prove this, and was therefore liable for liquidated damages until the contract’s termination date. This decision emphasizes the importance of clearly defining completion milestones in construction agreements and providing evidence of progress to avoid disputes over delay penalties.

Project Delays: How Far Should Liquidated Damages Go?

Highlands Prime, Inc. (HPI), a property developer, contracted Werr Corporation International (Werr), a construction firm, to build residential units in Tagaytay. The agreement stipulated a completion deadline and a liquidated damages clause penalizing delays. When the project wasn’t finished on time, HPI terminated the contract and sought damages for the delay. Werr contested the amount of liquidated damages, arguing that industry practice dictates that damages should only accrue until the point of ‘substantial completion,’ typically defined as 95% completion of the project. This case hinges on whether this industry practice should override the contract’s general terms regarding delay penalties.

The dispute initially went to the Construction Industry Arbitration Commission (CIAC), which partially sided with both parties. The CIAC awarded Werr a portion of its retention money but also imposed liquidated damages for a shorter period, based on its projection of when the project would have reached substantial completion. HPI appealed, arguing that the liquidated damages should cover the entire period until the contract’s termination. The Court of Appeals (CA) modified the CIAC’s decision, extending the period for liquidated damages to the termination date, as specified in the contract. Werr then elevated the case to the Supreme Court, questioning the CA’s decision.

At the heart of the matter is the interpretation of the contract in light of industry practices and relevant provisions of the Civil Code. The Supreme Court acknowledged that industry practices can indeed supplement contract terms, particularly when the contract is silent or ambiguous on specific points. Article 1376 of the Civil Code states:

Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established.

Building on this principle, the Court recognized the relevance of CIAP Document No. 102, a standard condition of contract for private construction projects, which defines substantial completion and its effect on liquidated damages. However, the Court emphasized that relying on industry practice requires fulfilling certain conditions. Specifically, the contractor must demonstrate that they actually achieved substantial completion, meaning 95% of the work was completed. In this case, Werr failed to provide sufficient evidence to prove that it had reached this threshold.

Furthermore, the Supreme Court disagreed with the CIAC’s approach of projecting a date of substantial completion based on past progress. The Court stated:

More importantly, Werr failed to show that it is the construction industry’s practice to project the date of substantial completion of a project, and to compute the period of delay based on the rate in past progress billings just as what the CIAC has done. Consequently, the CIAC erred when it assumed that Werr continued to perform works, and if it did, that it performed them at the rate of accomplishment of the previous works in the absence of evidence.

Because Werr did not prove it had reached 95% completion, it could not benefit from the industry practice of limiting liquidated damages to the period before substantial completion. The Court upheld the CA’s decision to calculate liquidated damages based on the entire delay period until the contract’s termination. This ruling underscores the importance of clear contractual terms and the need for contractors to meticulously document their progress to support claims of substantial completion.

In addition to the liquidated damages issue, the Court addressed HPI’s claims for additional costs incurred after the contract’s termination. HPI argued that it should be reimbursed for payments made to suppliers and for rectification works. However, the Court upheld the CIAC and CA’s findings that these expenses were not properly documented or were for work performed after the contract’s termination. As for attorney’s fees and litigation costs, the Court found no basis to disturb the lower courts’ decisions, which had denied these claims.

FAQs

What was the key issue in this case?	The key issue was whether liquidated damages for project delays should be calculated until the contract’s termination or only until the point of ‘substantial completion,’ according to industry practice.
What is meant by ‘substantial completion’ in this context?	‘Substantial completion’ generally refers to the completion of 95% of the project’s work, provided that the remaining work does not prevent the normal use of the completed portion.
Did the contractor prove substantial completion in this case?	No, Werr Corporation International failed to provide sufficient evidence to demonstrate that it had achieved 95% completion of the project before the contract was terminated.
How did the Court calculate liquidated damages?	The Court calculated liquidated damages based on the entire period of delay, from the original completion deadline until the contract’s termination date, as specified in the contract.
Can industry practices override contract terms?	Industry practices can supplement contract terms, especially when the contract is silent or ambiguous. However, parties must still meet the conditions to claim such benefits.
What does CIAP Document No. 102 have to do with this case?	CIAP Document No. 102 is a standard condition of contract for private construction projects that defines ‘substantial completion’ and its effect on liquidated damages. The court acknowledged the document as a suppletory contract provision.
Why did the Court deny HPI’s claims for additional costs?	The Court denied HPI’s claims because the expenses were either not properly documented or were for work performed after the contract’s termination and not chargeable to the retention money.
What is the practical implication of this ruling for construction contracts?	This ruling highlights the importance of clearly defining completion milestones in construction agreements and providing evidence of progress to avoid disputes over delay penalties.

The Supreme Court’s decision in this case provides valuable guidance for interpreting construction contracts and resolving disputes over liquidated damages. Contractors should meticulously document their progress and strive to achieve actual substantial completion to potentially limit their liability for delays. Project owners, on the other hand, should ensure that contracts clearly define completion milestones and provide for adequate remedies in case of delays.

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: WERR CORPORATION INTERNATIONAL vs. HIGHLANDS PRIME, INC., G.R. No. 187543, February 08, 2017