In ALC Industries, Inc. v. Department of Public Works and Highways, the Supreme Court affirmed the DPWH’s rescission of a contract with ALC Industries due to ALC’s failure to meet agreed-upon performance standards, even after a reduction in the project’s scope. The Court emphasized that failing to comply with specific contractual obligations, especially those instituted to ensure timely completion after initial delays, constitutes a substantial breach warranting rescission. This decision clarifies the importance of adhering to performance metrics established in amended contracts and reinforces the right of government agencies to rescind agreements when contractors fail to meet these critical benchmarks.

When a 90% Target Becomes the Deciding Factor: Examining Contract Rescission in Road Construction

This case originated from a contract between ALC Industries, Inc. (ALC) and the Department of Public Works and Highways (DPWH) for the construction of a road section in Davao-Bukidnon. Due to initial delays caused by discrepancies in the original design plans, the parties agreed to a Reduction in Scope Agreement (RISA), which reduced the project’s scope and adjusted the contract price. Despite this adjustment, ALC continued to fall behind schedule, leading the DPWH to eventually rescind the contract. The central legal question revolves around whether the DPWH was justified in rescinding the contract, considering ALC’s arguments that the delays were partly due to factors beyond its control and that its negative slippage was below the threshold stipulated in Presidential Decree (P.D.) 1870.

The DPWH based its rescission on two primary grounds: ALC’s failure to comply with Clause 10 of the RISA and its continuing commission of acts amounting to breaches of contract, resulting in negative slippage. The Supreme Court scrutinized these reasons, emphasizing that the negative slippage, while an evidence of the breach, was not the sole cause. The Court highlighted that the DPWH pointed to several specific failures on ALC’s part to fulfill its obligations under the RISA. These included the failure to submit a program of work, a month-by-month cash flow summary, complete the verification survey, and maintain facilities for the resident engineer, among other things.

ALC contended that the DPWH’s consideration of these breaches violated its right to due process, arguing that they were not explicitly stated in the rescission order. However, the Court reasoned that these breaches were intrinsically linked to the issue of negative slippage raised by both parties. As such, they were a legitimate part of the legal discourse. Further, the Supreme Court gave significant weight to ALC’s non-compliance with Clause 10 of the RISA, which stipulated that ALC needed to achieve 90% of the progress shown on the bar chart program by the end of December 1998. This clause became a critical factor in the Court’s decision.

“The Contractor agrees that should he fail to achieve 90% of the progress shown on the bar chart programme given on Attachment 4 for the period up to end December 1998, then the Employer has the right to enter upon the site and expel the Contractor therefrom in accordance with Conditions of Contract Clause 63.”

The Court found that ALC failed to meet this 90% progress target, accomplishing only 30.80% of the reduced project by the specified deadline. This translated to just 70.14% of the schedule, well below the agreed-upon threshold. Even when factoring in potential delays due to bad weather, ALC’s performance still fell short of the required 90%. Building on this principle, the Supreme Court asserted that the 90% progress requirement, as stipulated in the RISA, took precedence over the threshold set by law. The rationale was that the RISA was created to address initial delays, making its timetable an essential element of the agreement, assuring timely completion. ALC’s failure to maintain the contractually mandated pace of progress was deemed a significant and fundamental breach that undermined the purpose of the RISA.

In dissecting ALC’s claim for stand by costs for equipment and manpower, the Supreme Court agreed with the Court of Appeals’ ruling that ALC had waived any rights to recover these costs by entering into the RISA. The Court posited that the RISA was executed to allow the project to proceed despite earlier setbacks, and both parties implicitly waived claims against each other arising from these delays as a key consideration for entering into the amended agreement. The decision highlighted that ALC had already mobilized its resources before the contract was officially signed, creating a situation where it would inevitably incur stand by costs.

Regarding the delay caused by redesign works, the Court affirmed the CIAC’s award for costs equivalent to 50 days. However, it denied ALC’s request to increase the amount of damages, citing a lack of justification for the increase. Lastly, the Supreme Court addressed the issue of non-workable days due to inclement weather. While Clause 44 of the Conditions of Contract allowed for time extensions due to weather delays, it did not explicitly provide for the recovery of costs. The Court further held that such weather conditions should be regarded as fortuitous events. The New Civil Code states that in such cases, each party must bear its own loss.

“Article 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.”

In essence, the Court reinforced the principle that contractual obligations must be strictly adhered to, especially in agreements designed to mitigate prior delays. It also clarified that while time extensions may be granted for weather-related delays, the recovery of associated costs is not automatically guaranteed unless explicitly stipulated in the contract. This ruling highlights the importance of clear and comprehensive contractual terms and emphasizes the need for contractors to meticulously plan and manage their resources to meet agreed-upon performance standards.

FAQs

What was the key issue in this case?	The key issue was whether the DPWH was justified in rescinding its contract with ALC Industries for failing to meet the 90% progress target stipulated in the Reduction in Scope Agreement (RISA).
What is a Reduction in Scope Agreement (RISA)?	A RISA is an agreement that modifies the original contract by reducing the scope of work, often due to unforeseen circumstances or initial delays, as seen in this case where design errors led to a revised project scope.
What does negative slippage mean in construction contracts?	Negative slippage refers to the extent to which a project falls behind its planned schedule; in this case, the contract specified a threshold beyond which the DPWH could rescind the agreement.
What was the significance of Clause 10 in the RISA?	Clause 10 was crucial because it required ALC to achieve 90% of the progress shown on the bar chart program by a specific date, and failure to meet this target gave the DPWH the right to rescind the contract.
Did ALC’s claim of bad weather excuse its failure to meet the target?	While the contract allowed for time extensions due to weather, the Court found that even with these extensions factored in, ALC still did not meet the 90% progress target, justifying the rescission.
What are “stand by costs” and why were they disallowed?	“Stand by costs” refer to expenses incurred when equipment and personnel are idle, waiting for work to proceed; the Court disallowed these costs because ALC was deemed to have waived its right to claim them by entering into the RISA.
What is the effect of a fortuitous event on contractual obligations?	A fortuitous event, such as exceptionally adverse weather, generally means that each party bears its own losses, unless the contract specifically provides otherwise or one party is at fault.
What is the main takeaway for contractors from this case?	Contractors must adhere strictly to performance metrics in amended agreements, understanding that failure to meet these targets can lead to contract rescission, regardless of initial setbacks.

The Supreme Court’s decision in ALC Industries underscores the importance of clear, comprehensive contract terms and the need for strict adherence to performance standards. The ruling serves as a reminder that parties entering into agreements must fulfill their contractual obligations to avoid potential rescission and legal repercussions. In ensuring the successful implementation of construction projects, it’s crucial for contractors and government agencies to meticulously plan, manage resources, and maintain open communication throughout the project’s lifecycle.

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