Philippine Realty v. Ley Construction
REITERATIONFacts
The Antecedents: Ley Construction and Development Corporation (LCDC) entered into four major construction agreements with Philippine Realty and Holdings Corporation (PRHC) between April 1988 and October 1989 for the construction of several buildings, including the Alexandra buildings and the Tektite Building. These agreements stipulated fixed prices for each project. During the construction of the Tektite Building, LCDC encountered significant delays due to unexpected price hikes in construction materials. LCDC proposed an escalation of the contract price to PRHC, which was initially rejected by PRHC's board of directors. Despite this, a subsequent letter-agreement dated August 9, 1991, was issued by PRHC's construction manager, Dennis Abcede, proposing a P36 million escalation, subject to LCDC infusing funds. LCDC proceeded with the construction, advancing over P38 million, believing this escalation was agreed upon. Procedural History: LCDC filed a complaint against PRHC in the Regional Trial Court (RTC) seeking payment for outstanding balances and the P36 million escalation. The RTC rendered a decision in favor of LCDC. PRHC appealed to the Court of Appeals (CA), which reversed the RTC's decision, finding LCDC liable to PRHC for a net amount after setting off liabilities. PRHC then filed a petition for review on certiorari with the Supreme Court (SC) (G.R. No. 165548), and LCDC filed its own petition for review on certiorari after its motion for reconsideration was denied by the CA (G.R. No. 167879). The two petitions were consolidated by the SC. The Petition: Both parties filed petitions for review on certiorari under Rule 45 of the Rules of Court. PRHC's petition (G.R. No. 165548) questions the CA's findings regarding the P36 million escalation, the liability for Project 3, and the driver's quarters. LCDC's petition (G.R. No. 167879) argues that the CA erred in ruling there was no P36 million escalation agreement, in denying LCDC's claim for additional infusions, in disallowing the claim for concreting works, in awarding liquidated damages to PRHC, in holding LCDC liable for corrective works, and in deleting the award for attorney's fees. The SC is asked to resolve these conflicting rulings and determine the final liabilities of both parties.
Issue(s)
Whether PRHC is liable for the ₱36 million escalation price for the Tektite Building project. Whether LCDC is liable for liquidated damages for delays in the construction of the Tektite Building and other projects. Whether LCDC is liable for the costs incurred by PRHC for corrective works on defective waterproofing in Project 2. Whether LCDC is entitled to attorney's fees and expenses of litigation. Whether the trial court erred in awarding amounts for Project 3 and the concreting works in the Tektite Building, which were allegedly not included in the Stipulation of Facts.
Ruling
The Supreme Court SET ASIDE the Court of Appeals' Decision and reinstated the trial court's findings with modifications. PRHC was found liable to LCDC for ₱64,029,710.22, and LCDC was found liable to PRHC for ₱6,652,947.75. After setting off the liabilities, PRHC was ordered to pay LCDC the net amount of ₱57,376,762.47, with legal interest.
Ratio Decidendi
On the ₱36 million escalation price: The Court ruled that PRHC is liable for the ₱36 million escalation price for the Tektite Building project. This was based on the doctrine of apparent authority and estoppel. PRHC's representatives, Abcede and Santos, acted with apparent authority in negotiating the escalation. PRHC was deemed estopped from denying the agreement because it allowed LCDC to continue infusing funds without promptly informing it of the board's alleged denial of the proposal. The Court found that the elements of novation were present, extinguishing the prohibition against price escalation and creating a new obligation for the increased price. The Court clarified that the ₱2,248,463.92 infused by LCDC over and above the ₱36 million was for LCDC's own account, as PRHC had not agreed to reimburse beyond the ₱36 million. On liquidated damages: The Court found LCDC not liable for liquidated damages for delays in construction. It reasoned that the delays were primarily caused by events constituting force majeure, such as scarcity of construction materials, power failures, water supply interruptions, and typhoons. These events rendered it impossible for LCDC to fulfill its obligations normally. Furthermore, PRHC was estopped from claiming liquidated damages because its representatives, Abcede and Santos, had assured LCDC that it would not be penalized for delays, leading LCDC to continue working based on this assurance. The Court disagreed with the CA's view that each signed extension agreement was a separate contract, finding that LCDC's requests for time extensions were often unreasonably reduced by PRHC, and the reasons for delay fell under force majeure. On defective waterproofing: The Court held LCDC liable for the corrective works for defective waterproofing in Project 2. It clarified that the relationship between PRHC and LCDC was that of owner and independent contractor, not agency. Article XIV of the Project 2 Agreement stipulated that if the contractor sublets any part of the agreement, losses or expenses resulting from the sub-contractor's acts would be for the contractor's account. Despite PRHC recommending Vulchem Corporation, LCDC proceeded to hire it without objection, thus assuming responsibility for Vulchem's defective work. On attorney's fees: The Court found LCDC entitled to attorney's fees, reversing the CA's decision to delete the award. While the CA found no bad faith, the construction agreements contained a penal clause for attorney's fees (20% of the total amount claimed) in case of judicial proceedings. The Court, however, equitably reduced the amount from ₱750,000 to ₱200,000, deeming the original amount excessive and applying the principle of quantum meruit. On issues not included in Stipulation of Facts: The Court affirmed the trial court's ruling on unpaid balances for Project 3 and the concreting works in the Tektite Building, even though they were not explicitly included in the Joint Stipulation of Facts. The Court reiterated the doctrine that courts may rule on issues proven during trial without objection, even if not raised in the pleadings. Since PRHC did not object to the presentation of evidence on these claims, the trial court did not err in admitting and ruling on them.
Main Doctrine
The Supreme Court held that PRHC is liable for the agreed escalation price due to the doctrine of apparent authority and estoppel, as its representatives negotiated and allowed LCDC to continue infusing funds. However, LCDC is not liable for liquidated damages as the delays were caused by force majeure and PRHC is estopped from claiming them due to assurances made by its representatives. The Court also clarified the liabilities of parties in construction contracts regarding sub-contractors and defective work.