Phil. Charter Insurance Corp. v. Central Colleges of the Philippines

SPECIAL THIRD DIVISION

[G.R. Nos. 180631-33. July 2, 2014.]

PHILIPPINE CHARTER INSURANCE CORPORATION, petitioner, vs. CENTRAL COLLEGES OF THE PHILIPPINES AND DYNAMIC PLANNERS AND CONSTRUCTION CORPORATION, respondents.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, Third Division, issued a Resolution dated July 2, 2014, which reads as follows:

"G.R. Nos. 180631-33 (Philippine Charter Insurance Corporation v. Central Colleges of the Philippines and Dynamic Planners and Construction Corporation). — This resolves the Motion for Partial Reconsideration 1 filed by Philippine Charter Insurance Corporation (PCIC) seeking the reconsideration of the February 22, 2012 Decision 2 of the Court. In the said decision, the Court affirmed with modification the ruling of the Court of Appeals (CA) in the consolidated cases, docketed as CA-G.R. SP Nos. 90361, 90383 and 90384, thereby holding PCIC and Dynamic Planners and Construction Corporation (DPCC) solidarily liable to pay Central Colleges of the Philippines (CCP) the total amount of P13,231,460.73 under Surety Bond No. PCIC-45542 and Performance Bond No. PCIC-45541 (as modified by Bond Endorsement No. E-2003/12527).

As a brief background, DPCC served as CCP's general contractor for the construction of a five (5)-storey school building at No. 39 Aurora Boulevard, Quezon City, with a total contract price of P248,000,000.00. As agreed upon, the construction of the entire building was slated to undergo two phases, each valued at P124,000,000.00. This undertaking was evidenced by the May 16, 2000 "Contract Agreement" (Contract).

To guarantee the fulfillment of the obligation, DPCC posted three (3) bonds, all issued by PCIC, namely: (1) Surety Bond No. PCIC-45542, dated June 25, 2003, amounting to P7,031,460.74; (2) Performance Bond No. PCIC-45541 in the amount of P2,929,775.31 which was subsequently increased to P6,199,999.99 through Bond Endorsement No. E-2003/12527, and (3) Performance Bond No. PCIC-46172 for P692,890.74. All the bonds were callable and set to expire on October 30, 2003.

Unlike Phase 1 which went without issue, Phase 2 of the project met numerous delays. Per audit report, dated July 25, 2003, only 47% of the work was accomplished.

In a letter, dated October 29, 2003, CCP notified DPCC and PCIC of the breach in the Contract and its plan to claim on the construction bonds.

On November 6, 2003, CCP notified DPCC and PCIC that the construction was way behind schedule as only 51% of the project was completed, prompting it to declare the occurrence of default against DPCC. It formally requested PCIC to remit the proceeds of the bonds. TCaEIc

On November 14, 2003, DPCC wrote PCIC confirming the finding that Phase 2 was only 51% finished and, at the same time, requested for the extension of its performance and surety bonds because the supposed revision of the plans would require more days.

In a letter, dated November 21, 2003, CCP notified PCIC that due to the inability of DPCC to complete the project on time, it decided to terminate the Contract.

Meanwhile, on December 5, 2003, PCIC informed DPCC that it had approved its request for extension of the bonds.

On August 13, 2004, CCP demanded the payment of the amount of P13,924,351.47 covered by the bonds. The claim was, however, denied on August 20, 2004.

By reason of the denial, CCP filed a complaint before the Construction Industry Arbitration Commission (CIAC) against DPCC and PCIC. It prayed that both DPCC and PCIC should be held jointly and severally liable against the three bonds issued in its favor.

The CIAC ruled in favor of CCP, ordering DPCC and PCIC to pay the amounts of P7,031,460.74 from the Surety Bond representing the unrecouped downpayment and P6,892,890.73 from the two Performance Bonds for a total of P13,924,351.47. It likewise ordered CCP to pay DPCC P1,732,264.12 representing the cost of the construction materials left at the site, and P2,500,000.00 for the cost of equipment, formworks and scaffoldings appropriated by CCP, or a total amount of P4,232,264.12.

On appeal, the CA affirmed with modification the ruling of the CIAC. It deleted the award of the amounts pertaining to the cost of construction materials, equipment and formworks left at the site and appropriated by CCP.

DPCC appealed via a petition for review on certiorari. In its February 22, 2012 Decision, the Court affirmed with modification the ruling of the CA. The Court deleted the liability of DPCC and PCIC for the amount of P692,890.74 covered by Performance Bond No. PCIC-46172. The Court ordered DPCC and PCIC to pay CCP only the total amount of P13,231,460.73 under Surety Bond No. PCIC-45542 and Performance Bond No. PCIC-45541 (as modified by Bond Endorsement No. E-2003/12527). The Court also affirmed the CA decision deleting the cost of construction materials, equipment and formworks, which was originally awarded by the CIAC in favor of DPCC.

Hence, this motion for partial reconsideration.

PCIC limits this motion to the issues pertaining to its liability under Surety Bond No. PCIC-45542 and Performance Bond No. PCIC-45541 for the total amount of P13,231,460.73.

In brief, PCIC's points of contention are as follows:

1. Its liability on the surety bond is distinct from that of the performance bond. The surety bond was posted to guarantee the repayment of the downpayment made by CCP to DPCC. On the other hand, the performance bond was issued to guarantee DPCC's construction of the five-storey CCP Extension Building-Phase 2 as per contract agreement of May 16, 2000. Therefore, PCIC contends that whatever reasons which render the surety bond liable need not necessarily be the same reason which can render the performance bond liable.

2. PCIC cannot be held liable on the surety bond considering that the repayment of downpayment had already been effected. It asks the Court to take a second look at matters previously submitted in the petition.

3. It cannot be liable either under the performance bond on the basis that CCP failed to comply with the ten (10) day period within which a claim should be filed. PCIC believes that as early as July 25, 2003, DPCC, the principal, had long been in default. And as such, the October 29, 2003 claim was belatedly filed considering that the ten (10) day period already lapsed.

4. Relative thereto, it casts doubt on the Court's ruling that the October 29, 2003 notice constituted a formal demand necessary to render DPCC in default. On the contrary, PCIC contends that there was no need for a demand since the principal contract specifically provided that the time was of the essence, being an exception to the rule under Article 1169 of the Civil Code of the Philippines. Because DPCC had been in delay since July 25, 2003, CCP had until August 4, 2003 to file the claims with PCIC, only that the same was not made. Hence, PCIC should have been exonerated from its liability under the performance bond.

5. Lastly, the deletion of the award for actual damages in the amounts of P1,732,264.14 (for materials) and P2,500,000.00 (for equipment, formworks and scaffoldings) should be corrected. It hinges its claim on the theory that matters not denied should be admitted and need not be proved pursuant to Sections 10 and 11 of Rule 129 of the Rules of Court. Since CCP failed to deny that DPCC left the materials, equipment, formworks, and scaffoldings at the site, this matter, which remained uncontroverted, must stand. Thus, PCIC prays that the CIAC's award for the pertinent actual damages be reinstated. aSTAHD

Issues

Thus, the issues raised in this motion for reconsideration boil down to the following:

1. Whether PCIC should be held liable under the Surety Bond despite the allegation that the repayment of downpayment had already been effected.

2. Whether PCIC should be held liable under the Performance Bond despite the allegation that CCP failed to comply with the time-bar limitations provided for under the Performance Bond agreement.

3. Whether DPCC is entitled to recover the costs of the materials and equipments left at the site since CCP failed to deny the allegations that the said items were left at the site.

The Court's Resolution

The motion for partial reconsideration is bereft of merit.

PCIC's Liability under the Surety Bond

PCIC asks the Court to re-examine its submission pertaining to the allegation that the downpayment had been repaid through periodic deductions by way of work accomplishment. Such repayment, it argues, relieved it of its liability under the Surety Bond, which was issued precisely to guarantee the same. In effect, PCIC wants the Court to determine whether such repayment had actually been made by DPCC to CCP.

This requires the determination of facts, which, as a rule, is not a function of the Court for it is not a trier of facts. 3 Only under exceptional circumstances, such as those enumerated in Development Bank of the Philippines v. Traders Royal Bank, 4 will merit a review from the Court, viz.:

(1) When the findings are grounded entirely on speculations, surmises or conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) When there is grave abuse of discretion;

(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When in making its findings the Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee;

(7) When the findings are contrary to that of the trial court;

(8) When the findings are conclusions without citation of specific evidence on which they are based;

(9) When the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondent;

(10) When the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; or

(11) When the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion. 5

The Court is aware that the purposes for the issuance of the two bonds are distinct, and for which reason, their discharge would most likely be grounded differently such that, if complete repayment/recoupment of downpayment had been made to CCP, through periodic deductions on the billings issued by DPCC, as principal, the liability of PCIC as a surety would necessarily be negated. In other words, because a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default, 6 it follows that the surety's liability is also relieved if the principal debtor's obligation has been extinguished by modes recognized under Article 1231 of the Civil Code, 7 such as payment. Hence, an allegation of repayment, which if properly proven, would most likely change the landscape of PCIC's liability under the Surety Bond.

Unfortunately, PCIC was not able to sufficiently prove its claim of repayment. On the contrary, it was expressly reflected in the Construction Audit Report of H.D. Caluag Consultants, Inc. (Caluag) that the downpayment, as secured by Surety Bond No. PCIC-45542, was still unrecouped; and that based on its assessment, there was even an overpayment to DPCC in the amount of P27,779,022.00. The CIAC decision took note of this finding, which is herein reproduced: ICHAaT

The Construction Audit Report of Caluag dated July 25, 2003 shows the payments made to Dynamic as of July 12, 2003 as follows:

Central Colleges of the Philippines v. Dynamic Planners, etc. Final Award

Total Progress Billings (Nos. 1 to 11)	-	P65,404,493.86
Unrecouped down payment	-	7,031,460.74
Unliquidated cash advances	-	18,022,317.29
Variation Order No. 2	-	13,857,814.84
		––––––––––––––
TOTAL	-	P104,316,986.73
		=============

 

Variation Order No. 2 was for additional footing tie beams, concrete membranes and extra depth of excavation in accordance with structural designer's issued drawings.

As determined above, on the basis of a 57.33% of completion as of the termination of the Contract, Dynamic is entitled to P71,089,200.00. Thus, Dynamic should be credited with:

Work accomplishment	-	P71,167,200.00
Unrecouped down payment	-	7,031,460.74
Unliquidated cash advances	-	18,022,317.29
Variation Order No. 2	-	13,857,814.84
		––––––––––––––
TOTAL	-	P110,078,792.87
		=============

The original Contract Price was P124,000,000.00. To this amount shall be added the price of Variation Order No. 2 of P13,857,814.87 or an adjusted Contract Price of P137,857,814.87. Deducting therefrom P110,000,792.87, the overpayment to Dynamic is P27,779,022.00. 8

Given those particular facts, PCIC did not offer evidence either to satisfactorily show the supposed practice in the construction industry of the repayment or recoupment of the downpayment through deductions from progress billings of the construction project. Absent this relevant information, the Court cannot simply recognize PCIC's allegation as industry practice. Similarly, PCIC was not able to sufficiently present competent evidence that would, at least, establish the percentage of the downpayment that would be recouped at each stage of accomplishment if, indeed, there was such an arrangement.

PCIC's Liability under the Performance Bond

PCIC contends that demand is no longer necessary to constitute DPCC in default. Under normal circumstances, DPCC would have been in default as early as June 25, 2003, making the filing of CCP's claim with PCIC late for having been made beyond the required ten (10)-day period. After a painstaking review of PCIC's assertion, however, the Court still holds that the liability under the Performance Bond should remain.

Under the provisions of the Performance Bond, 9 CCP must file a written claim within ten (10) days, as a condition precedent, to hold PCIC liable. The ten (10)-day period must be reckoned from any of the following, whichever is the earliest:

1. the expiration of the bond;

2. the occurrence of the default; or

3. the failure of the principal 10

PCIC claims that the occurrence of the default must have set in as early as July 25, 2003, when respondent CCP declared, through the Construction Audit Report, that the percentage of work accomplished was only 47%.

The Court, however, cannot subscribe to such submission for mere delay is not equivalent to default.

There are three (3) requisites necessary for a finding of default. First, the obligation is demandable and liquidated; second, the debtor delays performance; and third, the creditor judicially or extrajudicially requires the debtor's performance. 11

Although it is true that the third requisite was no longer necessary for demand had been dispensed with on the basis of the provision 12 holding in high esteem that time was of the essence and in application of the exceptions stated in Article 1169 of the Civil Code, 13 the first requisite, that is, the obligation being demandable, was not evidently clear as of July 25, 2003. It was not apparent either in the September 4, 2003 Letter addressed to DPCC and PCIC, and not even in the September 16, 2003 appraisal report prepared by HD Caluag Consultancy, Inc. (HD Caluag).

The July 25, 2003 and September 16, 2003 documents, 14 relied upon by PCIC, were mere appraisal reports addressed to respondent CCP. Though they reveal that there was indeed delay, the same did not operate to make the obligation demandable. As far as the September 4, 2003 Letter sent by HD Caluag is concerned, it merely informed DPCC of CCP's concerns. Thus: IHEaAc

This is to express our concern regarding the prolonged absence of your project coordinators for the Mechanical, Electrical, Sanitary/Plumbing and Fire Protection (MEPF) works on-site. Over the past month, we were able to meet your electrical works coordinator only twice; aside from us finding it difficult to determine the actual status of MEPF works without these coordinators, we are, more importantly, very concerned over the delay in said works which per your schedule, was scheduled to commence September 2, 2003.

Please have your MEPF Coordinators meet with us immediately. 15

All that the above letter implies is a cautionary stance on the part of CCP against its contractor, DPCC.

It must be remembered that under Article 9.1 of the Contract, the claimant has the option to give an extension of time or to treat at first sight any failure to complete the work on a specified schedule as a ground to claim liquidated damages, to wit:

9.1 It is understood and agreed that time is of the essence of this CONTRACT. In the event that the CONTRACTOR refuses or fail[s] to complete the work within the time herein specified or within the validity of extension that may be granted by the OWNER, if any, the OWNER is hereby authorized to deduct the amount of liquidated damages from any amount due to the CONTRACTOR under this CONTRACT and the Performance Bond filed by the CONTRACTOR whichever is convenient and expeditious to the OWNER. However, no liquidated damages or any excess cost shall be charged when the delay in completion of the work is due to unforeseen causes beyond the control and without the fault or negligence of the CONTRACTOR or to any causes directly attributable to the OWNER or to force majeure as herein defined. 16

The Court recognizes that the extension option served as a mechanism to give CCP the discretion to allow DPCC the opportunity to still carry out the obligations despite certain delays. Unless and until CCP finally decided to give or discard the same, by giving notice or acting in contemplation of Article 9.1, or by declaring DPCC in default, the demandability of the liquidated damages under the Performance Bond could not be ascertained. Thus, when CCP finally decided on October 29, 2003, to notify PCIC and DPCC of its election to treat the ordinary delay as a breach of the obligation, thereby foreclosing the possibility of an extension, the claim for liquidated damages necessarily became concrete and demandable. This completed the requisites of default.

To accept the view of PCIC that DPCC incurred default from the time it failed to comply with the expected scheduled results is to disregard the essence of the stipulation giving CCP the flexibility to grant an extension. Obviously, this kind of interpretation would run against the intent of the parties to be bound by the stipulations on which they freely agreed.

In Asset Builders Corporation v. Stronghold Insurance Company, Inc., 17 the Court has explained the relationships created in a surety agreement:

Suretyship, in essence, contains two types of relationship — the principal relationship between the obligee and the obligor, and the accessory surety relationship between the principal and the surety. In this agreement, the obligee accepts the surety's solidary undertaking to pay if the obligor does not pay. Such acceptance however, does not change in any material way the obligee's relationship with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship. Thus, the acceptance does not give the surety the right to intervene in the principal contract. The surety's role arises only upon the obligor's default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor. 18 [Emphases supplied]

As a general rule, the surety's liability attaches upon the obligor's default. There are, however, exceptions. Because suretyship is a contract, the parties are free to establish any conditions provided that they are not contrary to law, morals, public order or public policy. 19 This may include a requisite condition before the surety's liability can attach. An example of which is the stipulation made by the parties in this case with respect to the reporting requirements, to wit:

The liability of PHILIPPINE CHARTER INSURANCE CORPORATION, under this bond will expire on October 30, 2003; Furthermore, it is hereby agreed and understood that PHILIPPINE CHARTER INSURANCE CORPORATION will not be liable for any claim not presented to it in writing within TEN (10) DAYS from the expiration of this bond or from the occurrence of the default or failure of the Principal, whichever is the earliest, and that the Obligee hereby waives its right to file any claims against the Surety after termination of the period of ten (10) DAYS above mentioned after which time this bond shall definitely terminate and be deemed absolutely cancelled. 20

Verily, PCIC cannot be held liable unless CCP complies with the notice requirement. Being in the nature of a condition precedent, CCP had ten (10) days from October 29, 2003 to present a written claim to PCIC, otherwise, the latter could not be held legally responsible under the Performance Bond. In compliance thereof, CCP sought the remittance of the pertinent proceeds in its favor by filing such a claim on November 6, 2003, or 8 days from the reckoning date. PCIC received the claim on November 7, 2003, or one (1) day ahead of the expiration date. ACETID

To this end, CCP's November 7, 2003 compliance with the 10-day notice requirement under the bond unavoidably resulted in the attachment of PCIC's liability as a surety. Clearly, CCP acted in accordance with the procedures. It acted as well in line with the time-bar limitation laid down in the Performance Bond Agreement as viewed in light of the Contract it entered with DPCC.

Unfortunately, the claim was denied on August 20, 2004. This denial established CCP's cause of action against PCIC.

It is a settled jurisprudence that a cause of action has three (3) elements, to wit: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff. 21

It bears stressing that it is only when the last element occurs that a cause of action is completed and arises. Accordingly, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty 22 (in this case, to pay the amount of the bond). Thus, from August 20, 2004, CCP's cause of action against PCIC arose by reason of the latter's refusal to remit the proceeds of the Performance Bond.

Having established that CCP was entitled to the proceeds of the bond, and that the procedural conditions were faithfully complied with, the Court has no reason to deny its claims for the proceeds under the Performance Bond. For said reason, the Court's ruling, that DPCC and PCIC should jointly and severally pay CCP the value corresponding to the Performance Bond, stays.

CCP's liability for Materials/Equipment left at the Site

On this last issue, suffice it to state that PCIC's submissions are mere reiteration of its position which was properly covered by the Court in its February 22, 2012 Decision. As such, the Court reaffirms Its ruling, finding no error on the part of the CA when it deleted the award of P4,232,264.12 in favor of DPCC covering the value of the construction materials, equipment, formworks, and scaffoldings allegedly appropriated by CCP or left at the construction site.

WHEREFORE, the subject motion for partial reconsideration is DENIED. (Leonen, J., designated Member per Raffle, dated June 16, 2014, in lieu of Associate Justice Roberto A. Abad who has retired)

SO ORDERED."

Very truly yours,

(SGD.) WILFREDO V. LAPITANDivision Clerk of Court

Footnotes

1. Rollo, pp. 1077-1107.

2. Id. at 1056-1074. Penned by Associate Justice Jose Catral Mendoza, with Associate Justices Presbitero J. Velasco, Jr., Diosdado M. Peralta, Roberto A. Abad, and Estela M. Perlas-Bernabe, concurring.

3. Pedro Angeles v. Estelita B. Pascual, G.R. No. 157150, September 21, 2011, 658 SCRA 23, 28.

4. G.R. No. 171982, August 18, 2010, 628 SCRA 404, 413-414.

5. Id.

6. Palmares v. Court of Appeals, 351 Phil. 664, 680-681 (1998).

7. Art. 1231. Obligations are extinguished:

(1) By payment or performance:

(2) By the loss of the thing due:

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor:

(5) By compensation:

(6) By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfilment of a resolutory condition, and prescription, are governed elsewhere in this Code.

8. Rollo, pp. 155-156.

9. Id. at 196.

10. Id.

11. General Milling Corporation v. Sps. Librado Ramos and Remedios Ramos, G.R. No. 193723, July 20, 2011, 654 SCRA 256, 265.

12. See Article 9.1 of the Contract, rollo, p. 187.

13. Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.

14. Rollo, p. 283.

15. Id. at 366.

16. Id. at 187.

17. G.R. No. 187116, October 18, 2010, 633 SCRA 370, 380.

18. Id. at 380.

19. Art. 1306. New Civil Code. — The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy.

20. Rollo, p. 196.

21. Development Bank of the Philippines v. Alejandro and Adelaida Licuanan, 545 Phil. 544, 554 (2007), citing China Banking Corporation v. Court of Appeals, 499 Phil. 770, 775 (2005).

22. Id.