Atlantic Erectors, Inc. v. Court of Appeals

[G.R. No. 170732, October 11, 2012,  684 SCRA 55]

DOCTRINE:

Liquidated damages – The parties to a contract are allowed to stipulate on liquidated damages to be paid in case of breach. It is attached to an obligation in order to ensure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. As a pre-condition to such award, however, there must be proof of the fact of delay in the performance of the obligation.

Effect of default – As long as the contractor fails to finish the works within the period agreed upon by the parties without justifiable reason and after the owner makes a demand, then liability for damages as a consequence of such default arises.

FACTS:

Respondent Herbal Cove Realty Corporation (Herbal Cove) wanted to build a a subdivision project somewhere in Tagaytay City. It hired petitioner Atlantic Erectors Inc. (Atlantic) to build the project. The Construction Contract indicated a contract price of almost P16.7Million and to finish building within 180 days. To secure payment in case of non completion of the project, the contract also provides:

ARTICLE IX

FAILURE TO COMPLETE WORK

Section 1: The CONTRACTOR acknowledges that the OWNER shall not suffer [loss] by the delay or failure of the CONTRACTOR to finish and complete the works called for under this Contract within the time stipulated in Section 6, Article IV. The CONTRACTOR hereby expresses covenants and agrees to pay to the Owner liquidated damages equivalent to the One-Tenth of One Percent (1/10 of 1%) of the Contract Price per calendar day of delay until completion, delivery and acceptance of the said Works by the OWNER to a maximum amount not to exceed 10%.

Atlantic was asked to commence construction on July 8, 1996, but eventually, it asked for an extension citing bad weather and delayed turnover of project sites which Herbal Cove granted but ultimately, Atlantic failed to deliver. Herbal Cove terminated the contract on October 3, 1997 and demanded liquidated damages. Herbal Cove also hired another contractor to finish the job. It filed a case with the Construction Industry Arbitration Commission (CIAC). The CIAC found in favor of Herbal Cove but did not award liquidated damages for failure to comply with 15-day notice of termination (provided for in its contract.). The CA awarded liquidated damages.

ISSUE: Whether or not Atlantic is liable for liquidated damages.

HELD:

Yes. The CIAC disallowed liquidated damages because Herbal Cove failed to comply with the rule on notice. However, the contract is the law between the parties and there are provisions in the same contract which provide "the Contractor shall be required to pay the Owner the liquidated damages in the amount stipulated in the Contract Agreement, the said payment to be made as liquidated damages, and not by way of penalty. The Owner may deduct from any sum due or to become due the Contractor any sums accruing for liquidated damages as herein stated." also, "Neither the taking over by the Owner of the work for completion by administration nor the re-letting of the same to another Contractor shall be construed as a waiver of the Owner’s rights to recover damages against the original Contractor and/or his sureties for the failure to complete the work as stipulated." Thus, under the contract, Herbal Cove's right to liquidated damages is distinct from the right to terminate contract.