F.F. Cruz & Co., Inc. vs. HR Construction Corp.

A party who repeatedly accepts and pays progress billings without demanding a contractually required joint measurement waives the right to later contest the contractor's valuation of completed works, and a subcontractor that has agreed to continue performance notwithstanding disputes under an express contractual provision cannot justify work stoppage as an exercise of the right to extrajudicially rescind.

FFCCI was the main contractor engaged by the DPWH for the construction of the Magsaysay Viaduct under the Lower Agusan Development Project. On August 9, 2004, FFCCI subcontracted to HRCC the supply of materials, labor, equipment, tools, and supervision for a portion of the project called the East Bank Levee and Cut-Off Channel, for a subcontract price of ₱31,293,532.72. The Subcontract Agreement provided that HRCC would submit monthly progress billings and that FFCCI would pay within 30 days subject to stipulated deductions. Critically, the parties agreed under subparagraph 4.3 that a joint measurement of completed works would be conducted with the DPWH representative, consultants, FFCCI, and HRCC to arrive at a common quantity. Article 11.2 of the same agreement required HRCC to continue performance notwithstanding any dispute or arbitration proceedings.

Sometime in 2004, FFCCI entered into a contract with the DPWH for the construction of the Magsaysay Viaduct, known as the Lower Agusan Development Project. On August 9, 2004, FFCCI subcontracted to HRCC the supply of materials, labor, equipment, tools, and supervision for the construction of a portion of the project called the East Bank Levee and Cut-Off Channel, for a subcontract price of ₱31,293,532.72. Under the Subcontract Agreement, HRCC would submit monthly progress billings, which FFCCI would pay within 30 days from receipt, subject to deductions for 10% retention and 2% expanded withholding tax. The parties agreed that requests for payment should include progress accomplishment of completed works as approved by FFCCI, and that a joint measurement would be conducted with the DPWH representative, consultants, FFCCI, and HRCC to arrive at a common quantity.

Thereafter, HRCC commenced construction. On September 17, 2004, HRCC submitted its first progress billing in the amount of ₱2,029,081.59 covering works completed from August 16 to September 15, 2004. FFCCI asserted that the DPWH had only evaluated HRCC's completed works until July 25, 2004, and thus approved only ₱423,502.88. After deducting retention and withholding tax, FFCCI paid HRCC ₱373,452.54 on December 3, 2004. FFCCI and the DPWH then jointly evaluated HRCC's works for the period July 26 to September 25, 2004, arriving at a gross amount of ₱2,008,837.52; after deductions, FFCCI paid ₱1,771,429.45 on December 21, 2004. On October 29, 2004, HRCC submitted its second progress billing of ₱1,587,760.23 for works from September 18 to 25, 2004, but FFCCI did not pay, claiming it had already paid for that period. On the same date, HRCC submitted its third progress billing of ₱2,569,543.57 for works from September 26 to October 25, 2004, which FFCCI also did not immediately pay, citing the need to evaluate the works accomplished. On November 25, 2004, HRCC submitted its fourth progress billing of ₱1,527,112.95 for works from October 26 to November 25, 2004. FFCCI later approved ₱1,505,570.99 for the period September 26 to November 25, 2004, and after deductions paid ₱1,327,639.87 on March 11, 2005.

On December 13, 2004, HRCC sent FFCCI a letter demanding payment of its progress billings totaling ₱7,340,046.09, plus interest, within three days. After taking its Christmas break on December 18, 2004, HRCC completely halted construction of the subcontracted project. On March 7, 2005, HRCC filed a complaint with the CIAC pursuant to the arbitration clause in the Subcontract Agreement, praying for payment of overdue obligations, attorney's fees, acceptance fee, and costs of litigation. During the preliminary conference, the parties defined the issues for resolution, and HRCC reduced its claimed amount to ₱2,635,397.77 — the difference between its total progress billings of ₱6,107,919.63 and FFCCI's total payments of ₱3,472,521.86.

The CIAC found that FFCCI had adopted a "back-to-back payment scheme" not agreed upon under the Subcontract Agreement, whereby FFCCI would only pay HRCC after the DPWH had first paid FFCCI. The CIAC held that FFCCI had waived its right to require joint measurement, having never demanded it in the three instances where it paid HRCC. It credited HRCC's valuation and awarded ₱2,239,452.63 as the balance of unpaid billings, computed as the total gross billings of ₱6,107,919.63 less total gross payments of ₱3,868,467.00 (net payments plus retention). The CIAC also held that HRCC's work stoppage was justified as an exercise of its right to rescind due to FFCCI's non-payment, and that FFCCI had ratified the stoppage by failing to file a counterclaim for liquidated damages. The CA affirmed the CIAC, agreeing that FFCCI had waived the joint measurement requirement and that HRCC was justified in stopping work.

• Waiver of Verification Right: FFCCI argued that its act of conducting a verification survey of HRCC's billings in the latter's presence did not amount to a waiver of its right to verify and approve said billings, and sought a determination of the legal significance of that act.
• Obligation to Accept Reported Accomplishment: FFCCI maintained that payment based on the results of its verification survey did not oblige it to accept whatever accomplishment HRCC reported in its progress billings.
• Adjudication by Mere Comparison: FFCCI argued that the mere comparison of payments made by FFCCI with HRCC's contested progress billings did not amount to a proper adjudication of the controversy between the parties.
• Ratification by Non-Counterclaim: FFCCI asserted that its failure to interpose a counterclaim against HRCC for liquidated damages due to work stoppage did not amount to a ratification of such work stoppage.
• Overlooked Facts: FFCCI contended that the CA disregarded or overlooked significant and material facts which would affect the result of the litigation.

• Finality of CIAC Factual Findings: HRCC argued that the instant petition merely assailed the factual findings of the CIAC as affirmed by the CA, and thus was not a proper subject of an appeal under Rule 45 of the Rules of Court. HRCC pointed out that factual findings of the CIAC, when affirmed by the CA, are final and conclusive upon the Supreme Court.

• Finality of CIAC Findings: Whether the petition raises questions of law reviewable under Rule 45 or merely questions of fact barred from review.
• Waiver of Joint Measurement: Whether FFCCI's non-compliance with the stipulation requiring joint measurement of HRCC's completed works bars it from contesting HRCC's valuation in its progress billings.
• Validity of Rescission/Work Stoppage: Whether HRCC's work stoppage constituted a valid extrajudicial rescission of the Subcontract Agreement.
• Ratification by Non-Counterclaim: Whether FFCCI's failure to file a counterclaim for liquidated damages amounted to ratification of HRCC's work stoppage.
• Arbitration Costs: Which party should bear the cost of arbitration, or in what proportion the costs should be shared.

• Finality of CIAC Findings: The petition was proper under Rule 45. While CIAC factual findings affirmed by the CA are generally final and conclusive, the issues here involved interpretation of the Subcontract Agreement's terms, which constitutes a question of law.
• Waiver of Joint Measurement: Yes. FFCCI had waived its right to demand joint measurement by repeatedly paying HRCC's progress billings without requiring it, and was consequently barred from contesting HRCC's valuation of completed works.
• Validity of Rescission/Work Stoppage: No. HRCC was not justified in stopping work because Article 11.2 of the Subcontract Agreement required it to continue performance notwithstanding any dispute, effectively waiving its right to extrajudicially rescind.
• Ratification by Non-Counterclaim: No. The Court did not rely on this ground; instead, it held that HRCC had contractually waived its right to rescind, making the work stoppage unjustified regardless of whether FFCCI filed a counterclaim.
• Arbitration Costs: The costs should be shared equally by both parties, given that HRCC had a valid reason to institute the complaint but its work stoppage was unjustified.

• Finality of CIAC Findings: The general rule is that CIAC arbitral awards are final and may not be appealed except on questions of law, pursuant to Section 19 of E.O. No. 1008. Factual findings of construction arbitrators, when affirmed by the CA, are final and conclusive upon the Supreme Court. However, this rule admits of exceptions, including when the award was procured by corruption, fraud, or undue means, or when arbitrators exceeded their powers. On the surface, the petition appeared to raise only factual questions about the amount due to HRCC. A closer analysis revealed that FFCCI actually asserted questions of law, because the core issue required interpretation of the terms of the Subcontract Agreement — specifically, the effect of non-compliance with the joint measurement requirement on the payment of progress billings. Where an interpretation of the true agreement between the parties is involved, the inquiry is one of law, not fact. The Court was not called upon to examine the probative value of evidence but to interpret contractual provisions as they related to the dispute.

• Waiver of Joint Measurement: The primordial consideration in resolving the valuation dispute was the terms of the Subcontract Agreement. Under Article 1370 of the Civil Code, if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Subparagraph 4.3 of the Subcontract Agreement required FFCCI to pay HRCC within 30 days upon receipt of monthly progress billings and mandated that joint measurement be conducted with the DPWH representative, consultants, FFCCI, and HRCC to arrive at a common quantity. As the main contractor of DPWH, FFCCI had the responsibility to request the DPWH representative to conduct the joint measurement. The testimony of FFCCI's project manager, Engineer Aganon, confirmed that no joint quantification was ever conducted with HRCC's participation. Despite this, FFCCI did not contest HRCC's progress billings for lack of joint measurement and instead proceeded to conduct its own verification and made payments. This voluntary payment, albeit in amounts different from those claimed, was a glaring indication of waiver. The doctrine of waiver, as defined in People vs. Donato, encompasses the voluntary and intentional relinquishment of a known existing legal right. Having waived the joint measurement requirement — which was essentially a mechanism granting FFCCI the opportunity to verify and contest HRCC's valuation before billing — FFCCI necessarily waived its right to dispute HRCC's valuation of completed works. Any issue FFCCI had with HRCC's valuation should have been raised during the joint measurement; having relinquished that opportunity, FFCCI was barred from contesting the billings after their submission.

• Validity of Rescission/Work Stoppage: The right of rescission in reciprocal obligations is statutorily recognized under Article 1191 of the Civil Code, which grants the injured party the power to rescind when the other obligor fails to comply. However, this right may be waived, expressly or impliedly. Article 11.2 of the Subcontract Agreement expressly provided that notwithstanding any dispute, controversy, difference, or arbitration proceedings, HRCC shall at all times proceed with the prompt performance of the Works in accordance with FFCCI's directives and the Subcontract Agreement. By agreeing to this provision, HRCC effectively waived its right to effect extrajudicial rescission of the contract. Accordingly, HRCC's work stoppage, undertaken in the guise of rescinding the Subcontract Agreement, was not justified. The CIAC and CA erred in holding otherwise.

• Ratification by Non-Counterclaim: The Court did not sustain the CIAC's reasoning that FFCCI's failure to file a counterclaim for liquidated damages ratified HRCC's work stoppage. Instead, the Court found the work stoppage unjustified on the independent ground that HRCC had contractually waived its right to rescind under Article 11.2.

• Arbitration Costs: Under Section 1, Rule 142 of the Rules of Court, costs ordinarily follow the results of the suit, but courts have discretion for special reasons to adjudge costs otherwise. Although HRCC had a valid reason to institute the complaint due to FFCCI's failure to pay the full amount of its progress billings, its unjustified work stoppage warranted an equitable apportionment. The arbitration costs were therefore ordered shared equally by both parties, modifying the CIAC and CA dispositions that charged only FFCCI.

• Finality of CIAC Arbitral Awards — Under Section 19 of E.O. No. 1008, the CIAC's arbitral award is final and inappealable except on questions of law appealable to the Supreme Court. Factual findings of construction arbitrators, when affirmed by the CA, are final and conclusive upon the Supreme Court. Exceptions exist where the award was procured by corruption, fraud, or undue means; there was evident partiality or corruption of the arbitrators; the arbitrators were guilty of misconduct; one or more arbitrators were disqualified; or the arbitrators exceeded their powers. The Court applied this doctrine by determining that FFCCI's issues, though seemingly factual, actually involved interpretation of the Subcontract Agreement's terms and thus constituted questions of law reviewable under Rule 45.

• Waiver of Contractual Rights — Waiver is the voluntary and intentional relinquishment or abandonment of a known existing legal right, advantage, benefit, claim, or privilege. Rights may be waived unless the waiver is contrary to law, public order, public policy, morals, or good customs. The Court applied this doctrine to hold that FFCCI, by repeatedly paying HRCC's progress billings without ever demanding the contractually required joint measurement, had effectively waived its right to require that condition and was consequently barred from contesting HRCC's valuation.

• Waiver of the Right to Rescind Reciprocal Obligations — While the right to rescind reciprocal obligations is implied under Article 1191 of the Civil Code and need not be expressly provided in the contract, the contracting parties may waive such right, expressly or impliedly. The Court applied this doctrine by finding that Article 11.2 of the Subcontract Agreement, requiring HRCC to continue performance notwithstanding any dispute, constituted an express waiver of HRCC's right to extrajudicially rescind the contract.

• Contract Interpretation — Literal Meaning Rule — Under Article 1370 of the Civil Code, if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. The Court applied this rule in construing subparagraph 4.3 and Article 11.2 of the Subcontract Agreement according to their plain terms.

• "FFCCI's voluntary payment in favor of HRCC, albeit in amounts substantially different from those claimed by the latter, is a glaring indication that it had effectively waived its right to demand for the joint measurement of the completed works. FFCCI's failure to demand a joint measurement of HRCC's completed works reasonably justified the inference that it had already relinquished its right to do so." — This passage articulates the ratio decidendi on the waiver of the joint measurement requirement, establishing that voluntary payment without insisting on a contractual condition precedent constitutes waiver.

• "In view of FFCCI's waiver of its right to demand a joint measurement of HRCC's completed works, is FFCCI now barred from disputing the claim of HRCC in its monthly progress billings? We rule in the affirmative." — This is the operative conclusion on the first substantive issue, directly answering the legal question presented and establishing the consequence of waiver.

• "In view of the provision of the Subcontract Agreement quoted above, HRCC is deemed to have effectively waived its right to effect extrajudicial rescission of its contract with FFCCI. Accordingly, HRCC, in the guise of rescinding the Subcontract Agreement, was not justified in implementing a work stoppage." — This passage states the ratio decidendi on the second substantive issue, holding that an express contractual undertaking to continue performance despite disputes constitutes waiver of the right to extrajudicially rescind.

• "The Court will not review the factual findings of an arbitral tribunal upon the artful allegation that such body had 'misapprehended the facts' and will not pass upon issues which are, at bottom, issues of fact, no matter how cleverly disguised they might be as 'legal questions.'" — This passage, quoted from Hi-Precision Steel Center, Inc. vs. Lim Kim Steel Builders, Inc., articulates the policy rationale underlying the finality of CIAC arbitral awards and the Court's refusal to entertain disguised factual questions.

• Hi-Precision Steel Center, Inc. vs. Lim Kim Steel Builders, Inc., G.R. No. 110434, December 13, 1993, 228 SCRA 397 — Cited as controlling authority for the rationale underlying the finality of CIAC arbitral awards and the policy favoring speedy and inexpensive settlement of construction disputes through voluntary arbitration. The Court relied on this case to explain why it will not review factual findings of arbitral tribunals disguised as legal questions.

• Spouses David vs. Construction Industry and Arbitration Commission, 479 Phil. 578 (2004) — Cited for the enumeration of exceptions to the rule that CIAC factual findings are final and conclusive, including procurement of the award by corruption, fraud, or undue means; evident partiality; arbitrator misconduct; disqualification of arbitrators; and excess of arbitral powers.

• People of the Philippines vs. Donato, G.R. No. 79269, June 5, 1991, 198 SCRA 130 — Cited as the authoritative definition of the doctrine of waiver, which the Court applied to hold that FFCCI had waived the joint measurement requirement through its repeated payments without demanding compliance.

• Abad vs. Goldloop Properties, Inc., G.R. No. 168108, April 13, 2007, 521 SCRA 131 — Cited for the principle that a court's purpose in examining a contract is to interpret the intent of the contracting parties as objectively manifested, and that where the written terms are not ambiguous, the court will interpret the contract as a matter of law.

• Pryce Corp. vs. Phil. Amusement and Gaming Corp., 497 Phil. 490 (2005) — Cited for the distinction between rescission under Article 1191 (more properly termed "resolution") and its basis in breach of faith violative of reciprocity between parties.

• Francisco vs. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008, 543 SCRA 644 — Cited for the proposition that the right to rescind reciprocal obligations, while implied, may be waived by the contracting parties.

• Article 1370, Civil Code of the Philippines — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Applied to interpret subparagraph 4.3 and Article 11.2 of the Subcontract Agreement according to their plain terms.

• Article 1191, Civil Code of the Philippines — Recognizes the power to rescind obligations implied in reciprocal ones when one obligor fails to comply, allowing the injured party to choose between fulfillment and rescission with payment of damages. Applied as the statutory basis for HRCC's claimed right to rescind, which the Court held had been waived under Article 11.2.

• Article 6, Civil Code of the Philippines — Provides that rights may be waived unless the waiver is contrary to law, public order, public policy, morals, or good customs. Cited by the CIAC and relied upon by the Court in affirming that FFCCI's waiver of the joint measurement requirement was valid.

• Section 19, Executive Order No. 1008 (Construction Industry Arbitration Law) — Provides that the CIAC's arbitral award shall be final and inappealable except on questions of law appealable to the Supreme Court. Applied to determine the scope of judicial review over CIAC awards and to confirm that the petition raised reviewable questions of law.

• Section 1, Rule 142, Rules of Court — Provides that costs ordinarily follow the results of the suit, but courts have power, for special reasons, to adjudge that either party shall pay the costs or that the same be divided as may be equitable. Applied to order the arbitration costs shared equally by both parties.

• Subparagraph 4.3, Article 4, Subcontract Agreement — Required FFCCI to pay HRCC within 30 days upon receipt of monthly progress billings subject to deductions, and mandated that joint measurement be conducted with the DPWH representative, consultants, FFCCI, and HRCC to arrive at a common quantity. Interpreted as a condition precedent that FFCCI was responsible for invoking and which it waived by non-enforcement.

• Article 11.2, Subcontract Agreement — Required HRCC to at all times proceed with the prompt performance of the Works notwithstanding any dispute, controversy, difference, or arbitration proceedings. Interpreted as an express waiver by HRCC of its right to extrajudicially rescind the contract, rendering its work stoppage unjustified.

Justice Antonio T. Carpio, Justice Arturo D. Brion, Justice Jose Portugal Perez, and Justice Maria Lourdes P. A. Sereno concurred in the decision. No separate concurring opinions were written.