Licomcen Incorporated vs. Foundation Specialists, Inc.

The Construction Industry Arbitration Commission (CIAC) possesses original and exclusive jurisdiction over all disputes arising from or connected with construction contracts, including mere contractual monetary claims, which jurisdiction cannot be limited by contractual stipulations restricting arbitration only to disputes involving the "execution of the Works" or imposing conditions precedent; moreover, an indefinite suspension of construction work without lifting it when conditions become favorable constitutes wrongful prolongation that entitles the contractor to nominal damages for violation of contractual rights.

LICOMCEN is a domestic corporation engaged in operating shopping malls. In March 1997, it secured a lease contract from the City Government of Legaspi to finance and construct a commercial complex known as the LCC Citimall, with the right to operate it for 50 years. For this project, LICOMCEN hired E.S. de Castro and Associates (ESCA) as engineering consultant and contracted FSI to perform initial construction works, specifically the construction and installation of bored piles foundation.

• On September 1, 1997, LICOMCEN and FSI entered into a Construction Agreement for the bored piles foundation of the LCC Citimall project, accompanied by Bid Documents and General Conditions of Contract (GCC).
• On December 16, 1997, LICOMCEN notified FSI of major design revisions and the possible suspension of work due to a substantial reduction in the number and length of piles required.
• On January 6, 1998, ESCA wrote FSI suggesting that only 50% of the steel bars be delivered to the jobsite and the rest returned to Manila to avoid double handling and storage problems.
• Despite this instruction, all ordered steel bars arrived in Legaspi City on January 14, 1998, and were delivered to FSI's batching plant (Tuanzon compound) rather than directly to the construction site.
• On January 15, 1998, LICOMCEN instructed FSI to hold all construction activities due to a pending administrative case before the Ombudsman (OMB-ADM-1-97-0622).
• On January 19, 1998, ESCA formalized the suspension and ordered demobilization until the case was resolved.
• On February 3, 1998, FSI demanded payment of costs incurred due to the suspension totaling P22,667,026.97.
• On March 24, 1998, ESCA replied to FSI's demands, objecting to several claims and denying liability for the steel bars delivered in disregard of instructions.
• On April 15, 1998, FSI rejected ESCA's evaluation but did not explicitly state an intent to arbitrate.
• On March 14, 2001, FSI sent a final demand letter to LICOMCEN for P29,232,672.83.
• The Ombudsman case was dismissed on October 12, 1998, but LICOMCEN never informed FSI of this development.
• On May 28, 2002, the City Government of Legaspi sent LICOMCEN a notice to proceed with the project, but LICOMCEN failed to relay this to FSI and instead conducted a rebidding for the project based on new designs.
• On October 2, 2002, FSI filed its petition for arbitration with the CIAC.

• LICOMCEN argued that the CIAC lacked jurisdiction because FSI's claims were mere contractual monetary claims, not disputes "in connection with or arising out of the execution of the Works" as required by GC-61 of the GCC, which should instead be litigated in the courts of Legaspi City under GC-05.
• LICOMCEN contended that FSI failed to comply with the condition precedent under GC-61 requiring a party to "officially give notice to contest such decision through arbitration" within 30 days from receipt of LICOMCEN's March 24, 1998 decision, and that FSI's April 15, 1998 letter did not constitute such notice.
• LICOMCEN asserted that FSI's action was barred by laches due to the three-year delay from the March 24, 1998 decision to the March 14, 2001 final demand letter.
• Regarding the material costs for steel bars, LICOMCEN argued that under GC-42(2), liability requires delivery to the Contractor certified by the Engineer, which was not complied with since the bars were delivered to the Tuanzon compound and in violation of ESCA's 50% instruction.
• LICOMCEN claimed that FSI sold 125,000 kg of steel bars to Ramon Quinquileria at a ridiculously low price (P4.00/kg vs. prevailing P20.00/kg), thereby minimizing actual damages.
• LICOMCEN disputed bearing the costs of arbitration, asserting that FSI's decision to proceed with steel bar delivery caused the dispute.

• FSI argued that the CIAC had jurisdiction over all disputes arising from the construction contract, and that the arbitration clause should be interpreted broadly to cover any dispute of any kind.
• FSI maintained that GC-42 of the GCC did not require proof of actual damage for material costs, only that materials were reasonably ordered and delivered to the contractor.
• FSI claimed that ESCA's January 6, 1998 letter merely suggested, not ordered, the 50% delivery, and that the steel bars had been ordered and paid for as early as November 1997, making it too late to stop delivery.
• FSI asserted that delivery to the Tuanzon compound (a staging site) was normal construction practice and satisfied the requirement of delivery to the contractor.
• FSI argued that LICOMCEN maliciously suspended the project, noting that the Ombudsman case was dismissed in October 1998 but LICOMCEN never notified FSI, and that LICOMCEN's rebidding indicated an intent to terminate the contract to avoid paying damages.
• FSI contended that it was entitled to unrealized profits under Articles 1170 and 2201 of the Civil Code because LICOMCEN's suspension was unlawful, and that the prohibition in GC-41 against "anticipated profits" only applied to lawful terminations.

• Procedural:
  • Whether the CIAC has jurisdiction over FSI's contractual monetary claims despite contractual stipulations limiting arbitration to disputes involving the "execution of the Works."
  • Whether FSI's failure to give explicit notice to contest through arbitration within 30 days as required by GC-61 bars the CIAC from exercising jurisdiction.
• Substantive Issues:
  • Whether LICOMCEN's indefinite suspension of the works was valid or constituted wrongful prolongation equivalent to termination.
  • Whether LICOMCEN is liable for the full cost of the steel bars delivered or only 50% thereof.
  • Whether FSI is entitled to equipment and labor standby costs.
  • Whether FSI is entitled to unrealized profits or nominal damages for the suspension/termination of the contract.
  • Which party should bear the costs of arbitration.

• Procedural:
  • The Supreme Court affirmed the CIAC's jurisdiction, holding that under Executive Order No. 1008, the CIAC has original and exclusive jurisdiction over any dispute arising from or connected with construction contracts, regardless of whether the dispute involves physical construction activities or mere contractual monetary claims.
  • The Court ruled that parties cannot limit the CIAC's jurisdiction by contractual stipulation, as jurisdiction is determined by law and cannot be fixed by the will of the parties.
  • The Court held that the condition precedent in GC-61 requiring notice to contest within 30 days cannot suspend the CIAC's jurisdiction, because the mere existence of an arbitration clause in a construction contract constitutes an agreement to submit to CIAC jurisdiction without any qualification or condition precedent.
• Substantive:
  • The Court held that while the initial suspension under GC-38 was valid due to the pending Ombudsman case, LICOMCEN wrongfully prolonged the suspension by failing to lift it when the case was dismissed on October 12, 1998, and by failing to inform FSI of the City Government's May 28, 2002 order to proceed, effectively terminating the contract through bad faith.
  • Regarding material costs, the Court upheld the CA's reduction of liability to 50% of the steel bar costs because FSI acted imprudently by proceeding with full delivery despite the suspension notice and ESCA's suggestion to deliver only 50%, especially since the steel bars were loaded in Cagayan de Oro on January 11, 1998, after receipt of the suspension notices.
  • The Court upheld the deletion of awards for equipment and labor standby costs, ruling that FSI's mere lists of equipment and employees were insufficient evidence; lease contracts or receipts were required to prove actual rental and maintenance expenses.
  • The Court denied the claim for unrealized profits, ruling that GC-41 clearly prohibits claims for "anticipated profits" on terminated work, and that FSI's distinction between "unrealized" and "anticipated" profits found no support in the contract language.
  • However, the Court awarded FSI P100,000.00 in nominal damages under Article 2221 of the Civil Code for the violation of its rights due to LICOMCEN's wrongful prolongation of the suspension.
  • The Court ordered LICOMCEN to bear the costs of arbitration as the party at fault.

• CIAC Jurisdiction and Contractual Limitations — The Construction Industry Arbitration Commission possesses original and exclusive jurisdiction over disputes arising from construction contracts as provided by law (EO 1008), and this jurisdiction cannot be limited, restricted, or subjected to conditions precedent by contractual stipulations, as jurisdiction is conferred by law and not by the will of the parties.
• Arbitration Clause as Ipso Facto Vesting of Jurisdiction — The mere incorporation of an arbitration clause in a construction contract is sufficient to vest the CIAC with jurisdiction over any construction controversy between the parties, and such jurisdiction is acquired without any qualification or condition precedent.
• Wrongful Prolongation of Suspension — An indefinite suspension of construction work, without lifting the suspension when the conditions justifying it cease to exist or without proper notice to the contractor, constitutes wrongful prolongation that effectively amounts to termination of the contract in bad faith.
• Nominal Damages — Under Article 2221 of the Civil Code, nominal damages may be awarded to a plaintiff whose right has been violated or invaded by the defendant, for the purpose of vindicating or recognizing that right, and not for indemnifying the plaintiff for any loss suffered; a technical violation of a right is sufficient to support such an award.

• "The jurisdiction of courts and quasi-judicial bodies is determined by the Constitution and the law. It cannot be fixed by the will of the parties to a dispute; the parties can neither expand nor diminish a tribunal's jurisdiction by stipulation or agreement."
• "The bare fact that the parties x x x incorporated an arbitration clause in [their contract] is sufficient to vest the CIAC with jurisdiction over any construction controversy or claim between the parties. The arbitration clause in the construction contract ipso facto vested the CIAC with jurisdiction."
• "[T]he mere existence of an arbitration clause in the construction contract is considered by law as an agreement by the parties to submit existing or future controversies between them to CIAC jurisdiction, without any qualification or condition precedent."
• "Nominal damages may be awarded to a plaintiff whose right has been violated or invaded by the defendant, for the purpose of vindicating or recognizing that right, and not for indemnifying the plaintiff for any loss suffered by him."
• "A contract must be interpreted from the language of the contract itself, according to its plain and ordinary meaning."

• HUTAMA-RSEA Joint Operations, Inc. v. Citra Metro Manila Tollways Corporation — Cited to establish that an arbitration clause in a construction contract ipso facto vests the CIAC with jurisdiction without need for a separate submission agreement.
• BF Homes, Inc. v. Manila Electric Company — Cited for the principle that jurisdiction is determined by the Constitution and law, not by the will of the parties, and cannot be fixed by stipulation.
• Excellent Quality Apparel, Inc. v. Win Multi-Rich Builders, Inc. — Cited for the principle that EO 1008 does not distinguish between claims involving payment of money and other claims, covering all disputes arising from construction contracts.
• Adriatico Consortium, Inc. v. Land Bank of the Philippines — Cited for the rule that contracts must be interpreted according to their plain and ordinary meaning when terms are clear.
• Almeda v. Cariño — Cited for the principle that nominal damages are awardable for the violation of a plaintiff's right even if only technical.

• Executive Order No. 1008, Section 4 — Defines the original and exclusive jurisdiction of the CIAC over disputes arising from or connected with construction contracts.
• Civil Code, Article 1370 — Provides that when the terms of a contract are clear, the literal meaning shall control.
• Civil Code, Article 2221 — Defines nominal damages as awardable for the vindication of a right violated, not for indemnification of loss.
• CIAC Rules of Procedure, Section 1, Article III — States that an arbitration clause in a construction contract is deemed an agreement to submit to CIAC jurisdiction.