Malayan vs. St. Francis

"Actual Remaining Construction Cost" (ARCC) in a construction contract refers strictly to actual expenditures directly necessary to complete the construction project in the traditional construction sense, excluding financial costs such as interest on loans obtained to finance completion, notwithstanding that the financing was necessary to complete the project.

Malayan Insurance Company, Inc. (Malayan) and ASB Realty Corporation (now St. Francis Square Realty Corporation, or St. Francis) executed a Joint Project Development Agreement (JPDA) in 1995 for the construction of a condominium tower. When St. Francis failed to complete the project due to corporate rehabilitation, the parties executed a Memorandum of Agreement (MOA) on April 30, 2002, whereby Malayan undertook to complete the project. Under the MOA, St. Francis warranted that Malayan could complete the project at a Remaining Construction Cost (RCC) not exceeding P452,424,849.00. The MOA provided that if the Actual Remaining Construction Cost (ARCC) exceeded the RCC, Malayan would be entitled to a proportionate share of the "Reserved Units" (53 units, later reduced to 39, valued at P175,856,323.05) listed in Schedule 4, while St. Francis would receive any remaining units.

• The Joint Venture and MOA: Malayan (owner) and St. Francis (developer, formerly ASB Realty Corp.) executed a JPDA in 1995 for the construction of the ASB Malayan Tower (later Malayan Plaza Tower). After St. Francis failed to complete the project due to rehabilitation proceedings, the parties executed an MOA on April 30, 2002, whereby Malayan undertook to invest the amount necessary to complete the project. St. Francis warranted that Malayan could complete the project at a Remaining Construction Cost (RCC) of P452,424,849.00 as set forth in Schedule 9 of the MOA.
• The Disputed ARCC: In August 2006, St. Francis secured a document from Malayan entitled "cost to complete" fixing the Actual Remaining Construction Cost (ARCC) at P614,593,565.96. St. Francis disputed several cost items amounting to P145,487,496.42, arguing their exclusion would entitle it to reserved units under Schedule 4 of the MOA. Malayan countered that the ARCC had reached P635,018,369.05 as of November 30, 2008, exceeding the RCC and the aggregate value of the reserved units (P175,856,323.05), thereby extinguishing St. Francis' entitlement.
• Arbitration Proceedings: The parties stipulated to facts and issues in the Terms of Reference (TOR), including whether interest expenses, Input VAT, Comprehensive All Risk Insurance (CARI), change orders, prolongation costs, and other items formed part of the ARCC. The project was completed on June 7, 2006 as certified by the architect.
• CIAC and CA Findings: The CIAC found the ARCC to be P614,593,565.96 (based on Exhibit C-3) less disallowances of P52,864,385.00, resulting in excess ARCC of P109,304,331.96, and allocated 37.8% of reserved units to St. Francis. The CA modified this, computing the net ARCC at P600,745,505.96 and allocating only 16% to St. Francis, including interest expenses in the ARCC but excluding certain other costs.

• Interest Expense (St. Francis): St. Francis argued that interest expense should not be included in the ARCC as it is not an actual construction cost but a financial cost, and the term "construction" in ARCC should be understood in its plain meaning referring to on-site work.
• Scope and Computation of ARCC (St. Francis): St. Francis maintained that the ARCC should be limited to traditional construction costs based on receipted expenses (P514,179,217.94 per Exhibit R-48-series), excluding unsubstantiated costs, and that the CA erred in relying on summaries without verifying supporting documents.
• Input VAT (St. Francis): St. Francis contended that Input VAT is not part of construction cost but a tax credit/asset under the National Internal Revenue Code, and allowing Malayan to claim it as cost while also offsetting it against output VAT would result in unjust enrichment.
• CARI (St. Francis): St. Francis argued that CARI should be disallowed due to lack of proof of actual payment and because the assured included both Malayan and LANDEV (project manager), requiring proof that Malayan actually paid the premium.
• Burden of Proof (Malayan): Malayan contended that St. Francis never disputed that Malayan had actually incurred the ARCC, only the propriety of including certain items; thus, Malayan should not bear the burden to prove actual incurrence of costs that were judicially admitted.
• Change of Theory (Malayan): Malayan argued that the CA erred in allowing St. Francis to belatedly change its theory in its Draft Decision and appeal by arguing that certain costs were unsubstantiated, when it had originally only objected to the propriety of inclusion.
• Cost Exclusions (Malayan): Malayan maintained that costs for change orders (due and not due to reconfiguration), half of Narra Parquet works, half of CARI, half of Interior Design works, contingency costs, and costs incurred after June 2006 should be included in the ARCC as they were proper, necessary, and reasonable for completion.
• Entitlement to Units and Income (Malayan): Malayan asserted that St. Francis should not be entitled to any reserved units because the ARCC exceeded the warranted RCC by more than the value of the reserved units, and invoked Article 1187 of the Civil Code to claim all rental income from the reserved units as fruits of a unilateral obligation subject to suspensive conditions.

• Interest Expense (Malayan): Malayan countered that the MOA provisions recognize the parties' intent to include ARCC interest expense as part of their respective capital contributions or investment in the project, confirmed by St. Francis' own inclusion of interest expense in its claims for reimbursement.
• Input VAT (Malayan): Malayan argued that Input VAT constitutes actual expenditure necessary to complete the project, regardless of accounting classification, and that St. Francis would likewise benefit from tax credits upon sale of its allocated units.
• CARI (Malayan): Malayan argued that CARI was necessary for the project and supported by official receipts, and that minutes of the Bids and Awards Committee established that Malayan, as owner, agreed to secure the insurance directly.
• Scope of ARCC (St. Francis): St. Francis countered that the CA erred in including non-construction costs in the ARCC and in failing to verify that amounts in summaries corresponded to actual supporting documents.
• Prolongation Costs (St. Francis): St. Francis argued that prolongation costs should not be fully included as they were caused by Malayan's delays, as established in a separate CIAC case (CIAC Case No. 27-2007).

• Interest Expense: Whether interest expenses from loans obtained to finance project completion form part of the Actual Remaining Construction Cost (ARCC).
• Scope and Computation of ARCC: Whether the ARCC should be limited to traditional construction costs or include all capital contributions, and whether the CA correctly computed the total ARCC based on the evidence.
• Input VAT: Whether Input VAT paid on goods and services for the project forms part of the ARCC.
• CARI: Whether the cost of Comprehensive All Risk Insurance should be included in the ARCC and in what amount.
• Change Orders and Other Costs: Whether costs for change orders due to reconfiguration, change orders not due to reconfiguration, Narra Parquet works, Interior Design works, contingency costs, and prolongation costs form part of the ARCC.
• Burden of Proof and Change of Theory: Whether St. Francis is barred from questioning the substantiation of specific cost items when it allegedly admitted Malayan had incurred the ARCC.
• Allocation of Reserved Units: Whether St. Francis is entitled to any reserved units and in what proportion based on the correct computation of ARCC.
• Income from Reserved Units: Whether Malayan is entitled to retain all rental income from the reserved units pending determination of ARCC, or whether such income should be shared proportionately.
• Attorney's Fees and Arbitration Costs: Whether either party is entitled to attorney's fees and how arbitration costs should be allocated.

• Interest Expense: Interest expenses in the amount of P39,348,659.88 were excluded from the ARCC. The Court held that ARCC refers to actual expenditures necessary to complete the project in the traditional "construction" sense, not the "investment" sense. Interest is a financial cost of borrowing, not a construction cost, and the MOA did not expressly include interest in the computation of ARCC or Malayan's investment (which only specified payment of principal amounts).
• Scope and Computation of ARCC: The Court recomputed the net ARCC at P505,391,573.63. This figure was derived from the gross construction cost per receipts (P554,583,160.20) plus inclusion of prolongation costs (P8,282,974.82), less deductions (interest, change orders not due to reconfiguration, contingencies, interior design works totaling P41,705,696.66) and exclusions of unsubstantiated costs (P15,768,864.73). The Court affirmed that ARCC is distinct from "investment" under the MOA.
• Input VAT: Input VAT was allowed to remain in the ARCC. The Court ruled that the issue is not the technical accounting classification but whether the tax was actually incurred and paid as part of the contract price for goods and services necessary to complete the project. No unjust enrichment occurs as Malayan merely avails of tax credit provisions, and St. Francis may likewise claim tax credits upon sale of its allocated units.
• CARI: The full amount of P4,361,291.34 was included in the ARCC. Official receipts supported this amount, and minutes of the Bids and Awards Committee showed Malayan agreed to secure the insurance directly as owner. The Court rejected the equal sharing approach of the CIAC and CA.
• Change Orders Due to Reconfiguration: The increased costs of P7,434,129.52 were included in the ARCC. The Court found St. Francis had consented to reconfiguration on the condition it result in savings, and net savings of P14,096,239.07 were realized despite the additive change orders.
• Change Orders Not Due to Reconfiguration: Costs of P971,796.29 were excluded. These were additive works ordered by Malayan to improve or enhance the project beyond the specifications in Schedule 6 of the MOA, which Malayan alone should bear.
• Narra Parquet Works: The entire increased cost of P4,982,798.44 due to force majeure (government log ban) was included in the ARCC. The Court rejected equal sharing, holding that such cost falls under "Contingencies" under Schedule 9 of the MOA and should be treated as part of construction costs.
• Interior Design Works: The net increase of P1,508,172.21 was included but equally shared (P754,086.10 each) between the parties due to the impossibility of separating costs arising from flooring change (force majeure) from other causes. However, the full cost of gym equipment and underlay (P1,059,217.73) was included in the ARCC as proper and necessary under the MOA specifications.
• Contingency Costs: The amount of P631,154.39 was excluded as it represented legal fees for defending against a claim for damages from falling debris, which is not directly related to construction completion.
• Costs After June 2006: Costs incurred after the project completion date of June 7, 2006 (per Certificate of Occupancy) were excluded from the ARCC pursuant to Section 5 of the MOA.
• Burden of Proof and Change of Theory: The Court found no merit in Malayan's contention that St. Francis admitted the ARCC amount or changed its theory. St. Francis consistently disputed the substantiation and amount of the ARCC in its complaint and the Terms of Reference. As the party with exclusive control of the project and possession of documents, Malayan bore the burden of proving the ARCC.
• Allocation of Reserved Units: Based on the net ARCC of P505,391,573.63 less the RCC of P452,424,849.00, the excess ARCC is P52,966,724.63. This represents 30% of the total aggregate value of reserved units (P175,856,323.05), allocated to Malayan. The remaining 70% was allocated to St. Francis (P122,889,598.42).
• Income from Reserved Units: The Court held that Malayan held the rental income in trust for the parties proportionate to their eventual ownership shares (30% Malayan, 70% St. Francis) from the completion date (June 7, 2006) until finality of the decision, subject to accounting for upkeep expenses. The obligation to give the units was unilateral subject to suspensive conditions, but the nature and circumstances indicated the parties intended proportional sharing of fruits, not full appropriation by Malayan.
• Attorney's Fees: Denied for both parties as none of the exceptions under Article 2208 of the Civil Code were present; Malayan's denial of claims did not constitute gross and evident bad faith.
• Arbitration Costs: Allocated pro rata based on the amounts claimed and counterclaimed: St. Francis to pay P936,775.29 (88%) and Malayan P127,742.09 (12%), pursuant to Section 1, Rule 142 of the Rules of Court and the Amended Terms of Reference.

• Finality of CIAC Factual Findings — Factual findings of construction arbitrators are final and conclusive and not reviewable by the Supreme Court on appeal when affirmed by the Court of Appeals, except when: (1) the award was procured by corruption, fraud or other undue means; (2) there was evident partiality or corruption; (3) arbitrators were guilty of misconduct in refusing to hear evidence; (4) arbitrators were disqualified and willfully refrained from disclosing such; (5) arbitrators exceeded their powers; (6) there is grave abuse of discretion depriving a party of fair opportunity to present its position; (7) the CA findings are contrary to those of the CIAC; or (8) a party is deprived of administrative due process.
• Construction Cost Definition — "Construction cost" in the construction industry means the cost of all construction portions of the project based on construction contracts and other direct construction costs; it excludes compensation to architects and consultants, cost of land, right-of-way, or other costs defined as the owner's responsibility. It does not include financial costs such as interest expenses.
• Contract Interpretation — When 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 interpretation of obscure words or stipulations shall not favor the party who caused the obscurity.
• Conditional Obligations (Article 1187, Civil Code) — In a unilateral obligation subject to suspensive conditions, the debtor appropriates the fruits and interests received unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. Where the determination of the condition is delayed by the debtor's own actions or inaction, equity requires that fruits be held in trust for the party ultimately determined to be entitled thereto.
• Attorney's Fees (Article 2208, Civil Code) — Attorney's fees cannot be recovered as part of damages except in the enumerated instances therein; the power to award demands factual, legal, and equitable justification, and no premium should be placed on the right to litigate.

• "The Court upholds the CIAC ruling to disallow the interest expense from loans secured by Malayan to finance the completion of the project, and thus, reverses the CA ruling that such expense in the amount of P39,348,659.88 should be included in the computation of the ARCC. As correctly held by the CIAC, only costs directly related to construction costs should be included in the ARCC. Interest expense should not be included in the computation of the ARCC because it is not an actual expenditure necessary to complete the project, but a mere financial cost."
• "The term ARCC should only be construed in light of its plain meaning which is the actual expenditures necessary to complete the project, and it is not equivalent to the term 'investment' under the MOA."
• "The Court finds that Malayan’s obligation to give the reserved units is unilateral because it was subject to 2 suspensive conditions, i.e., the completion of the project and the determination of the ARCC, the happening of which are entirely dependent upon Malayan, without any equivalent prestation on the part of St. Francis. Even if the obligation is unilateral, Malayan cannot appropriate all the civil fruits received because it could be inferred from the nature and circumstances of the obligation that the intention of the person constituting the same was different."
• "The general rule is that attorney’s fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate. They are not to be awarded every time a party wins a suit. The power of the court to award attorney’s fees under Article 2208 demands factual, legal, and equitable justification."

• Shinryo (Philippines) Company, Inc. v. RRN, Incorporated, G.R. No. 172525, October 20, 2010 — Cited for the doctrine that factual findings of quasi-judicial bodies with expertise, such as the CIAC, are accorded respect and finality when affirmed by the CA.
• IBEX International, Inc. v. Government Service Insurance System, 618 Phil. 304 (2009) — Cited for the exceptions allowing review of CIAC factual findings.
• ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 499 (1999) — Cited for the principle that attorney's fees are not recoverable except in the instances enumerated in Article 2208 of the Civil Code and require factual, legal, and equitable justification.
• University of the Philippines v. Philab Industries, Inc., 482 Phil. 693 (2004) — Cited for the definition of unjust enrichment, requiring that a party be unjustly enriched in the sense of illegally or unlawfully, not merely benefiting from the efforts of others.

• Article 1187, Civil Code — Governs the effects of conditional obligations to give, specifically regarding the appropriation of fruits and interests during the pendency of suspensive conditions. Applied to hold that Malayan could not appropriate all rental income from the reserved units despite the obligation being unilateral, as the nature and circumstances indicated a contrary intention.
• Article 1308, Civil Code — Provides that the performance of a contract cannot be left to the will of one of the contracting parties. Cited by the CIAC and approved by the Court to reject an interpretation that would give Malayan sole discretion to determine what costs are related to construction.
• Article 1370, Civil Code — When 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 the scope of ARCC and the specifications in Schedule 6 of the MOA.
• Article 1377, Civil Code — The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. Applied to resolve ambiguities in the MOA against Malayan, who drafted the agreement.
• Article 2208, Civil Code — Enumerates the instances when attorney's fees may be recovered. The Court found none of the exceptions applied to the parties' claims.
• Section 110, National Internal Revenue Code (Tax Code) — Defines creditable input tax and the tax credit method. Cited to explain that Malayan's offsetting of input VAT against output VAT does not constitute unjust enrichment.
• Section 113(B), National Internal Revenue Code — Requires VAT invoices to separately indicate the VAT component. Cited to support that the burden of VAT was shifted to Malayan by suppliers.
• Section 1, Rule 142, Rules of Court — Costs ordinarily follow the results of the suit, but the court may adjudge that either party shall pay costs or that the same be divided as may be equitable. Applied to allocate arbitration costs pro rata based on amounts claimed.

Presbitero J. Velasco, Jr. (Chairperson), Martin S. Villarama, Jr., Bienvenido L. Reyes, and Francis H. Jardeleza.