PEZA vs. Green Asia Construction & Development Corporation

A contractor claiming price escalation under PD 1594 need not prove that the increase in construction costs was due to direct acts of the government, because PD 1594 and PD 454 are in pari materia, and the latter expressly considers increases in the prices of gasoline, fuel oils, and cement as direct acts of the government.

On 23 September 1992, the Export Processing Zone Authority (EPZA), later succeeded by the Philippine Economic Zone Authority (PEZA), and Green Asia Construction & Development Corporation (Green Asia) entered into a contract for a road network/storm drainage project with a fixed contract price of ₱130,595,337.40. In 1996, Green Asia claimed price escalation under PD 1594 due to increased construction costs. PEZA consistently denied the claim, contending that Green Asia failed to prove the cost increase was due to direct acts of the government and asserting that the fixed contract price waived the right to escalation.

• The Contract: EPZA and Green Asia signed a contract on 23 September 1992 for a road network/storm drainage project for ₱130,595,337.40. The contract stipulated a fixed contract price, mode of payment, advance payment, and progress payment.
• The Claim for Price Escalation: On 26 March 1996, Green Asia claimed price escalation amounting to ₱9,860,169.58 under PD 1594, invoking official indices of prices from the National Statistics Office.
• Denial by PEZA: PEZA denied the claim through its Acting Corporate Secretary, citing Section 8 of PD 1594, which requires proof that the cost increase was due to direct acts of the government. PEZA also maintained that the fixed contract price constituted a waiver of the price escalation provision.
• Escalation to the Office of the President: After repeated denials and follow-up letters from 1997 to 2006, Green Asia sent a final demand notice to PEZA in 2007 and subsequently appealed to the OP. The OP granted the claim, interpreting "direct acts of the government" under PD 1594 in light of PD 454 to include price increases in gasoline, fuel oils, and cement, thereby eliminating the need to prove the government directly caused the increase.
• Court of Appeals Ruling: PEZA elevated the case to the CA. The CA sustained the OP's interpretation but modified the awarded amount, ordering the parties to compute the escalation using the parametric formula provided in Clause 12.1 of the IRR of PD 1594.

• Statutory Construction: PEZA argued that PD 1594 is unambiguous and requires no statutory construction.
• Failure to Prove Conditions: PEZA maintained that Section 8 of PD 1594 requires the concurrence of two conditions for price adjustment: an increase in construction cost and the increase being due to direct acts of the government. Green Asia allegedly failed to prove these conditions.
• Waiver via Fixed Price: PEZA asserted that the stipulation on a fixed contract price in Article IV of the contract constituted a waiver of the provisions of PD 1594 on price escalation.

• Proof of Price Increase: Green Asia argued that it proved the increase in the cost of labor and construction materials using official indices of prices from the National Statistics Office for Calendar Years 1992-1999.
• Fixed Price vs. Price Escalation: Green Asia countered that a fixed contract price does not equate to the final receivable amount, applying only when work orders do not vary. It maintained that price escalation under the IRR of PD 1594 compensates for fluctuations beyond the contractor's control, making it impossible and unrealistic to stay within the original budget.

• Price Escalation Entitlement: Whether PD 1594 requires a contractor to prove that the price increase of construction materials was due to the direct acts of the government before a price escalation is granted.

• Price Escalation Entitlement: The claim for price escalation was upheld without requiring proof that the government directly caused the price increase. PD 1594 and PD 454 are in pari materia and must be construed together. PD 454 expressly defines increases in the prices of gasoline, fuel oils, and cement as "direct acts of the government." Because PD 1594 reproduced this phrase without supplying a contrary definition, the definition in PD 454 was deemed adopted. Furthermore, "price adjustment" under PD 1594 and "price escalation" under its IRR are one and the same concept and must be read together; the IRR merely provides the parametric formula for computation. Absent a prohibitory clause in the contract, the right to price escalation is deemed written into the agreement.

• In Pari Materia — Statutes relating to the same person, thing, class, or subject matter must be interpreted and harmonized with each other to form a complete, coherent, and intelligent system. Applied to construe PD 1594 and PD 454 together, thereby adopting the latter's definition of "direct acts of the government" for the former.
• Price Escalation in Government Contracts — When the law allows price escalation and the contract contains no prohibitory clause, payment of price escalation is deemed included in the contract. The law is deemed written into the contract between the parties.

• "It is axiomatic in statutory construction that a statute must be interpreted, not only to be consistent with itself, but also to harmonize with other laws on the same subject matter, as to form a complete, coherent and intelligible system."
• "[P]rice escalation is expressly allowed under Presidential Decree 1594, which law allows price escalation in all contracts involving government projects including contracts entered into by government entities and instrumentalities and Government Owned or Controlled Corporations (GOCCs). It is a basic rule in contracts that the law is deemed written into the contract between the parties. And when there is no prohibitory clause on price escalation, the Court will allow payment therefor."

• Honasan v. The Panel of the Investigating Prosecutors of the Department of Justice, G.R. No. 159747, 13 April 2004, 427 SCRA 46 — Followed. Cited for the doctrine that statutes in pari materia must be construed together to harmonize with other laws on the same subject matter.
• National Steel Corporation v. The Regional Trial Court of Lanao del Norte, G.R. No. 127004, March 11, 1999 — Followed. Cited for the proposition that price escalation is allowed under PD 1594 and is deemed written into the contract absent a prohibitory clause.

• Section 8, Presidential Decree No. 1594 — Prescribes the conditions for price adjustment in government infrastructure contracts, requiring an increase or decrease in construction cost due to direct acts of the government. Applied in conjunction with PD 454, which defines what constitutes direct acts of the government.
• Section 1, Presidential Decree No. 454 — Amends Republic Act No. 5979 to authorize adjustment of contract prices, expressly considering the increase of prices of gasoline, other fuel oils, and cement as direct acts of the government. Applied to supply the definition of "direct acts of the government" missing in PD 1594.
• Paragraphs 6 and 7, Clause 12.1, Implementing Rules and Regulations of Presidential Decree No. 1594 — Provides the parametric formula for computing price escalation, requiring an increase or decrease of more than five percent (5%) of the original or adjusted contract unit price. Applied to determine the proper computation of the amount due to the contractor.

Antonio T. Carpio (Chairperson), Arturo D. Brion, Bienvenido L. Reyes, Estela M. Perlas-Bernabe.