LVM Construction Corp. v. F.T. Sanchez

G.R. No. 181961 (December 5, 2011)

LVM must pay retention to F.T. Sanchez JV after SC dismissed E-VAT claims for lack of contract support.

Facts:

Petitioner LVM Construction Corporation (LVM) is a licensed construction firm engaged in constructing roads and bridges for the Department of Public Works and Highways (DPWH). LVM was awarded the contract for the Arterial Road Link Development Project in Southern Leyte and subsequently subcontracted approximately 30% of the contract amount to a Joint Venture composed of F.T. Sanchez Construction Corporation (FTSC), Socor Construction Corporation (SCC), and Kimwa Construction and Development Corporation (KCDC). The contract price was initially set at P90,061,917.25 but was later reduced to P86,318,478.38.

The Sub-Contract Agreement, executed on November 27, 1996, stipulated that payments to the Joint Venture would be based on the work accomplished, with a 9% deduction and a 10% retention for every billing. Payments were to be made within seven days after the DPWH's check to LVM was cleared.

The Joint Venture submitted 27 billings to LVM. For the first 26 billings, LVM paid a total of P80,414,697.12 and retained P8,041,469.79. However, for the 27th billing of P5,903,780.96, LVM only paid a partial amount of P2,544,934.99, claiming it had not yet received full payment from DPWH.

After completing the subcontracted works, the Joint Venture demanded payment for the retained amounts and unpaid claims. In a letter dated May 16, 2001, LVM informed the Joint Venture that it would deduct 8.5% for E-VAT from the amounts due, as no deductions had been made from the previous payments. The Joint Venture countered that it had issued official receipts for all payments, which included a 10% VAT, and thus LVM could claim an equivalent input tax.

After years of unpaid claims, the Joint Venture filed a complaint against LVM on June 30, 2005, before the Construction Industry Arbitration Commission (CIAC), seeking payment for retention money, unpaid balances, interest, and attorney's fees. LVM countered that it was entitled to offset E-VAT payments from the retention money and claimed liquidated damages due to delays by the Joint Venture.

The CIAC ruled in favor of the Joint Venture, granting its claims for retention money and interest, while denying LVM's counterclaims. LVM appealed to the Court of Appeals, which affirmed the CIAC's decision.

Issues:

  1. Whether the Joint Venture was liable to pay E-VAT as claimed by LVM, and if such liability needed to be explicitly stated in the Sub-Contract Agreement.
  2. Whether the Court of Appeals erred in ruling that the Joint Venture had already paid E-VAT merely because it issued receipts for services rendered.

Arguments:

  • Petitioner (LVM):

    • LVM argued that the Joint Venture's liability for E-VAT did not need to be explicitly stated in the Sub-Contract Agreement, as it was a legal obligation incorporated into the contract.
    • LVM contended that it was justified in deducting E-VAT payments from the retention money owed to the Joint Venture, claiming that it had advanced these payments.

  • Respondents (Joint Venture):

    • The Joint Venture maintained that it had issued official receipts for all payments, which included the 10% VAT, and thus LVM could claim input tax based on these receipts.
    • They argued that LVM's claims for deductions were unfounded as there was no provision in the Sub-Contract Agreement allowing for such deductions.

Court's Ruling:

The Supreme Court denied LVM's petition for lack of merit, affirming the Court of Appeals' decision. The Court held that there was no stipulation in the Sub-Contract Agreement regarding the offsetting of E-VAT payments from the retention money. The contract must be enforced according to its terms, and the absence of an agreement on the matter meant LVM could not unilaterally impose such deductions.

The Court emphasized that the Joint Venture had fulfilled its obligations by issuing BIR-registered receipts, which indicated that it had already paid the corresponding VAT. LVM, as the contractor, was liable for the 8.5% VAT withheld by DPWH, while the Joint Venture was responsible for the 10% VAT on the payments made for the subcontracted works.

The ruling established that contractual obligations must be explicitly stated, and parties cannot unilaterally impose deductions not agreed upon in the contract. The decision reinforced the principle that contracts are the law between the parties and must be interpreted according to their clear terms.