Philippine Charter Insurance Corp. v. Central Colleges

G.R. No. 180631-33 (February 22, 2012)

Court upheld CCP's contract termination, confirmed joint liability in arbitration. Payment mandated.

Facts:

On May 16, 2000, Central Colleges of the Philippines (CCP) entered into a contract with Dynamic Planners and Construction Corporation (DPCC) for the construction of a five-storey school building in Quezon City, with a total contract price of P248,000,000. The construction was to be executed in two phases, each valued at P124,000,000. To secure the fulfillment of its obligations, DPCC posted three bonds issued by Philippine Charter Insurance Corporation (PCIC): Surety Bond No. PCIC-45542, Performance Bond No. PCIC-45541, and Performance Bond No. PCIC-46172, all callable on demand and set to expire on October 30, 2003.

Phase 1 of the project was completed without issues, and CCP paid DPCC a downpayment of P14,880,000. However, Phase 2 faced significant delays. By July 25, 2003, only 47% of the work was completed, and by November 6, 2003, this figure had only increased to 51%. Consequently, CCP notified DPCC and PCIC of the breach of contract and its intention to claim on the bonds. Following further correspondence, CCP formally terminated the contract with DPCC on November 21, 2003, due to the contractor's inability to complete the project on time.

Despite a request from DPCC for an extension of the bonds, negotiations between CCP and DPCC broke down, leading CCP to hire another contractor. On August 13, 2004, CCP sent a final demand to PCIC for payment of P13,924,351.47 under the bonds, which PCIC denied on August 20, 2004. Subsequently, CCP filed a complaint for arbitration against DPCC and PCIC before the Construction Industry Arbitration Commission (CIAC).

In its answer, DPCC and PCIC denied liability, claiming that CCP had unlawfully withheld materials and equipment left at the site, amounting to P4,232,264.12. On June 3, 2005, CIAC ruled in favor of CCP, finding DPCC liable for breach of contract and ordering it to pay CCP under the bonds.

Legal Issues:

  1. Whether the Court of Appeals (CA) erred in sustaining the CIAC award that found PCIC liable under the performance and surety bonds.
  2. Whether the CA erred in upholding the CIAC's decision that CCP was justified in terminating the contract with DPCC.
  3. Whether the CA erred in deleting DPCC's counterclaim for the costs of materials and equipment left at the site.

Arguments:

  • Petitioner (PCIC):

    • The CA erred in sustaining the CIAC award, arguing that the liability under Performance Bond No. PCIC-46172 should not attach as the obligation was already fulfilled.
    • PCIC contended that CCP's claim was time-barred, as it was filed beyond the ten-day period stipulated in the bonds after the occurrence of default.
    • PCIC also argued that the CA improperly deleted DPCC's counterclaim for the costs of materials and equipment.

  • Respondents (CCP and DPCC):

    • CCP maintained that it was justified in terminating the contract due to DPCC's inexcusable delay in completing the project.
    • CCP asserted that it complied with the notice requirements for claiming against the bonds, and the claims were not time-barred.
    • DPCC argued that it was entitled to compensation for the materials and equipment left at the site, which CCP had unlawfully withheld.

Court's Decision and Legal Reasoning:

The CA affirmed CIAC's decision, finding that DPCC was indeed in delay and that CCP was justified in terminating the contract. The CA ruled that the claims against the bonds were valid and not time-barred, as CCP's notice of default on October 29, 2003, initiated the timeline for claims. The CA also noted that the issue regarding Performance Bond No. PCIC-46172 was not raised before CIAC and thus could not be considered on appeal.

The CA modified the CIAC's decision by deleting the award for DPCC's counterclaim regarding the materials and equipment, as DPCC failed to provide sufficient proof of the actual costs.

The Supreme Court partially granted the petition, modifying the total amount owed under the bonds and affirming the CA's findings regarding the termination of the contract and the validity of CCP's claims.

Significant Legal Principles Established:

  1. The liability of a surety is solidary with that of the principal debtor, and the surety is bound to fulfill the obligation upon the principal's default.
  2. A notice of default and demand for fulfillment of obligations is crucial in determining the timeline for claims against surety and performance bonds.
  3. Judicial admissions made during proceedings are binding and cannot be contradicted by the admitting party.
  4. Claims for actual damages must be substantiated with competent evidence; mere assertions without proof are insufficient for recovery.