J.A.B. Bulao & Associates

TRANSCEPT CONSTRUCTION AND MANAGEMENT PROFESSIONALS, INC. VS. TERESA C. AGUILAR (G.R. NO. 177556, 08 DECEMBER 2010). SUBJECT: CIAC CASE; COMPUTATION OF UNACCOMPLISHED WORKS, LIQUIDATED DAMAGES, CONSULTANCY SERVICES.)

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D E C I S I O N

CARPIO, J.:

The Case

          Before the Court is a petition for review assailing the 24 January 2007 Decision^[1][1] and the 20 April 2007 Resolution^[2][2] of the Court of Appeals in CA-G.R. SP No. 93021.

The Antecedent Facts

          From the decisions of the Court of Appeals and the Construction Industry Arbitration Commission (CIAC), we gathered the following facts:

          On 18 August 2004, Teresa C. Aguilar (Aguilar) entered into an Owner-General Contractor Agreement (First Contract) with Transcept Construction and Management Professionals, Inc. (Transcept) for the construction of a two-storey split level vacation house (the Project) located at Phase 3, Block 3, Lot 7, Canyon Woods, Laurel, Batangas.  Under the First Contract, the Project would cost P3,486,878.64 and was to be completed within 210^[3][3] working days from the date of the First Contract or on 7 June 2005.  Aguilar paid a downpayment of P1 million on 27 August 2004.

          On 30 November 2004, Transcept submitted its First Billing to Aguilar for work accomplishments from start to 15 November 2004, in accordance with the Progressive Billing payment scheme.  Aguilar paid P566,356.

          On 1 February 2005, Aguilar received the Second Billing amounting to P334,488 for the period of 16 November 2004 to 15 December 2004.  Transcept informed Aguilar that non-payment would force them to halt all works on the Project.  Aguilar questioned the Second Billing as unusual for being 45 days ahead of actual accomplishment.  Aguilar did not pay and on 2 February 2005, Transcept stopped working on the Project.

          Thereafter, Aguilar hired ASTEC, a duly accredited testing laboratory, to test Transcept’s quality of work.  The test showed substandard works done by Transcept.  In a letter dated 7 March 2005, Transcept outlined its program to reinforce or redo the substandard works discovered by ASTEC.  On 28 March 2005, ASTEC, through Engr. Jaime E. Rioflorido (Engr. Rioflorido), sent Aguilar an Evaluation of Contractor’s Performance which showed that aside from the substandard workmanship and use of substandard materials, Transcept was unreasonably and fraudulently billing Aguilar.  Of the downpayment amounting to P1,632,436.29, Engr. Rioflorido’s  reasonable assessment of Transcept’s accomplishment amounted only to P527,875.94.  Engr. Rioflorido recommended the partial demolition of Transcept’s work. 

          On 30 May 2005, Transcept and Aguilar entered into a Construction Contract (Second Contract) to extend the date of completion from 7 June 2005 to 29 July 2005 and to use up the P1.6 million downpayment paid by Aguilar.  Aguilar hired the services of Engr. Edgardo Anonuevo (Engr. Anonuevo) to ensure that the works would comply with the plans in the Second Contract. 

          Transcept failed to finish the Project on 29 July 2005, alleging that the delay was due to additional works ordered by Aguilar.  Transcept also asked for payment of the additional amount of P290,824.96.  Aguilar countered that the Second Contract did not provide for additional works. 

          On 2 September 2005, Aguilar sent a demand letter to Transcept asking for payment of P581,844.54 for refund and damages.  Transcept ignored the demand letter.  On 6 September 2005, Aguilar filed a complaint against Transcept before CIAC.

The Decision of the CIAC

          CIAC assessed the work accomplished with the corresponding costs, as against the downpayment of P1,632,436.29 which was the contract price in the Second Contract.  On 16 January 2006, the CIAC promulgated its Decision.^[4][4]  

          For  Labor and Materials of the Scope of Work, the CIAC credited the accomplishment to be P1,110,440.13 representing Aguilar’s estimate  which was  reassessed by the CIAC after the ocular inspection conducted by the parties.  For indirect costs for General Requirements of the Scope of Work, the CIAC’s computation was P275,355.50.  The CIAC noted that Aguilar did not submit any evidence on indirect costs and her counsel did not cross-examine Transcept’s witnesses on the matter.  For the Septic Tank, which the CIAC found to be part of the Second Contract, the CIAC assessed the accomplishment to amount to P7,300.  The CIAC added 5% Contingencies and 10% Contractor’s Profit which are the minimum factors in making estimates practiced in the construction industry.  The CIAC thus estimated that the total accomplishment amounted to P1,602,359.97 which was  P30,076.72 below the contract price of P1,632,436.29.  The tabulated amount shows:

Direct Costs for Labor and Materials                              P1,110,440.13

Indirect Costs for General Requirements                   275,355.50

Septic Tank                                                                             7,300.00

  Sub-Total                                                         P1,393,095.63

Plus 5% Contingencies                                               69,654.78

Add 10% of Sub-Total for Contractor’s Profit               139,309.56    

  Total                                                                 P1,602,359.97                                                

          The CIAC ruled that the accomplishment of P1,602,359.97 was 98.16% of P1,632,436.29, which was way above 95% and should therefore be considered as substantial completion of the Project.  As such, the CIAC ruled that liquidated damages could not be awarded to Aguilar.  The CIAC, however, ruled that Aguilar was entitled to P75,000 as Consultancy Expenses.

          The CIAC also found that Aguilar demanded extra works which entailed additional working days.  The CIAC computed that the additional works performed over and above the Second Contract amounted to P189,909.91. 

          The dispositive portion of the CIAC’s decision reads:

In view of all the foregoing, it is hereby ordered that:

1.                  Respondent [Transcept] shall pay Claimant [Aguilar] the amount of P30,076.72, representing the unaccomplished works in the contract, plus 6% interests from the date of the promulgation of this case, until fully paid.

2.                  Respondent shall pay Claimant the amount of P75,000.00, representing the cost of Consultancy Services, plus 6% interests from the date of the promulgation of this case, until fully paid.

3.                  Claimant shall pay Respondent the amount of P189,909.91, representing the cost of work performed over & above the scope of work in the contract.

4.                  The cost for liquidated damages and cost representing interests of construction bond, prayed for the Claimant, are denied for being without merit.

5.                  Attorney’s fees prayed for by both parties are denied for being without merit.

6.                  Cost of Arbitration shall be shared equally by the parties.

            SO ORDERED.^[5][5]

          Aguilar assailed the CIAC’s decision before the Court of Appeals.

The Decision of the Court of Appeals

         In its 24 January 2007 Decision, the Court of Appeals reversed the CIAC’s decision. 

         The Court of Appeals agreed with the CIAC that Aguilar did not allege in her complaint the amount corresponding to the indirect costs for  General Requirements.  However, the Court of Appeals made a recomputation of the indirect costs for General Requirements based on  P1,632,436.29 and made the following findings:

Direct Costs for Labor and Materials                              P1,110,440.13

Indirect Costs for General Requirements                   128,799.22

Septic Tank                                                                             7,300.00

  Sub-Total                                                         P1,246,539.35

Plus 5% Contingencies                                               62,326.96

Add 10% of Sub-Total for Contractor’s Profit               124,653.93    

  Total                                                                 P1,433,520.24

The Court of Appeals then deducted P1,433,520.24 from P1,632,436.29 and concluded that Aguilar is entitled to P198,916.05 instead of  P30,076.72.

         From the above computation, the Court of Appeals ruled that Transcept only accomplished 87.81% of the contract price thus entitling Aguilar to liquidated damages equivalent to 10% of P1,632,436.29 or P163,243.63.

         The Court of Appeals further ruled that Transcept was not entitled to payment for additional works because they were in fact only rectifications of the works poorly done by Transcept.  Finally, the Court of Appeals ruled that Aguilar was able to prove that she paid P135,000 for consultancy services.

         The dispositive portion of the Court of Appeals’ decision reads:

  WHEREFORE, the foregoing considered, the instant petition is hereby GRANTED and the assailed decision REVERSED AND SET ASIDE.  Accordingly, a new one is entered ordering respondent to pay petitioner the following:

1)                 P198,916.02 for unaccomplished works in the second contract, plus 6% interest from the date of the filing of the case, until fully paid;

2)                 P135,000.00, representing the cost of consultancy services, plus 6% interest from the filing of the case, until fully paid; and

3)                 P163,243.63 as and by way of liquidated damages.

     The award of P189,909.91 in favor of Aguilar for additional works is hereby deleted.

          No costs. 

   SO ORDERED.^[6][6]

         Transcept filed a motion for reconsideration.  In its 20 April 2007 Resolution, the Court of Appeals denied the motion.

         Hence, the petition before this Court.

The Issues

         The issues in this case are the following:

1.                Whether the Court of Appeals erred in holding that Aguilar is entitled to  P198,916.02 instead of  P30,076.72 for unaccomplished works;

2.                Whether the Court of Appeals erred in awarding Aguilar liquidated damages;

3.                Whether the Court of Appeals erred in deleting the CIAC’s award of P189,909.91 to Transcept representing additional works done under the Second Contract; and

4.                Whether the Court of Appeals erred in awarding Aguilar the amount of P135,000 for consultancy services.

The Ruling of this Court

         The petition is partly meritorious.

Refund for Unaccomplished Works

         The Court of Appeals ruled that CIAC erred in adopting Transcept’s computation of unaccomplished works.  The Court of Appeals agreed with Aguilar that the CIAC’s computation was based on what Transcept submitted which was based on the original contract price of P3,486,878.64 instead of the contract price of P1,632,436.29 under the Second Contract. 

         However, the Court of Appeals failed to consider the CIAC’s as well as its own finding that Aguilar did not present any evidence on indirect costs for General Requirements.  In addition, Aguilar’s counsel did not cross-examine Transcept’s witnesses.  In short, Aguilar did not dispute but merely accepted Transcept’s computation on indirect expenses.  Aguilar did not interpose any objection to the computation until after the CIAC ruled that Transcept substantially complied with the Project.  We also note Transcept’s explanation, as well as the CIAC’s finding, that General Requirements refer to mobilization, overhead, insurance, hoarding and protection, temporary facilities, equipment, materials testing, line set out, as-built drawings, and clean out.  They had been used up at the start of the Project.  Hence, costs for General Requirements are not dependent on the amount of the contract because they were incurred at the beginning of the Project.  We should therefore revert to the computation made by the CIAC, as follows:

Direct Costs for Labor and Materials                              P1,110,440.13

Indirect Costs for General Requirements                   275,355.50

Septic Tank                                                                             7,300.00

  Sub-Total                                                         P1,393,095.63

Plus 5% Contingencies                                               69,654.78

Add 10% of Sub-Total for Contractor’s Profit               139,309.56    

  Total                                                                 P1,602,359.97                                                

Liquidated Damages

         Section 20.11(A)(a) of the Construction Industry Authority of the Philippines (CIAP) Document No. 102 provides that “[t]here is substantial completion when the Contractor completes 95% of the Work, provided that the remaining work and the performance of the work necessary to complete the Work shall not prevent the normal use of the completed portion.”

         According to CIAC’s computation, Transcept’s accomplishment amounted to 98.16% of the contract price.  It is beyond the 95% required under CIAP Document No. 102 and is considered a substantial completion of the Project.  We thus agree with CIAC’s application of Article 1234 of the Civil Code, which provides that “[i]f the obligation had been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.”^[7][7]

         There being a substantial completion of the Project, Aguilar is not entitled to liquidated damages but only to actual damages of P30,076.72, representing the unaccomplished works in the Second Contract as found by the CIAC, which is the difference between the contract price of P1,632,436.29 and the accomplishment of P1,602,359.97.

Additional Works

         The Second Contract excluded the construction of the following works:

1.                  Architectural Works –  – Roofing System             

2.                  Interior Fit-Out Works/Glass/Windows/CAB/CARP

3.                  Truss System

4.                  Supply and Installation of Plumbing Fixtures and Bathroom        Accessories

5.                  Supply and Installation of Downspout System

6.                  Electrical Roughing-in and Wiring Works

7.                  Supply and Installation of Wiring Devices

8.                  Supply and Installation of Circuit Breakers

9.                Testing and Commissioning.^[8][8]

         The CIAC found that Aguilar demanded additional works from Transcept.  The CIAC found that the additional works include the balcony, lifting of roof beams, and extra fast walls which are not covered by the Second Contract.  However, we agree with the Court of Appeals that the works done were just for correction of the substandard works done under the First Contract.  During the ocular inspection, Aguilar pointed out that the lifting of the roof beam was done because the construction was three meters short of that specified in the First Contact.^[9][9]  Hence, while the roofing system is excluded from the Second Contract, it could not be said that the lifting of the roof beam is an additional work on the part of Transcept.

         The Court notes that the Second Contract was entered into by the parties precisely to correct the substandard works discovered by ASTEC.  Hence, Aguilar should not be made to pay for works done to correct these substandard works.

Consultancy Services

         The Court of Appeals correctly awarded Aguilar the cost of consultancy services amounting to P135,000.  While Engr. Rioflorido was not presented as a witness, it was established that Aguilar hired ASTEC, a duly accredited testing laboratory, to test Transcept’s quality of work, and that Engr. Rioflorido represented ASTEC.  As found by the Court of Appeals, Aguilar paid Engr. Rioflorido the amount of P65,000 for the services, which should be added to the P75,000 consultancy services awarded to Aguilar.^[10][10] 

         WHEREFORE, we AFFIRM the 24 January 2007 Decision and the 20 April 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 93021, with the MODIFICATION that the award of P198,916.02 for unaccomplished works is reduced to P30,076.72, and the award of P163,243.63 for liquidated damages is deleted.

          SO ORDERED.

                                      ANTONIO T. CARPIO

                                            Associate Justice

WE CONCUR:

                RENATO C. CORONA         

           Chief Justice       

ANTONIO EDUARDO B. NACHURA        ROBERTO A. ABAD           

                 Associate Justice                                  Associate Justice

     JOSE C. MENDOZA      

Associate Justice

ATTESTATION

          I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

                                                    ANTONIO T. CARPIO

                                                                   Associate Justice

                            Chairperson

CERTIFICATION

          Pursuant to Section 13, Article VIII of the Constitution, and the Division  Chairperson’s Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

                                                                   RENATO C. CORONA

                                                                          Chief Justice

SPOUSES REUBEN DE LA CRUZ AND MINERVA DELA CRUZ VS. RAMON C.PAPAP IV IN HIS CAPACITY AS CO-ADMINISTRATOR OF THE ESTATE OF ANGELA M. BUTTE (G.R. NO. 185899, 08 DECEMBER 2010). SUBJECT: DIRECT TESTIMONY NOT SUBJECTED TO CROSS-EXAMINATION EXPUGNED.

DOCTRINES:

DIRECT TESTIMONY CAN BE IMPUGNED IF NOT CROSS-EXAMINED EVEN IF THE REASON IS THAT THE WITNESS DIED AND THEREFORE COULD NOT BE EXAMINED PROVIDED THAT THE  PARTY WHO SHALL CONDUCT CROSS-EXAMINATION  WAS NOT AT FAULT.

“BUT HAVING THEIR TURN TO CROSS-EXAMINE MYRON IS DIFFERENT FROM THEIR BEING ACCORDED AN OPPORTUNITY TO CROSS-EXAMINE HIM.  THE RTC SET THE DEPOSITION TAKING ON SEPTEMBER 7, 2001 BUT MYRON DIED BEFORE THAT DATE, ON AUGUST 16, 2001.  CONSEQUENTLY, IT WAS NOT THE DEFENDANTS’ FAULT THAT THEY WERE UNABLE TO CROSS-EXAMINE HIM.”

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DECISION

ABAD, J.:

This case is about the plaintiff’s lone witness who passed away due to illness before the adverse party could cross-examine him.

The Facts and the Case

In 1994, the Intestate Estate of Angela M. Butte (the Estate) filed an action for cancellation of titles, recovery of properties, and damages against several defendants, including petitioner spouses Reuben and Minerva Dela Cruz (the Dela Cruzes) before the Regional Trial Court (RTC) of Antipolo City in Civil Cases 94-3447 and 95-3816.  On October 21, 1999 the Estate presented Myron C. Papa (Myron), its executor, to testify on the substance of the complaint.  At the conclusion of Myron’s testimony on that day, the RTC required the Estate and the latter agreed to present Myron anew at the next scheduled hearing to identify the originals of certain exhibits, after which counsels for the defendants, would begin to cross-examine him. 

But the Estate never got around recalling Myron to the witness stand.  He was taken ill and diagnosed as suffering from stage four colon and liver cancer, prompting respondent Ramon C. Papa IV (Ramon), the Estate’s co-administrator, to seek repeated postponements of hearings in the case to allow Myron undergo intensive treatment.  Later, the Estate filed a motion for leave to have the defendants cross-examine Myron by deposition at the hospital where he was confined.  The RTC granted the motion on February 22, 2001^[1][1] and eventually set the deposition-taking on September 7, 2001 but Myron passed away on August 16, 2001.

On November 15, 2001 one of the defendants moved to expunge Myron’s direct testimony.  The Dela Cruzes for their part moved to dismiss the case for failure of the Estate to prosecute it.  On March 13, 2002 the RTC issued an order, denying the two motions based on the ground that the Estate had no control of the circumstances that caused the delay in the case.

On December 3, 2003 the Estate asked leave of court to file its formal offer of exhibits.  On December 5, 2003 the Dela Cruzes filed a motion to strike out Myron’s testimony on the ground of failure to cross-examine him.  Meanwhile, the Estate filed its formal offer of evidence.

In a March 4, 2005 Order,^[2][2] the RTC granted the Dela Cruzes’ motion to strike out Myron’s testimony on the ground that, due to the Estate’s fault, such testimony was never completed, depriving the defendants of the opportunity to cross-examine him.  Because the RTC denied the Estate’s motion for reconsideration,^[3][3] it filed a special civil action of certiorari and mandamus before the Court of Appeals (CA) in CA-G.R. SP 91074, assailing the March 4, 2005 Order.  Meanwhile, on August 16, 2005 the RTC admitted the Dela Cruzes’ demurrer to evidence.

On July 25, 2008 the CA rendered a Decision,^[4][4] granting the petition and setting aside the RTC’s order that struck out Myron’s testimony.  The CA denied the Dela Cruzes’ motion for reconsideration. 

Although the CA likewise set aside the RTC’s denial of the respondent’s documentary evidence and its admission of the Dela Cruzes’ demurrer, it held that the RTC may not be compelled by mandamus to admit the documentary exhibits in issue, since the matter of admitting them is discretionary upon it.  Because the CA declined to reconsider,^[5][5]  the Dela Cruzes filed this petition for review, seeking reinstatement of the RTC’s Order dated March 4, 2005.

The Issue Presented

The key issue in this case is whether or not the CA erred in reinstating Myron’s testimony after the RTC ordered the same stricken out for depriving the defendants of the opportunity to cross-examine him.

The Court’s Ruling

The CA said that the defendants were guilty of unreasonable delay in objecting to Myron’s testimony.  Myron died on August 16, 2001 yet the other defendants moved to expunge his testimony only on November 15, 2001.  On the other hand, the Dela Cruzes filed a similar motion only in December 2003.  Citing Section 36, Rule 132 of the Rules of Court,^[6][6] the CA held that they should have objected to Myron’s testimony when it was offered or soon after the reason for objecting to its admission became apparent.  When they failed to do so, said the CA, the defendants waived their right to object to the same. 

The CA characterized the defendants’ actions as betraying an “intention to defeat the (Estate’s) action through a technicality.”^[7][7]  Because Myron’s testimony was expunged after the respondent Estate had rested its case, it could no longer present other witnesses who may testify on and identify its documentary evidence, thus resulting in its inadmissibility.  The CA ruled that as a result of the RTC’s error in sustaining the defendants’ actions, the Estate was thus “effectively deprived of an opportunity to meet the consequences of the expunction of Myron’s testimony.”^[8][8] 

But it is evident that the defendants’ right to cross-examine Myron did not yet come up when he finished his direct testimony on October 21, 1999.  The Estate undertook to return him to the witness stand to identify for it the originals of certain documents.  Consequently, when Myron was taken ill, the obligation to move the case forward continued to be on the Estate’s side.  Rather than move it, however, the Estate repeatedly asked for the deferment of Myron’s testimony on the chance that he could recover and return to court.  It took the Estate more than a year to remedy the situation by asking the RTC to allow the cross-examination of Myron in the hospital where he was confined.  Thus, only when the Court granted this motion on February 22, 2001 did it become evident that the Estate was waiving the additional direct examination that it reserved on October 21, 1999.  Thus, the turn of the Dela Cruzes to cross-examine Myron came only after February 22, 2001.

But having their turn to cross-examine Myron is different from their being accorded an opportunity to cross-examine him.  The RTC set the deposition taking on September 7, 2001 but Myron died before that date, on August 16, 2001.  Consequently, it was not the defendants’ fault that they were unable to cross-examine him. 

The CA appears too hasty in blaming the defendants for the further delays that followed.  When Myron died on August 16, 2001, the obligation to close his aborted testimony and proceed with its other evidence remained with the Estate.  But it did nothing, prompting one of the defendants to ask the RTC on November 15, 2001 to strike down Myron’s testimony on the ground of the defendants’ failure to cross-examine him.  The Dela Cruzes themselves asked that the case be dismissed for the Estate’s failure to prosecute after such a long time. 

Still, wanting to give the Estate the chance to present additional evidence, on March 13, 2002 the RTC denied the defendants’ motions.  But the Estate did nothing for about a year and eight months until December 3, 2003 when, rather than present additional evidence, it asked leave to close its case with a formal offer of its documentary exhibits.  Clearly, it was only at this stage that the Estate signaled its intention to still avail itself of Myron’s unfinished testimony.  And the Dela Cruzes did not lose time to act.  On December 5, 2003 they renewed the defendants’ earlier motion to expunge such testimony.  And this time, the RTC granted the motion.  It did so correctly since the Estate showed a lack of interest in offering a substitute testimony for that of Myron’s. 

Since the Estate presented its documentary exhibits and had the same authenticated through Myron’s testimony, it stands to reason that the striking out of the latter’s testimony altogether wiped out the required authentication for those exhibits.  They become inadmissible unless the RTC, in its discretion, reopens the trial upon a valid ground and permits the Estate to rectify its mistakes.

ACCORDINGLY, the Court GRANTS the petition and SETS ASIDE the Court of Appeals’ decision and resolution in CA-G.R. SP 91074 dated July 25, 2008 and January 12, 2009, respectively, and REINSTATES the order of the Regional Trial Court of Antipolo City in Civil Cases 94-3447 and 95-3816 dated March 4, 2005.

SO ORDERED.

ROBERTO A. ABAD 

                                                              Associate Justice

WE CONCUR:

ANTONIO T. CARPIO 

Associate Justice

ANTONIO EDUARDO B. NACHURA      DIOSDADO M. PERALTA

                  Associate Justice                                    Associate Justice

JOSE CATRAL MENDOZA

Associate Justice

ATTESTATION

          I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

                                                      ANTONIO T. CARPIO

                                                   Associate Justice

                                Chairperson, Second Division                  

CERTIFICATION

          Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

                                                             RENATO C. CORONA

                                                            Chief Justice