The Case

Before the Court is a petition for review assailing the 24 January 2007 Decision^[1] and the 20 April 2007 Resolution^[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] 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]

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]

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	1,433,520.93

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]

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

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]

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]

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]  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]

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.

Corona, C.J.,^* Nachura, Abad, and Mendoza, JJ., concur.

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^*  Designated additional member per Raffle dated 8 December 2010.

^[1]  Rollo, pp. 61-74. Penned by Associate Justice Josefina Guevara-Salonga with Associate Justices   Vicente Q. Roxas and Ramon R. Garcia, concurring.

^[2]  Id. at 76-77.

^[3]  120 days in the Decision of the Court of Appeals.

^[4]  Rollo, pp. 107-123.  Penned by Sole Arbitrator Jacinto M. Butalid.

^[5]  Id. at 123.

^[6]  Id. at 73-74.

^[7]  See Diesel Construction Co., Inc. v. UPSI Property Holdings, Inc., G.R. No. 154885, 24 March 2008, 549 SCRA 12.

^[8]  Rollo, pp. 111-112.

^[9]  Transcript of the Ocular Inspection, pp. 28-29.

^[10] CA rollo, p. 292.