507 Phil. 259
CHICO-NAZARIO, J.
On 26 April 1978, Filinvest Land, Inc. ("FILINVEST", for brevity), a corporation engaged in the development and sale of residential subdivisions, awarded to defendant Pacific Equipment Corporation ("PACIFIC", for brevity) the development of its residential subdivisions consisting of two (2) parcels of land located at Payatas, Quezon City, the terms and conditions of which are contained in an "Agreement". (Annex A, Complaint). To guarantee its faithful compliance and pursuant to the agreement, defendant Pacific posted two (2) Surety Bonds in favor of plaintiff which were issued by defendant Philippine American General Insurance ("PHILAMGEN", for brevity). (Annexes B and C, Complaint).On the basis of the commissioner's report, the trial court dismissed Filinvest's complaint as well as Pecorp's counterclaim. It held:
Notwithstanding three extensions granted by plaintiff to defendant Pacific, the latter failed to finish the contracted works. (Annexes G, I and K, Complaint). On 16 October 1979, plaintiff wrote defendant Pacific advising the latter of its intention to takeover the project and to hold said defendant liable for all damages which it had incurred and will incur to finish the project. (Annex "L", Complaint).
On 26 October 1979, plaintiff submitted its claim against defendant Philamgen under its performance and guarantee bond (Annex M, Complaint) but Philamgen refused to acknowledge its liability for the simple reason that its principal, defendant Pacific, refused to acknowledge liability therefore. Hence, this action.
In defense, defendant Pacific claims that its failure to finish the contracted work was due to inclement weather and the fact that several items of finished work and change order which plaintiff refused to accept and pay for caused the disruption of work. Since the contractual relation between plaintiff and defendant Pacific created a reciprocal obligation, the failure of the plaintiff to pay its progressing bills estops it from demanding fulfillment of what is incumbent upon defendant Pacific. The acquiescence by plaintiff in granting three extensions to defendant Pacific is likewise a waiver of the former's right to claim any damages for the delay. Further, the unilateral and voluntary action of plaintiff in preventing defendant Pacific from completing the work has relieved the latter from the obligation of completing the same.
On the other hand, Philamgen contends that the various amendments made on the principal contract and the deviations in the implementation thereof which were resorted to by plaintiff and co-defendant Pacific without its (defendant Philamgen's) written consent thereto, have automatically released the latter from any or all liability within the purview and contemplation of the coverage of the surety bonds it has issued. Upon agreement of the parties to appoint a commissioner to assist the court in resolving the issues confronting the parties, on 7 July 1981, an order was issued by then Presiding Judge Segundo M. Zosa naming Architect Antonio Dimalanta as Court Commissioner from among the nominees submitted by the parties to conduct an ocular inspection and to determine the amount of work accomplished by the defendant Pacific and the amount of work done by plaintiff to complete the project.
On 28 November 1984, the Court received the findings made by the Court Commissioner. In arriving at his findings, the Commissioner used the construction documents pertaining to the project as basis. According to him, no better basis in the work done or undone could be made other than the contract billings and payments made by both parties as there was no proper procedure followed in terminating the contract, lack of inventory of work accomplished, absence of appropriate record of work progress (logbook) and inadequate documentation and system of construction management.
Based on the billings of defendant Pacific and the payments made by plaintiff, the work accomplished by the former amounted to P11,788,282.40 with the exception of the last billing (which was not acted upon or processed by plaintiff) in the amount of P844,396.42. The total amount of work left to be accomplished by plaintiff was based on the original contract amount less value of work accomplished by defendant Pacific in the amount of P681,717.58 (12,470,000-11,788,282.42).
As regards the alleged repairs made by plaintiff on the construction deficiencies, the Court Commissioner found no sufficient basis to justify the same. On the other hand, he found the additional work done by defendant Pacific in the amount of P477,000.00 to be in order.
On 01 April 1985, plaintiff filed its objections to the Commissioner's Resolution on the following grounds:
a) Failure of the commissioner to conduct a joint survey which according to the latter is indispensable to arrive at an equitable and fair resolution of the issues between the parties;
b) The cost estimates of the commissioner were based on pure conjectures and contrary to the evidence; and,
c) The commissioner made conclusions of law which were beyond his assignment or capabilities.
In its comment, defendant Pacific alleged that the failure to conduct joint survey was due to plaintiff's refusal to cooperate. In fact, it was defendant Pacific who initiated the idea of conducting a joint survey and inventory dating back 27 November 1983. And even assuming that a joint survey were conducted, it would have been an exercise in futility because all physical traces of the actual conditions then obtaining at the time relevant to the case had already been obliterated by plaintiff.
On 15 August 1990, a Motion for Judgment Based on the Commissioner's Resolution was filed by defendant Pacific.
On 11 October 1990, plaintiff filed its opposition thereto which was but a rehash of objections to the commissioner's report earlier filed by said plaintiff.[3]
In resolving this case, the court observes that the appointment of a Commissioner was a joint undertaking among the parties. The findings of facts of the Commissioner should therefore not only be conclusive but final among the parties. The court therefore agrees with the commissioner's findings with respect toThe Court of Appeals, finding no reversible error in the appealed decision, affirmed the same.The unpaid balance due defendant therefore is P1,939,191.67. To this amount should be added additional work performed by defendant at plaintiff's instance in the sum of P475,000.00. And from this total of P2,414,191.67 should be deducted the sum of P532,324.01 which is the cost to repair the deficiency or defect in the work done by defendant. The commissioner arrived at the figure of P532,324.01 by getting the average between plaintiff's claim of P758,080.37 and defendant's allegation of P306,567.67. The amount due to defendant per the commissioner's report is therefore P1,881,867.66.
- Cost to repair deficiency or defect – P532,324.02
- Unpaid balance of work done by defendant - P1,939,191.67
- Additional work/change order (due to defendant) – P475,000.00
Although the said amount of P1,881,867.66 would be owing to defendant Pacific, the fact remains that said defendant was in delay since April 25, 1979. The third extension agreement of September 15, 1979 is very clear in this regard. The pertinent paragraphs read:Defendant Pacific therefore became liable for delay when it did not finish the project on the date agreed on October 15, 1979. The court however, finds the claim of P3,990,000.00 in the form of penalty by reason of delay (P15,000.00/day from April 25, 1979 to Jan. 15, 1980) to be excessive. A forfeiture of the amount due defendant from plaintiff appears to be a reasonable penalty for the delay in finishing the project considering the amount of work already performed and the fact that plaintiff consented to three prior extensions.
a) You will complete all the unfinished works not later than Oct. 15, 1979. It is agreed and understood that this date shall DEFINITELY be the LAST and FINAL extension & there will be no further extension for any cause whatsoever.b) We are willing to waive all penalties for delay which have accrued since April 25, 1979 provided that you are able to finish all the items of the contracted works as per revised CPM; otherwise you shall continue to be liable to pay the penalty up to the time that all the contracted works shall have been actually finished, in addition to other damages which we may suffer by reason of the delays incurred.
The foregoing considered, this case is dismissed. The counterclaim is likewise dismissed.
No Costs.[4]
Coming now to the main matter, Filinvest argues that the penalty in its entirety should be respected as it was a product of mutual agreement and it represents only 32% of the P12,470,000.00 contract price, thus, not shocking and unconscionable under the circumstances. Moreover, the penalty was fixed to provide for actual or anticipated liquidated damages and not simply to ensure compliance with the terms of the contract; hence, pursuant to Laureano v. Kilayco,[9] courts should be slow in exercising the authority conferred by Art. 1229 of the Civil Code.
(a) Based on Pecorps billings and the payments made by Filinvest, the balance of work to be accomplished by Pecorp amounts to P681,717.58 representing 5.47% of the contract work. This means to say that Pecorp, at the time of the termination of its contract, accomplished 94.53% of the contract work;(b) The unpaid balance of work done by Pecorp amounts to P1,939,191.67;(c) The additional work/change order due Pecorp amounts to P475,000.00;(d) The cost to repair deficiency or defect, which is for the account of Pecorp, is P532,324.02; and(e) The total amount due Pecorp is P1,881,867.66.
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.As a general rule, courts are not at liberty to ignore the freedom of the parties to agree on such terms and conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public policy.[13] Nevertheless, courts may equitably reduce a stipulated penalty in the contract in two instances: (1) if the principal obligation has been partly or irregularly complied; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code which provides:
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
Art. 1229.The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.In herein case, the trial court ruled that the penalty charge for delay – pegged at P15,000.00 per day of delay in the aggregate amount of P3,990,000.00 -- was excessive and accordingly reduced it to P1,881,867.66 "considering the amount of work already performed and the fact that [Filinvest] consented to three (3) prior extensions." The Court of Appeals affirmed the ruling but added as well that the penalty was unconscionable "as the construction was already not far from completion." Said the Court of Appeals:
Turning now to plaintiff's appeal, We likewise agree with the trial court that a penalty interest of P15,000.00 per day of delay as liquidated damages or P3,990,000.00 (representing 32% penalty of the P12,470,000.00 contract price) is unconscionable considering that the construction was already not far from completion. Penalty interests are in the nature of liquidated damages and may be equitably reduced by the courts if they are iniquitous or unconscionable (Garcia v. Court of Appeals, 167 SCRA 815, Lambert v. Fox, 26 Phil. 588). The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable (Art. 1229, New Civil Code). Moreover, plaintiff's right to indemnity due to defendant's delay has been cancelled by its obligations to the latter consisting of unpaid works.We are hamstrung to reverse the Court of Appeals as it is rudimentary that the application of Article 1229 is essentially addressed to the sound discretion of the court.[15] As it is settled that the project was already 94.53% complete and that Filinvest did agree to extend the period for completion of the project, which extensions Filinvest included in computing the amount of the penalty, the reduction thereof is clearly warranted.
This Court finds no fault in the cost estimates of the court-appointed commissioner as to the cost to repair deficiency or defect in the works which was based on the average between plaintiff's claim of P758,080.37 and defendant's P306,567.67 considering the following factors: that "plaintiff did not follow the standard practice of joint survey upon take over to establish work already accomplished, balance of work per contract still to be done, and estimate and inventory of repair" (Exhibit "H"). As for the cost to finish the remaining works, plaintiff's estimates were brushed aside by the commissioner on the reasoned observation that "plaintiff's cost estimate for work (to be) done by the plaintiff to complete the project is based on a contract awarded to another contractor (JPT), the nature and magnitude of which appears to be inconsistent with the basic contract between defendant PECORP and plaintiff FILINVEST."[14]
. . . [I]n any case wherein there has been a partial or irregular compliance with the provisions in a contract for special indemnification in the event of failure to comply with its terms, courts will rigidly apply the doctrine of strict construction against the enforcement in its entirety of the indemnification, where it is clear from the terms of the contract that the amount or character of the indemnity is fixed without regard to the probable damages which might be anticipated as a result of a breach of the terms of the contract; or, in other words, where the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance with the contract. But the courts will be slow in exercising the jurisdiction conferred upon them in article 1154[17] so as to modify the terms of an agreed upon indemnification where it appears that in fixing such indemnification the parties had in mind a fair and reasonable compensation for actual damages anticipated as a result of a breach of the contract, or, in other words, where the principal purpose of the indemnification agreed upon appears to have been to provide for the payment of actual anticipated and liquidated damages rather than the penalization of a breach of the contract. (Emphases supplied)Filinvest contends that the subject penalty clause falls under the second type, i.e., the principal purpose for its inclusion was to provide for payment of actual anticipated and liquidated damages rather than the penalization of a breach of the contract. Thus, Filinvest argues that had Pecorp completed the project on time, it (Filinvest) could have sold the lots sooner and earned its projected income that would have been used for its other projects.
Art. 2226. Liquidated damages are those agreed upon by the parties to a contract to be paid in case of breach thereof.Thus, we lamented in one case that "(t)here is no justification for the Civil Code to make an apparent distinction between a penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper."[19]
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.