11 v. St. Francis Square Realty Corporation

PERALTA, J.:

This resolves the Petition for Partial Review on Certiorari under Rule 45 of the Rules of Court filed by Malayan Insurance Company, Inc. and the Petition for Review filed by St. Francis Square Realty Corporation, both seeking to reverse and/or modify the Court of Appeals Decision1 dated January 27, 2011 in CA-G.R. SP Nos. 109286 and 109298, which affirmed with modifications the Award2 dated March 27, 2009 of the Construction Industry Arbitration Commission (CIAC) in CIAC CASE No. 33-2008 entitled "ST. FRANCIS SQUARE REALTY CORPORATION, Claimant, - versus- MALAYAN INSURANCE COMPANY, INC., Respondent."

Malayan Insurance Company, Inc. (Malayan) is a duly-organized domestic corporation engaged in insurance business. Formerly known as ASB Realty Corporation (ASB), St. Francis Square Realty Corporation (St.

Francis) is a duly-organized domestic corporation engaged in real estate development. The admitted facts are as follows: 1. The parties' respective juridical existence; 1.1 The ASB Group of Companies, which include the ASB Realty Corporation (now St.

Francis Square Realty Corp.), is under rehabilitation with the Securities and Exchange Commission (SEC) pursuant to a petition dated May 2, 2000; 2. [Malayan], as Owner, and [St. Francis], as Developer, executed a Joint Project Development Agreement (JPDA) on 09 November 1995 for the construction, development and completion of what was then known as "ASB Malayan Tower"

("the Project"), originally a 50-storey office/residential condominium located at the ADB Avenue cor. Opal St., Ortigas Center, Pasig City. 3.

[Malayan] is the absolute and registered owner of the parcel of land (the Lot) in Pasig City where the Project is located, as evidenced by Transfer Certificate of Title No. PT-78585 xxx; 4. The Certificate of Registration No. 96-04-2701 issued by the Housing Land Use and Regulatory Board (HLURB) on 12 April 1996 shows that [Malayan] is the Owner and [St. Francis] is the developer xxx; 5.

The License to Sell No. 96-05-2844 issued by the HLURB also refers to [Malayan] as the Owner and [St. Francis] as Developer xxx; 6. The Master Deed with Declaration of Restrictions of the ASB-Malayan Tower dated 13 May 1996 approved by the HLURB and registered with the Register of Deeds of Pasig City, sets forth Malayan as "the Developer (absolute and registered owner) x x x ; 7.

ASB Realty Corporation [now, St. Francis] was not able to complete the Project; 7.1 The parties executed a Memorandum of Agreement (MOA) on 30 April 2002, under which [Malayan] undertook to complete the condominium project then known as "ASB Malayan Project" that later became "Malayan Plaza Tower"

xxx; 8. The MOA was approved by the SEC; 9. The Lot was the subject of a Contract to Sell between [Malayan] as seller and [St.

Francis] as buyer, but [St. Francis] was unable to completely perform its obligation under the Contract to Sell; 10. Under Sec. 2 of the MOA, [Malayan] "shall invest the amount necessary to complete the Project"

, among other obligations; 11. The basis for the distribution and disposition of the condominium units is the parties' respective capital investments in the Project as provided in Sec. 4 of the MOA; 11.1 [St. Francis] represented and warranted to Malayan that Malayan can complete the Project at a cost not exceeding Php452,424,849.00 (the Remaining Construction Cost [RCC]) [Sec. 9 of MOA].

12. The net saleable area included in Schedule 4 of the 30 April 2002 MOA ("Reserved Units") originally covered fifty-three (53) units with thirty-eight (38) parking spaces.

The aforesaid 53 Reserved Units became only thirty-nine (39) units after a reconfiguration was done; 13. The aggregate monetary value of the Reserved Units as fixed by [St. Francis], is One Hundred Seventy-Five Million Eight Hundred Fifty-Six Thousand Three Hundred Twenty-Three Pesos and 05/100 (P175,856,323.05); 14.

Under the MOA, [Malayan] assumed vast powers and revoked all authorities previously granted to [St. Francis] (Section 8 of the MOA, xxx), with the exception of including [St. Francis] in the bidding committee for bidding of material and services requirements of the Project (Section 9, paragraph v of the MOA, xxx).

The general supervision, management and control of the day-to-day operations were undertaken by [Malayan] (Section 5, paragraph b of the MOA, xxx) but under Sec. 9 of the MOA, "Malayan shall allow one (1) representative of [St. Francis] to observe the development and completion of the Project"; 15. On 24 August 2006, [St.

Francis] sent a letter to [Malayan] seeking to reconcile several items amounting to P133.64 million xxx; 16. There was a change in the specification of the floor finish from Narra Parque[t] to Kendall Laminated Flooring; 17. [Malayan] made interest expense, amounting to P37,705,346.62 as of August 2006, as part of its actual construction cost on that date; 18.

[St. Francis] filed a case against the Register of Deeds of Pasig City and Atty. Francis Serrano docketed as OMB-C-C-06-0583-J before the Office of the Ombudsman due to alleged alterations on the Condominium Certificates of Title over the units comprising the net saleable area in Schedule 4 of the MOA; 19. [Malayan] has included some of the units under Schedule 4 of the MOA in the condotel pool managed by Quantum Hotels and Resorts from which it derives income; 20.

Despite the completion of the Project and the turnover of the units to [St. Francis], [Malayan], and other buyers of units, the issue of actual cost of construction has not been resolved to the mutual satisfaction of the parties; and 21. The parties agreed to submit a list of documents that they admitted the authenticity and due execution thereof.3 On November 7, 2008, St.

Francis filed with the CIAC a Complaint with Prayer for Interim Relief against Malayan. St. Francis alleged that in August 2006, it secured a copy of a document entitled "cost to complete"

from Malayan which fixed the Actual Remaining Construction Cost (ARCC) at P614,593,565.96. It disputed several cost items in the ARCC, amounting to P145,487,496.42, and argued that their exclusion would entitle it to some reserved units. On December 8, 2008, Malayan filed a Verified Answer (With Grounds for Immediate Dismissal), claiming that St.

Francis failed to state a cause of action because the ARCC had already reached P635,018,369.05 as of November 30, 2008, thereby exceeding the Remaining Construction Cost (RCC) [P452,424,849.00] by more than the aggregate value of the reserved units [P175,856,323.05]; hence, St. Francis is no longer entitled to any of such units. On January 20, 2009, a preliminary conference was held where the parties stipulated on facts, formulated issues, and drafted and signed the Terms of Reference (TOR) which would govern the proceedings of the case.

Aside from the above-stated admitted facts, the TOR, which was later amended, listed the following issues to be determined by the CIAC: 2. What is the meaning or scope of the term Remaining Construction Cost (RCC) as used in the MOA as stated in Par. 11.1 of the Admitted Facts?

2.1. What is the meaning or scope of the term "actual remaining construction cost" as used in the MOA?

2.2. Specifically, were the following costs and expenses part of the actual remaining construction cost incurred by [Malayan] and questioned by [St. Francis] to wit: 2.2.1.

Awarded contracts, specifically those pertaining to Narra Parquet Works, Interior Design Works, Sanitary/Plumbing and Fire Protection Works, Additional Consultant's Fees and Audio Intercom and Paging System; 2.2.2. Change Orders, pursuant to the reconfiguration done on several of the units; 2.2.3. Interest Expense from loans incurred to finance the construction, development and completion of the Project; 2.2.4.

Input Value Added Taxes ("VAT") paid to the government for goods and services utilized from the Project; 2.2.5. Attendance Fees; 2.2.6. Alleged Prolongation Costs and Extended Overhead; 2.2.7.

Judgment Award in CIAC Case No. 27-2007 (TVI v MICO); [Additional issue from TOR Amendment] 2.2.8. Contractor's All Risk Insurance; 2.2.9. Contingency Costs.

2.2.10 Other costs as mentioned in Exhibit "R-24" [Additional issue from TOR Amendment] 3. What is the total capital investment or contribution respectively of [St.

Francis] and [Malayan] to the Project per MOA? [Additional issue from TOR Amendment] 4. What is the actual remaining construction cost to complete the Project spent by [Malayan] as of today in excess of [St.

Francis'] estimate RCC? 5. After completion of the Project and computation of the actual remaining construction costs to complete the same, is [St.

Francis] still entitled to any of the Reserved units in Schedule 4 of the MOA? 5.1. If so, is [St.

Francis] entitled to the income therefrom? 6. Is [Malayan] entitled to its Counterclaim for the excess in the actual remaining construction cost it incurred vis-à-vis the value of the Reserved Units?

7. Which party is entitled to attorney's fees? [7.1] How much?

[8.] Which party shall bear the cost of arbitration?4 On March 2, 2009, St. Francis submitted the Joint Affidavit of Witnesses of Claimant , while Malayan submitted the Joint Affidavit of Respondent's Witnesses. Thereafter, both parties submitted their respective Joint Reply-Affidavits.

Malayan also filed a Joint Affidavit of Respondent's Witnesses by Way of (1) Evidence for New Issue No. 3 Defined under the Amended Terms of Reference; (2) Sur-Rejoinder Affidavit of Claimant's Witnesses; and (3) Redirect Examination. Trial ensued during which the witnesses of St. Francis and Malayan testified.

Both parties likewise submitted Lists of Exhibits. After trial, the parties simultaneously filed on April 27, 2009 their respective Memoranda in the form of Draft Decisions. On May 27, 2009, the CIAC rendered its Award, the dispositive portion of which states:

WHEREFORE , AWARD is hereby made as follows: FOR THE CLAIMANT[St. Francis]: GRANT[S] its claims for DISALLOWANCES amounting to ₱52,864,385.00 from the ARCC of P614,593.565.96 under Exhibit C-3; ALLOCATES 37.8% ownership over the Reserved Units ( P66,551,993.09/ P175,856,325.05); As a consequence of these awards, Respondent [Malayan] is hereby DIRECTED to deliver possession and transfer title over the Reserved Units in the proportion hereby stated. GRANTS 37.8% proportionate share of the income realized from rentals of the Reserved Units up to the present date. As a consequence of these awards, Respondent [Malayan] is hereby DIRECTED to pay the Claimant [St. Francis] its proportionate share in the income from the Reserved Units. FOR THE RESPONDENT[Malayan]: ALLOCATES 62.2% proportionate share of the income realized from rentals of the Reserved Units up to the present date (P109,304,331.96/ P175,856,325.05); GRANTS 62.2% proportionate share of the income realized from rentals of the Reserved Units up to the present date. FOR BOTH CLAIMANT [St. Francis] and RESPONDENT [Malayan], all their Claims and Counterclaims for Attorney's Fees are DENIED. Arbitration costs are maintained according to the pro rata sharing that they had initially shared. SO ORDERED.5 Dissatisfied with the CIAC Award, both parties filed with the Court of Appeals (CA) their respective Petitions for Review under Rule 43 of the Rules of Court. On January 27, 2011, the CA affirmed with modifications the CIAC Award, the dispositive portion of the decision reads: WHEREFORE, premises considered, the CIAC's Award is hereby AFFIRMED subject to the following modifications: 1) The total amount of deductions should be P15,135,166.51 and this is, in turn, shall be deducted from the Total Actual Remaining Construction Cost of P615,880,672.47 to arrive at the Net amount of P600,745,505.96 as computed above; 2) St. Francis should be entitled to 16% ownership over the reserved units (P27,535,668.09/P175,856,325.05) ownership of the reserved units to be done by drawing of lots with the corresponding interest thereon; 3) As a consequence of the above awards, Malayan is hereby DIRECTED to deliver possession and transfer title over the reserved units in accordance and in the proportion above-stated and to pay St. Francis its proportionate share in the income from the reserved units reckoned from the date of completion of the Project, that is from June 7, 2006 up to the finality of this decision, and to render full accounting of all the rentals and such other income derived from said reserved units so awarded to St. Francis; 4) Arbitration Costs shall be maintained pro rata in accordance with their respective shares in the reserved units. 5) Malayan and all others claiming rights under it, are enjoined from exercising acts of ownership over the reserved units relative to the proportionate share awarded to St. Francis hereunder; 6) The concerned Register of Deeds is directed to immediately reinstate the name of St. Francis Square Realty Corporation (formerly ASB Realty Corporation) as the registered owner in the corresponding Condominium Certificates of Title Covering the reserved units herein awarded to St. Francis; and 7) All other awards granted by CIAC in its Award dated 27 May 2009 not affected by the above modifications are affirmed. No costs. SO ORDERED.6 Aggrieved by the CA decision, both parties filed their respective motions for reconsideration, which were denied in the Resolution dated October 4, 2011. Hence, the present petitions of both parties. St. Francis raises the following issues: I. The Court of Appeals gravely erred in ruling that interest [expenses] should be part of the actual remaining construction cost. The ruling is contrary to law and the evidence on record. II. The Court of Appeals committed serious error in finding that the actual construction cost is P554,583,160.20. The ruling is contrary to law and the evidence on record. III. The Court of Appeals erred in considering VAT as part of the ARCC. This is contrary to the facts and records of the case. IV. The Court of Appeals committed grave error in allowing the inclusion of the alleged cost of the Contractor's All Risk Insurance as part of the ARCC. This is contrary to law and the records of the case. V. The Court of Appeals committed grave and serious error on its allocation of the reserved units. This is contrary to law and the records of the case.7 On the other hand, Malayan raises the following issues: A. THE COURT OF APPEALS COMMITTED SERIOUS LEGAL ERROR IN PLACING THE BURDEN ON MALAYAN TO PROVE THAT IT HAD ACTUALLY INCURRED THE ARCC, DESPITE THE FACT THAT DURING THE ARBITRAL PROCEEDINGS, ST. FRANCIS HAD NEVER DISPUTED, AND THEREFORE, ADMITTED, THAT MALAYAN HAD INCURRED THE ARCC. THE COURT OF APPEALS THUS DECIDED A QUESTION OF SUBSTANCE DEFINITELY NOT IN ACCORD WITH THE BASIC LEGAL PRINCIPLE THAT A PARTY NEED NOT PROVE WHAT HAS NOT BEEN RAISED, DISPUTED OR PUT IN ISSUE. B. THE COURT OF APPEALS SERIOUSLY ERRED IN ALLOWING ST. FRANCIS TO BELATEDLY CHANGE ITS THEORY IN ITS DRAFT DECISION FILED WITH THE CIAC AND ITS APPEAL. THE COURT OF APPEALS THUS DECIDED A QUESTION OF SUBSTANCE IN DISREGARD OF THE BASIC DUE PROCESS TENET THAT A PARTY CANNOT CHANGE ITS THEORY AFTER TRIAL OR ON APPEAL BECAUSE IN BOTH CASES THE OTHER PARTY IS DEPRIVED OF THE OPPORTUNITY TO MEET THE NEW ISSUES. C. THE COURT OF APPEALS SERIOUSLY ERRED IN DISREGARDING UNCONTROVERTED TESTIMONIAL EVIDENCE THAT MALAYAN HAD ACTUALLY INCURRED ITS ARCC, AND FOCUSING EXCLUSIVELY ON DOCUMENTARY EVIDENCE. D. THE COURT OF APPEALS SERIOUSLY ERRED IN EXCLUDING THE FOLLOWING COSTS FROM THE ARCC, DESPITE THE FACT THAT THEY WERE PROPER, NECESSARY AND REASONABLE FOR THE COMPLETION OF THE PROJECT: 1. CHANGE ORDERS DUE TO RECONFIGURATION; 2. CHANGE ORDERS NOT DUE TO RECONFIGURATION; 3. HALF OF THE COSTS FOR THE NARRA PARQUET WORKS; 4. HALF OF THE COSTS FOR THE COMPREHENSIVE ALLRISK INSURANCE (CARI); 5. HALF OF THE COSTS FOR THE INTERIOR DESIGN WORKS; 6. CONTINGENCY COSTS; AND 7. COSTS INCURRED AND/OR PAID AFTER JUNE 2006. E. THE COURT OF APPEALS SERIOUSLY ERRED IN RULING THAT ST. FRANCIS IS ENTITLED TO SOME OF THE RESERVED UNITS. MALAYAN'S ARCC EXCEEDED THE ST. FRANCIS WARRANTED RCC BY MORE THAN THE VALUE OF THE RESERVED UNITS. HENCE, ST. FRANCIS SHOULD NOT GET EVEN ONE OF THE RESERVED UNITS. F. THE COURT OF APPEALS SERIOUSLY ERRED IN RULING THAT ST. FRANCIS IS ENTITLED TO THE INCOME RECEIVED BY MALAYAN FROM ST. FRANCIS'S (sic) SHARE IN THE RESERVED UNITS, IF ANY, MALAYAN IS ENTITLED TO ALL OF THE RESERVED UNITS. AND EVEN ASSUMING ARGUENDO THAT ST. FRANCIS IS ENTITLED TO SOME RESERVED UNITS, THE COURT OF APPEALS' DIRECTIVE IS IN DISREGARD OF ARTICLE 1187 OF THE CIVIL CODE. G. THE COURT OF APPEALS SERIOUSLY ERRED IN NOT AWARDING MALAYAN ITS COUNTERCLAIMS AS WELL AS ATTORNEY'S FEES, AND IN NOT ORDERING ST. FRANCIS TO BEAR ALL THE COSTS OF ARBITRATION.8 The Court finds partial merit in both the petition for review of St. Francis and the petition for partial review on certiorari of Malayan. In resolving in seriatim all the issues raised by both parties, the Court is guided by the rule that findings of fact of quasi-judicial bodies, which have acquired expertise because their jurisdiction is confined to specific matters, are generally accorded not only respect, but also finality, especially when affirmed by the CA. In particular, factual findings of construction arbitrators are final and conclusive and not reviewable by this Court on appeal.9 As exceptions, however, factual findings of construction arbitrators may be reviewed by the Court when the petitioner proves affirmatively that: (1) the award was procured by corruption, fraud or other undue means; (2) there was evident partiality or corruption of the arbitrators or any of them; (3) the arbitrators were guilty of misconduct in refusing to hear evidence pertinent and material to the controversy; (4) one or more of the arbitrators were disqualified to act as such under Section Nine of Republic Act No. 876 and willfully refrained from disclosing such disqualifications or of any other misbehavior by which the rights of any party have been materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter submitted to them was not made; (6) when there is a very clear showing of grave abuse of discretion resulting in lack or loss of jurisdiction as when a party was deprived of a fair opportunity to present its position before the Arbitral Tribunal or when an award is obtained through fraud or the corruption of arbitrators; (7) when the findings of the CA are contrary to those of the CIAC, and (8) when a party is deprived of administrative due process.10 Apart from conflicting findings of fact of the CA and the CIAC as to the propriety of some arbitral awards, mathematical computations, and entitlement to claim certain costs as part of the amount necessary to complete the project, none of the other exceptions above was shown to obtain in this case. Hence, the Court will not disturb those findings where the CA and the CIAC are consistent with each other, but will review their findings which are inconsistent and cannot be reconciled. The Court will discuss first the issues raised by St. Francis. I. Interest expense The CIAC stated that only costs directly related to construction costs can be included in the ARCC because such intention of the parties in the MOA can be inferred from the fact that the baseline or starting point for the determination of the ARCC is the estimate made by St. Francis based on Schedule 9 of the MOA.11 The CIAC held that the ARCC was intended to be spent within and among the four categories above exclusively, subject to adjustments by reason of price increases and awarded contracts. It also rejected Malayan's theory that costs which are not directly incurred for the construction, but which are actually related to it and to the completion of the building, should be included in the ARCC. According to the CIAC, such could not have been the intention of the parties; otherwise, St. Francis would be placed at the complete mercy of Malayan since the determination of what costs are related to construction is left to the latter's entire discretion. Had such been the intention, the parties would have set up standards to guide the discretion in determining what expenses or costs are related to construction so as to be included in the term ARCC. Without such standards, the validity of the MOA would have been questionable, as its interpretation would contravene Article 1308 of the New Civil Code which provides that the performance of a contract cannot be left to the will of one of the parties. The CA reversed the CIAC ruling and held that Malayan had to obtain loans in order to finance the completion of the project, and in doing so, it incurred interests which are deemed as an accessory of such loans. It added that actual expenditures should not be limited only to traditional construction costs as the parties' intention was to include those relative to the actual completion of the project, for which Malayan had to invest in the form of seeking loan facilities from banking institutions in order to fully finance the obligations set forth in the MOA. It also stressed that it was specifically stated in the MOA that the parties' investment in the project would be distributed in accordance with their respective contributions St. Francis contends that interest expense should not be included in the computation of the Actual Remaining Construction Cost (ARCC). According to St. Francis, the term ARCC should be understood in its ordinary context or plain meaning. The word "construction" refers to all on-site work on buildings or altering structures from land clearance through completion, including excavation, erection and the assembly and installation of components and equipment. Plainly, ARCC is the actual cost of completing and building the structure which is the condominium/project. Malayan counters that the MOA itself is replete with provisions recognizing the parties' contractual intent to include the ARCC interest expense and the parties' respective capital contributions or investment in the project. Such intent is confirmed by the parties' contemporaneous and subsequent acts when St. Francis' own interest expense was credited to determine the number of units it was entitled to. The Court upholds the CIAC ruling to disallow the interest expense from loans secured by Malayan to finance the completion of the project, and thus, reverses the CA ruling that such expense in the amount of P39,348,659.88 should be included in the computation of the ARCC. As correctly held by the CIAC, only costs directly related to construction costs should be included in the ARCC. Interest expense should not be included in the computation of the ARCC because it is not an actual expenditure necessary to complete the project, but a mere financial cost. As will be discussed later, the term ARCC should be construed in its traditional "construction" sense, rather than in the "investment" sense. It also bears emphasis that part of Malayan's investment under Section 2 of the MOA12 is the payment of P65,804,381.00 as the principal amount of the loan obtained by ASB from the Rizal Commercial Banking Corporation (RCBC) to finance the project. If it were the intention of the parties to include interest expense as part of their investments, or even the ARCC, then the MOA would have expressly indicated such intent in the provisions on investments of Malayan and of ASB. Nowhere in the provisions of the MOA can it be gathered that interest expense is included in the computation of the ARCC. Apart from the ARCC's definition as actual expenditures necessary to complete the project, the closest provision in the MOA that could shed light on the scope and meaning of ARCC is Section 9 on the Remaining Construction Cost (RCC) whereby St. Francis represented and warranted that Malayan can complete the project at a cost not exceeding P452,424,849.00 as set forth in ASB's Construction Budget Report, which reads: Estimated Cost to Complete I. Balance to Complete Existing Contracts - Php 161,098,039.86 II. Unawarded Contracts 224,045,419.16 III. Professional Fee 4,138,108.08 IV. Contingencies 63,143,281.10