Mercantile Insurance Co v. Dmci-Laing Construction

DECISION CAGUIOA, J.:

This is a petition for review on certiorari1 (Petition) under Rule 45 of the Rules of Court assailing the Decision2 dated July 30, 2012 (Assailed Decision) and Resolution3 dated January 7, 2013 (Assailed Resolution) rendered by the Court of Appeals (CA) in CA-G.R. SP. No. 80705. The Assailed Decision and Resolution reverse the Decision4 promulgated on November 7, 2003 issued by the Construction Industry Arbitration Commission (CIAC) Arbitral Tribunal (Tribunal) in CIAC Case No. 10-2003 which, in turn, dismissed the claim filed by respondent DMCI­ Laing Construction, Inc. (DLCI) against Altech Fabrication Industries, Inc. (Altech) and petitioner The Mercantile Insurance Co., Inc. (Mercantile).

The Facts The facts, as narrated by the CA, are as follows: On March 17, 1997, Rockwell Land Corporation ("Rockwell"), as the owner and developer, entered into an agreement with [DLCI], as the General Contractor, for the construction of The Condominium Towers and associated external landscaping works of Hidalgo Place, Rizal Tower, Luna Garden, [and] Amorsolo Square (the "Project") at the Rockwell Center, Makati City. Part of [DLCI's] scope of work in the Project [was] the supply and installation of glazed aluminum and curtain walling. Part of the terms and conditions of the contract between Rockwell and DLCI (the "Main Contract") [was] the appointment of [Altech] as Rockwell's nominated sub[-]contractor to DLCI for the supply and installation of glazed aluminum and curtain walling.

On July 30, 1997, in compliance with the agreement between Rockwell and DLCI, Rockwell sent a Notice of Award to Proceed [(NTP)] to Altech for the supply and installation of the glazed aluminum and curtain walling at the Project. Said [NTP] bears the conformity of DLCI and Altech. Pursuant to the [NTP] and the Sub-Contract Agreement [(Sub­ Contract)] between DLCI and Altech, Altech secured a Performance Bond from Mercantile for its scope of work in the [P]roject.

On September 5, 1997, Mercantile, as surety, with Altech, as principal, issued Performance Bond No. G(13)-1500/97 in favor of Rockwell and DLCI, as obligee, for the amount of PhP90,448,941.60. On September 8, 1997, Mercantile issued [B]ond [E]ndorsement No. E-109/97 ST, correcting the effectivity of the Performance Bond from September 5, 1997 to September 5, 1999. Thereafter, on September 12, 1997, Mercantile issued [B]ond [E]ndorsement No. E-116/97 ST, correcting the obligee of the [P]erformance [B]ond to DLCI alone, and not in favor of Rockwell and DLCI.

Subsequently, on August 26, 1999, Mercantile issued [B]ond [E]ndorsement [N]o. E-220/99 ST, extending the effectivity of the Performance Bond for another six (6) months from September 5, 1999 to March 5, 2000.5 (Emphasis supplied) On November 9, 1998, DLCI called Altech's attention to the poor progress of the works subject of their Sub-Contract in its Letter6 addressed to Altech's President and General Manager, Nicanor Peña: [W]e detail below a programme status report of your installation works- Panel installation at Rockwell as [of] [November 7, 1998 Total Panels Planned % Planned No Actual % Actual No Hidalgo 4623 75% 3406 14% 664 Rizal 4830 60% 2919 5% 264 Luna 3100 0.36 1110 NIL NIL Amorsolo [east and west] 3500 0.35 1235 NIL NIL Project Total 16,053 0.54 8670 6% 928 We would record that this situation is totally unacceptable, and we hereby request, in compliance with the proposed sub-contract conditions, the submission of your revised sub-contract works programme and recovery proposals identifying the methodology by which the agreed completion dates for your works are to be maintained.

x x x x We would remind you that as a direct consequence of these delays[,] Altech maybe held liable for x x x any costs, losses or expenses caused by the delays, and subsequently suffered by DLCI.7 DLCI was constrained, in several instances, to undertake the completion and rectification of unfinished and sub-par works to avert further delay. DLCI apprised Altech of these instances, as well as its intention to charge the corresponding costs against Altech's account.8 On September 3, 1999, DLCI sent a letter to Mercantile, demanding "liquidation of the [Performance Bond]" with interest at the stipulated rate of 2o/o per month (First Call).9 DLCI's First Call was reiterated in its subsequent letters dated September 30, 1999,10 October 18, 1999, 11 and March 3, 2000.12 The First Call and the reiterative letters sent by DLCI demanded the liquidation of the Performance Bond, but did not indicate the exact amount claimed.13 On January 20, 2000, Altech advised DLCI that it had relinquished its major assets to its bank: due to financial difficulties.14 Nevertheless, Altech assured DLCI that it "[would] continue to provide [its] whole hearted support in terms of the logistical needs of the [P]roject."15 On February 21, 2000, DLCI terminated its Sub-Contract with Altech effective immediately.

The Termination Letter reads, in part: This termination is due to [Altech's] failure x x x to perform in accordance with the agreed terms of the sub-contract stipulated in the Notice of Award as well as in the documents referred to therein such as, but not limited to, the [Sub-Contract]. Despite numerous written communications from us, [Altech has] failed to proceed with the sub-contract works with due diligence and [has] consistently failed to meet the required quality standards. Furthermore, [Altech has], by [its] own admission, entered into a deed of arrangement with its creditors in which it surrendered its major assets to the latter.

The aforementioned acts are clearly events of default falling under [Paragraph] 17 of the [Sub-Contract] which justify [its] immediate termination x x x. For purposes of record, we will conduct an assessment and evaluation of the sub-contract works on Wednesday[,] [February 23, 2000 before we formally take-over the same. We invite you to send your representatives to witness the assessment.

We reserve the right to claim from [Altech] reimbursement of all costs, as well as compensation for all damages, arising from [Altech's] default, including but not limited to costs of both direct and consequential delays. Likewise, we reserve the right to claim the refund of any payment which, after a review of your accomplishment and records, may be found to have been not due or wrongly paid to [Altech].16 (Emphasis supplied) Subsequently, Mercantile advised DLCI that it had referred its demand to Altech for appropriate action through its Letter17 dated March 13, 2000. On March 28, 2000, Mercantile advised DLCI that since Altech had informed them that negotiations were underway for an amicable settlement, they would hold further evaluation of DLCI's claim in abeyance "to give enough elbow room to [Altech] to settle [the claim] on [its] own."18 After negotiations between DLCI and Altech fell through, DLCI reiterated its demand for liquidation on November 28, 2000.19 Mercantile denied DLCI's claim on February 26, 2001 on the ground that the Performance Bond expired on March 5, 2000.20 Aggrieved, DLCI filed a complaint against Altech and Mercantile before the CIAC (CIAC Complaint) on May 29, 2003,21 seeking to collect the sum of Php31,618,494.81 representing the costs it allegedly incurred to complete the sub-contracted works, with interest and costs of litigation.22 Despite earnest efforts to serve the CIAC Complaint upon Altech, DLCI was unable to do so since Altech was no longer holding office at its registered principal address.

Its corporate officers refused to respond to the CIAC Complaint.23 For its part, Mercantile argued that DLCI failed to file the CIAC Complaint within a "reasonable period of time" as required by the Sub­ Contract.24 In addition, Mercantile challenged the validity of the termination of the Sub-Contract, as well as DLCI's right to claim against the Performance Bond.25 CIAC Ruling In a Decision promulgated on November 7, 2003, the Tribunal dismissed DLCI's Complaint.26 The Tribunal ruled that DLCI did not file the CIAC Complaint within a reasonable period, as required by Section 2, Paragraph 25 of the Sub­ Contract, which states: x x x Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the Sub-Contractor. The demand for arbitration shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably have failed.

In no case, however, shall the demand be made later than the time of final payment, except as otherwise stipulated in the Sub-Contract.27 (Italics omitted) According to the Tribunal, DLCI was unable to justify why it waited for more than three (3) years and three (3) months after termination of the Sub-Contract before filing the CIAC Complaint.28 According to the Tribunal, DLCI's delay amounts to a violation of the Sub-Contract, and triggers the application of laches.29 Moreover, the Tribunal held that Mercantile should be released from its obligations under the Performance Bond pursuant to Article 2080 of the Civil Code,30 since DLCI's delay had deprived it of the opportunity to exercise its right of subrogation against Altech.31 It held: It is not controverted that when [DLCI] filed its claim with CIAC on [May 29, 2003, [Altech] could no longer be found and efforts to serve it with the letter request for arbitration proved futile.

As already held x x x [DLCI] is found guilty of inexcusable delay in filing this claim for arbitration. The consequence of this delay is to deprive [Mercantile] of its right to go after [Altech] on a cross-claim in this suit. This surely deprives [Mercantile] of its right of subrogation against Altech as [i]ndemnitor in the Performance Bond.

x x x [I]n accordance with the provisions of Article 2080 x x x [Mercantile] is "released from its obligation" under the [P]erformance [B]ond.32 The Tribunal also ruled that DLCI's First Call was not a valid demand since it did not indicate the specific amount DLCI sought to recover from Mercantile.33 Consequently, the Tribunal concluded that DLCI's claim is already barred, since the Performance Bond had already expired two (2) years before DLCI finally ascertained the total amount of its claim.34 In addition, the Tribunal found the termination of the Sub-Contract unjustified, as DLCI's own Project Financial Manager John O'Connor admitted that Altech achieved 95% accomplishment as of the month of termination. According to the Tribunal, 95% work accomplishment qualifies as substantial completion under the Uniform General Conditions of Contract for Private Construction prescribed by the Construction Industry Authority of the Philippines (CIAP) in CIAP Document 102.35 In any case, the Tribunal held that DLCI is not entitled to reimbursement for costs it had incurred in order to complete the Project, since its claims consist of expenses incurred after the unilateral termination of the Sub-Contract; it emphasized that the term "cost to complete"

assumes a definite meaning in the const1uction industry, and relates to "the right of the owner (or in this case, the main contractor) to collect damages against the contractor (in this case, the sub-contractor) for the latter's failure to complete the work as stipulated, prompting the former to take-over the project and complete the work by administration or by a different contractor."36 Aggrieved, DLCI filed a petition for review before the CA, insisting on its right to claim against the Performance Bond.

CA Ruling The CA granted DLCI's petition for review through the Assailed Decision, the dispositive portion of which reads:

WHEREFORE , the instant petition is GRANTED. The [CIAC Decision] is REVERSED and SET ASIDE. [Altech] and [Mercantile] are jointly and solidarily liable to pay [DLCI] the amount of Php31,618,494.81 representing the costs incurred by [DLCI] in completing the project and an interest at the rate of 2% per month on the said amount due from September 3, 1999 until the amount of Php31,618,494.81 is fully paid. Furthermore, a 12% interest per annum shall be imposed on the award upon the finality of this Decision until the payment thereof.37 (Emphasis supplied; emphasis in the original omitted) The CA observed that negotiations between and among DLCI, Altech and Mercantile continued after the termination of the Sub-Contract, and that DLCI served its final written demand38 upon Altech and Mercantile on January 20, 2003. A meeting between DLCI and Mercantile's representatives followed on .January 27, 2003, where said parties mutually agreed that attempts to arrive at an amicable settlement have failed.39 Considering the foregoing, the CA ruled that the filing of the CIAC Complaint four (4) months later, or on May 29, 2003, was done within a reasonable time.40 The CA further held that Mercantile cannot invoke laches to evade liability in this case since the CIAC Complaint was brought within the prescriptive period of ten (10) years for filing an action upon a written contract (i.e., the Performance Bond),41 inasmuch as DLCI's right of action only arose on January 27, 2003, when negotiations between the parties ceased. Ultimately, the CA found Mercantile liable under the Performance Bond. Citing Article 2047 of the Civil Code governing suretyship, it held: By executing the [P]erformance [B]ond, Mercantile, as surety, guaranteed the performance and completion by Altech of its sub­ contracted works, and in case of Altech's failure to complete the [P]roject according to the terms of the Sub-Contract x x x, Mercantile's liability, as surety, sets in. A careful review of the record[s] of the case revealed that Altech has reneged on its undertaking under the Sub-Contract before DLCI asked Mercantile for the liquidation of the [P]erformance [B]ond on September 3, 1999. On various dates, DLCI sent letters to Altech concerning the latter's continued poor performance and delays which seriously affected the progress of DLCI' s programmed work. DLCI mentioned that it may have no other alternative but to seek recourse through the terms of the Sub-Contract and that repair works, as well as, associated costs as a result of damage to other contractors' works due to Altech's delay shall be charged to Altech's account. Apparently, Altech had already been in default even prior to DLCI's call on the [P]erformance [B]ond. By reason of said default, liability attached to Altech and as a consequence, the liability of Mercantile as surety had arisen. By the language of the bond issued by Mercantile, it guaranteed the full and faithful compliance by Altech of its obligations set forth in its Sub-Contract with DLCI. This guarantee made by Mercantile gave DLCI the right to proceed against the former following Altech's default or non-compliance with its obligation.42 (Emphasis supplied) Contrary to the Tribunal's findings, the CA held that DLCI's First Call was valid despite its failure to reflect the specific amount claimed. While DLCI's exact monetary claim was still undetermined at the time of the First Call, it was already understood, by the terms of the Performance Bond, that such amount would not exceed Php90,448,941.60.43 In addition, the CA ruled that Mercantile cannot escape its liability under the Performance Bond due to its alleged expiration, considering that it was Mercantile's own inaction which delayed the evaluation of DLCI's claim.44 Further, the CA ruled that the termination of the Sub-Contract was justified by Altech's consistent delay and poor workmanship, regardless of the level of its accomplishment at the time of termination.45 As a result, Mercantile is liable for the costs of completion claimed by DLCI having guaranteed the full and faithful compliance of Altech's obligations under the Sub-Contract.46 Finally, while the CA found Mercantile liable to pay DLCI's claim, it fom1d no basis to hold it liable for costs of litigation and attorney's fees there being no evidence that the former acted in bad faith.47 Mercantile's motion for reconsideration was denied by the CA through the Assailed Resolution, which Mercantile received on January 10, 2013.48 On January 17, 2013, Mercantile filed a Motion for Extension of Time49 praying that it be granted a period of thirty (30) days, or until February 24, 201350 to file its Petition, which the Court granted.51 Mercantile filed the present Petition on February 20, 2013.52 The Court directed DLCI to file its comment on the Petition in its Resolution53 dated March 18, 2013. DLCI filed its Comment54 on July 2, 2013, to which Mercantile filed its Reply.55 The Issue The Court is called upon to determine whether the CA erred when it directed Mercantile to pay DLCI the sum of Php31,618,494.81 on the basis of the Performance Bond, with stipulated interest at the rate of 2% per month. The Court's Ruling The Petition is denied for lack of merit. The Assailed Decision and Resolution are affirmed, with modification. The CIAC Complaint was timely filed. Foremost, Mercantile insists that the CIAC Complaint should have been dismissed outright since DLCI failed to file it within a reasonable time. A plain reading of Section 2, Paragraph 25 of the Sub-Contract belies this claim. Section 2, Paragraph 25 of the Sub-Contract requires that any demand for arbitration between and among the parties shall be made within a reasonable time after the dispute has arisen and attempts to settle amicably have failed.56 Mercantile does not dispute that all efforts to arrive at an amicable settlement proved futile on January 27, 2003,57 following its refusal to heed DLCI's final demand for payment. Verily, the filing of the CIAC Complaint four (4) months later, that is, on May 29, 2003, was done within a reasonable time from the reckoning date set by Section 2, Paragraph 25 of the Sub­ Contract. DLCJ's demand for liquidation through the First Call was valid. It is a well-established rule that a contract stands as the law between the parties for as long as it is not contrary to law, morals, good customs, public order, or public policy.58 Hence, to determine the validity of DLCI's demand for liquidation, reference to the conditions of the Performance Bond is proper. On the conditions for recovery, the Performance Bond states: [T]his bond is conditioned x x x upon the OBLIGEE's [DLCI's] first demand, the SURETY [(Mercantile)] shall immediately indemnify [DLCI] notwithstanding any dispute to the effect that the principal has fulfilled its contractual obligation, the amount demanded; PROVIDED however, that the liability of [Mercantile] under this bond shall in no case exceed the x x x sum [of Php90,448,941.60. [Mercantile] further agrees to pay [DLCI] interest at the rate of 2% per month on the amount due from the date of rece[i]pt by [Mercantile] of [DLCI's] first demand letter up to the date of actual payment.59 (Emphasis supplied; italics omitted) By these terms, Mercantile obligated itself to pay DLCI immediately upon demand, notwithstanding any dispute as to the fulfillment of Altech's obligations under the Sub-Contract. The Performance Bond thus stands as a contract of surety contemplated under Article 2047 of the Civil Code which states: ART. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book60 shall be observed. In such case the contract is called a suretyship. (Emphasis supplied) Through a contract of suretyship, one party called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of another party, called the obligee.61 As a result, the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching upon the obligation of the latter, and their liabilities are interwoven as to be inseparable.62 While the contract of surety stands secondary to the principal obligation, the surety's liability is direct, primary and absolute, albeit limited to the amount for which the contract of surety is issued.63 The surety's liability attaches the moment a demand for payment is made by the creditor. The Court's ruling in Trade and Investment Development Corporation of the Philippines v. Asia Paces Corporation64 lends guidance: x x x [S]ince the surety is a solidary debtor, it is not necessary that the original debtor first failed to pay before the surety could be made liable; it is enough that a demand for payment is made by the creditor for the surety's liability to attach. Article 1216 of the Civil Code provides that: Article 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.65 (Emphasis supplied) While the Performance Bond in this case is "conditioned" upon DLCI's first demand, a close reading of its terms unequivocally indicates that Mercantile's liability thereunder consists of a pure obligation since such liability attaches immediately upon demand, and is neither dependent upon any future or uncertain event, nor a past event unknown to the parties.66 Thus, the Performance Bond is one that is callable on demand, wherein mere demand triggers Mercantile's obligation (as surety) to indemnify DLCI (the obligee) the amount for which said bond was issued, that is, Php90,448,941.60.67 Accordingly, the requirement of "first demand" in this case should be understood in light of Article 1169,68 wherein the obligee is deemed to be in delay upon judicial or extra-judicial demand. Clearly, Mercantile's liability became due upon its receipt of the First Call. In this respect, DLCI's alleged failure to state the value of its claim is of no moment. As astutely observed by the CA: x x x [The Tribunal] makes much out of DLCI's failure to state the specific amount that it is claiming. It must be emphasized that at the time of the call on the bond, Mercantile's obligation guaranteeing project completion already arose and it is understood that the exact amount, while still undetermined, shall not exceed the amount of the bond [Php90,448,941.60.69 The Tribunal appears to have overlooked the fact that the First Call demanded for the liquidation of the Performance Bond, that is, the payment of the entire amount for which it was issued. Payments made in response to DLCI's demand for liquidation would have then been subject to subsequent adjustment following the final settlement of Altech and DLCI's respective accounts. This much is clear from the terms of the Performance Bond.70 The Performance Bond itself provides that Mercantile's liability is not contingent upon the determination of the actual amount for which Altech is liable. In the event of an overpayment, Mercantile can proceed against DLCI based on the principle of unjust enrichment.71 Any amount subject to reimbursement would then assume the nature of a forbearance of money, subject to legal interest. In any case, it bears stressing that Mercantile made no mention of the purported defect in DLCI's First Call at any time prior to the CIAC proceedings. To recall, Mercantile premised its refusal to evaluate DLCI's claim solely on the pending negotiations between DLCI and Altech. Mercantile's objection regarding the validity and completeness of the First Call, which it belatedly raised during the CIAC proceedings, appears to have been an afterthought. For these reasons, the Court finds Mercantile's refusal to evaluate DLCI's claim unjustified. DLCI is entitled to claim the costs it incurred as a consequence of Altech' s delay and poor workmanship. Under the Performance Bond, Altech and Mercantile jointly and severally bound themselves "for the payment of the [Performance] Bond in the event that Altech [should] fail to fully and faithfully undertake and complete its scope of work in strict compliance with the general conditions, plans and specifications, bill of quantities and other documents, which were [furnished to] Altech x x x and which [were] incorporated in said Performance Bond x x x by reference."72 In turn, the general conditions of the Sub-Contract between DLCI and Altech provide: 6. Commencement [and] Completion x x x x (12) Time is an essential feature of the [Sub-Contract]. If [Altech] shall fail to complete the Sub-Contract Works within the time or times required by its obligations hereunder[, Altech] shall indemnify [DLCI] for any costs, losses or expenses caused by such delay, including but not limited to any liquidated damages or penalties for which [DLCI] may become liable under the Main Contract as a result wholly or partly of [Altech's] default x x x. xxxx 17. [Altech's] Default x x x x (f) [If Altech] fails to execute the Sub-Contract works or to perform his other obligations in accordance with the Sub-Contract after being required in writing so to do by [DLCI]; x x x x x x x (3) [DLCI] may in lieu of giving a notice of termination x x x take part only of the Sub-Contract Works out of the hands of [Altech] and may[,] by himself, his servants or agents execute such part and in such event [DLCI] may recover his reasonable costs of so doing from [Altech], or deduct such costs from monies otherwise becoming due to [Altech].73 (Emphasis supplied; italics omitted) The records show that Altech failed to accomplish its work in a timely and satisfactory manner. This is apparent from the correspondences,74 which DLCI submitted as evidence. Mercantile had the full opportunity to contest the truthfulness and veracity of these correspondences and the matters to which they pertain. Instead of doing so, Mercantile merely argued that DLCI's failure to "pray for Liquidated Damages and Cost for Rectification of work" belies its claim of delay and poor workmanship.75 Mercantile's undue reliance on nomenclature does not support its cause. To recall, the CIAC Complaint prayed for the payment of costs incurred to complete the sub-contract works.76 These costs represent those incurred as a consequence of Altech's delay and poor workmanship. Verily, these costs are chargeable against the Performance Bond, inasmuch as the latter stands as a guarantee for Altech's full and faithful compliance with the Sub-Contract. Mercantile further attempts to evade liability on the Performance Bond by drawing a distinction between first, costs incurred before and after termination of the Sub-Contract and also, between costs incurred to complete the project and those which are claimed due to overpayment. However, these distinctions are irrelevant to Mercantile's liability under the Performance Bond. At the risk of being repetitive, Mercantile's Performance Bond guarantees Altech's full and faithful compliance with the Sub-Contract. Accordingly, the scope of the Performance Bond should be understood to cover all costs incurred by DLCI as a result of Altech's failure to comply with its obligations under said agreement. To limit the scope of the Performance Bond only to costs incurred before termination of the Sub­ Contract would be to create an additional condition for recovery which does not appear on the face of the Performance Bond. To stress, Mercantile's liability is conditioned only upon DLCI's first demand, "notwithstanding any dispute to the effect that the principal has fulfilled its contractual obligation [or] the amount demanded."77 It is likewise erroneous for Mercantile to argue that DLCI's claim is a mere request for reimbursement for overpayment which falls outside of the scope of the Performance Bond. Reference to DLCI's breakdown of claims is proper, thus: 1. Total sub-contract amount Aluminum works 361,451,520.00 Glazing works 90,793,188.00