Werr Corp. International v Highlands Prime; G.R. No. 187543; February 8, 2017; Jardeleza, J.

FACTS:

HPI and Werr were engaged in property development and construction. HPI chose Werr as the contractor. The contract indicated that the project be finished in 210 days. HPI paid its 20% downpayment and granted several extensions. However, the project was not completed within the last extension so HPI terminated the contract. Werr demanded for the balance of the contract price. Werr averred that the computation for liquidated damages be from the rules laid out on CIAP (industry practice) rather than the stipulation in the Agreement.

ISSUE:

Whether or not the computation for the liquidated damages should only be up to the substantial completion of the project as stated in the industry practice and not the stipulation in the agreement.

RULING:

No.

At the outset, we do not agree with the CA that industry practice be rejected because liquidated damages is provided in the Agreement, autonomy of contracts prevails, and industry practice is completely set aside. Contracting parties are free to stipulate as to the terms and conditions of the contract for as long as they are not contrary to law, morals, good customs, public order or public policy. Corollary to this rule is that laws are deemed written in every contract. In previous rulings, SC held that when the project was in its 95% completion, the contractor is excused from liquidated damages.

As expressly stated under Articles 1234 and 1376, and in jurisprudence, the construction industry's prevailing practice may supplement any ambiguities or omissions in the stipulations of the contract. In this case, clause 41.5 of the Agreement is undoubtedly a valid stipulation. However, while clause 41.5 requires payment of liquidated damages if there is delay, it is silent as to the period until when liquidated damages shall run. The Agreement does not state that liquidated damages is due until termination of the project; neither does it completely reject that it is only due until substantial completion of the project. This mission in the Agreement may be supplemented by the provisions of the Civil Code, industry practice, and the CIAP Document No. 102. Hence, the industry practice that substantial compliance excuses the contractor from payment of liquidated damages applies to the Agreement.

But, Werr cannot benefit from this because they failed to show that they were at 95% completion rate. That the effects of substantial completion will only apply when actual substantial completion is reached is apparent when we consider the reason behind the rules on substantial completion of the project. The rules are intended to balance the allocation and burden of costs between the contractor and the project owner so that the contractor still achieves a return for its completed work, and the project owner will not incur further costs. To compute the period of delay when substantial compliance is not yet achieved but merely on the assumption that it will eventually be achieved would result in an iniquitous situation where the project owner will bear the risks and additional costs for the period excused from liquidated damages.