Breach and Balance: Equitable Relief in Construction Contract Disputes

The Supreme Court recently clarified how monetary awards should be handled when both parties to a construction contract are guilty of breach. In Tondo Medical Center v. Rolando Rante (G.R. No. 230645, July 1, 2019), the Court ruled that even when a contractor's default justifies termination, the project owner cannot keep everything if it also failed its own obligations. The decision underscores the principle of equitable mitigation of damages under Article 2215 of the Civil Code.

The Dispute

Tondo Medical Center (TMC) engaged Jaderock Builders to renovate its OB-Gyne wards and improve other facilities. The project, funded by the Department of Health, had a contract price of about P11.8 million and a 240-day completion period. Jaderock posted a performance bond of P1.18 million.

Delays plagued the project. TMC granted extensions, but the work remained unfinished. Eventually, TMC terminated the contract, declared the performance bond forfeited, and blacklisted the contractor. Jaderock contested the termination and filed for arbitration with the Construction Industry Arbitration Commission (CIAC).

The CIAC's Finding: Mutual Breach

The CIAC upheld TMC's right to terminate the contract, noting that Jaderock had accomplished only about 74% of the project—a negative slippage exceeding 10%, a valid ground for termination under the implementing rules of Republic Act No. 9184 (Government Procurement Reform Act).

However, the CIAC also found that TMC was not faultless. TMC had breached the contract by:

• Failing to deliver all project sites. Only two of five areas were turned over, delaying the start of construction.
• Inaction on variation orders. TMC had an obligation to approve or disapprove additional work proposals within 30 days but did neither, even as work proceeded.
• Failing to address illegal settlers on the site, which hampered the contractor's progress.

Because both parties breached their obligations, the CIAC awarded Jaderock a portion of the retention fee, the full performance bond, 80% of the cost of completed variation orders, and other amounts. TMC appealed, arguing that a contractor in default should not receive such awards.

The Supreme Court's Ruling

The Supreme Court affirmed the CIAC's approach, with one modification: it deleted the award of attorney's fees.

The Court explained that while the CIAC's factual findings are generally final and binding, monetary awards can be reviewed. In assessing damages, the CIAC properly applied Article 2215 of the Civil Code, which allows courts to equitably mitigate damages when the plaintiff itself contravened the contract. The list in Article 2215 is not exclusive, and it applies even when both parties are at fault.

Key points from the ruling:

• Retention fee. The purpose of the 10% retention is to cover defective work. Since the cost of defective tiling (P462,101.89) was deducted from the total retained amount (P495,229.53), the balance of P33,127.64 had to be released to prevent unjust enrichment.
• Performance bond. Forfeiture was improper because the contractor's failure to complete the project was largely due to TMC's own breaches—non-delivery of all sites and inaction on variation orders.
• Variation orders. Since the contractor had completed 80% of the additional work with TMC's knowledge and without objection, TMC had to pay 80% of the cost (P1,152,795.26).
• Unreturned tools. The contractor was entitled to the return of its tools as a consequence of termination, but not as compensatory damages, since the value was not proven with reasonable certainty.
• Attorney's fees. These were deleted. Under Article 1192 of the Civil Code, when both parties breach and the first infractor cannot be determined, each party bears its own damages.

Practical Takeaways

• Termination is not a windfall. A project owner who validly terminates a contract may still have to pay for work actually performed and return securities if the owner also breached its obligations.
• Document everything. The contractor's failure to send written notices for time extensions was treated as a waiver, but it did not erase the owner's own breaches. Keep clear records of all communications.
• Act on variation orders. Owners who sit on additional work proposals risk being deemed to have approved them, especially if the work proceeds without objection.
• Know the arbitration framework. CIAC awards are final on factual matters; appeals are limited largely to questions of law. Technical findings are given great weight.
• Equity cuts both ways. Courts will mitigate damages to prevent unjust enrichment, not to punish either party.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.