Breach of Contract: DPWH’s Right to Rescind Despite Slippage Thresholds

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The Supreme Court, in ALC Industries, Inc. v. Department of Public Works and Highways (G.R. Nos. 173219-20, August 11, 2010), settled an important question in government construction contracts: can an agency rescind a contract for a contractor’s failure to meet a progress threshold even when the contractor’s negative slippage is below the statutory 15% limit? The Court answered yes, provided the contract itself sets a stricter standard.

The Case

ALC Industries won a contract to build a 105-kilometer section of the Davao-Bukidnon Road. Because of design errors, the parties agreed to reduce the project scope to 46.2 kilometers. Despite this, ALC fell further behind. After several warnings, the DPWH rescinded the contract, citing ALC’s failure to comply with the Reduction in Scope Agreement (RISA) and its continuing breaches resulting in negative slippage.

ALC argued that its negative slippage was only 8.72%, below the 15% threshold under Presidential Decree 1870. The Construction Industry Arbitration Commission (CIAC) computed slippage differently—at 22.06%—but still voided the rescission after adjusting for bad weather. The Court of Appeals, however, upheld the rescission based on other contractual breaches. The Supreme Court affirmed.

The Issue

The central question was whether the DPWH could rescind the contract when the negative slippage did not exceed the 15% threshold set by law. ALC argued that the rescission was based solely on slippage, which was below the threshold.

The Ruling

The Supreme Court ruled that the DPWH’s rescission was valid. The rescission order cited two grounds: ALC’s failure to comply with Clause 10 of the RISA and its continuing acts of breach. The negative slippage was merely evidence of the breach, not the breach itself.

More importantly, the Court held that the 90% progress requirement under Clause 10 of the RISA was a contractual obligation that superseded the statutory threshold. The parties had voluntarily agreed to this stricter standard. ALC’s failure to meet it was a substantial and fundamental breach that defeated the very purpose of the agreement.

The Court also noted that even factoring in bad weather, ALC’s accomplishment fell below the 90% target. The RISA’s timetable was an integral part of the agreement, and ALC’s failure justified termination.

Standby Costs and Waiver

The Court also addressed ALC’s claim for standby costs. It ruled that by entering into the RISA, ALC had waived its claims arising from the initial delays. The RISA was a compromise where both sides gave up claims to continue the project. ALC also created its own problem by mobilizing before the contract was signed.

As for weather delays, the Court noted that while the contract allowed time extensions for exceptionally adverse climatic conditions, it did not provide for recovery of costs. Weather conditions are fortuitous events, and under Article 1174 of the Civil Code, each party bears its own loss.

Practical Takeaways

• Contractual thresholds prevail. A stricter progress requirement in a supplemental agreement supersedes the statutory 15% slippage threshold. Contractors should carefully review all agreed timetables.
• Slippage is evidence, not the cause. A rescission based on breach can stand even if slippage is below the statutory threshold, provided other breaches are proven.
• Waivers are binding. Entering into a compromise agreement may waive prior claims. Contractors should ensure all claims are settled before signing.
• Weather delays do not mean cost recovery. Unless the contract expressly allows it, contractors cannot recover costs for delays caused by weather.
• Document everything. The DPWH’s memorandum listing ALC’s specific failures was crucial. Contractors should keep detailed records of compliance with all contractual obligations.

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