Contract Assignments, Prior Rights vs. Garnishments in Construction Disputes

Fort Bonifacio Development Corporation v. Manuel N. Domingo (G.R. No. 180765, February 27, 2009) settles an important question for construction projects: when a contractor assigns its receivables to a creditor, and other creditors later garnish the same receivables, who has the better right? The case also clarifies which tribunal—the regular courts or the Construction Industry Arbitration Commission (CIAC)—has jurisdiction over such disputes.

The Facts

Fort Bonifacio Development Corporation hired LMM Construction for work on the Bonifacio Ridge Condominium. The contract allowed Fort Bonifacio to withhold 5% retention money for one year after project completion. Due to defects and delays, Fort Bonifacio terminated the contract and hired a replacement contractor.

Meanwhile, LMM Construction assigned its receivables from Fort Bonifacio to Manuel Domingo to settle a debt of P804,068.21. The assignment was made on February 28, 2005, and Fort Bonifacio was notified in April 2005.

However, Fort Bonifacio had already received a garnishment notice from the CIAC in July 2004 (from Asia-Con Builders), followed by another from the NLRC in June 2005, and a third from the RTC of Makati in January 2006. Fort Bonifacio paid the garnishing creditors and later told Domingo nothing remained of the retention money.

Domingo sued Fort Bonifacio and LMM Construction in the RTC of Pasay City. Fort Bonifacio moved to dismiss, arguing that the dispute should go to the CIAC because Domingo, as assignee, stepped into LMM's shoes and was bound by the contract's arbitration clause.

The Issue

The sole issue was whether the RTC had jurisdiction over Domingo's complaint, or whether the CIAC should hear the case.

The Ruling

The Supreme Court denied Fort Bonifacio's petition and affirmed the RTC's jurisdiction. The Court applied the elementary rule that jurisdiction is determined by the allegations in the complaint, not the defenses raised.

Examining Domingo's complaint, the Court found his cause of action arose not from a violation of the Trade Contract, but from the non-payment of LMM's monetary obligation to him—a right that pre-existed and was separate from LMM's right to payment under the contract. Domingo was not disputing the existence of LMM's receivables; he was asserting priority over other creditors.

The Court rejected Fort Bonifacio's reliance on Article 1311 of the Civil Code on the relativity of contracts. While Domingo, as assignee, stepped into LMM's shoes, the right to the receivables under the Trade Contract was not even in dispute. What Domingo questioned was Fort Bonifacio's arbitrary preference of other creditors.

CIAC Jurisdiction Is Limited

Under Executive Order No. 1008, the CIAC has original and exclusive jurisdiction over disputes arising from or connected with construction contracts, provided the parties agree to submit to voluntary arbitration. However, the Court noted that while the CIAC's jurisdiction is not limited to the enumerated examples, other issues it may hear must be of the same kind or species, applying the principle of ejusdem generis.

Domingo's claim was not construction-related at all. It involved the application of laws on obligations, contracts of assignment, and preference of credits—matters better suited for a regular trial court after full trial, not an arbitration body devoted to construction disputes.

Practical Takeaways

• Priority between assignee and garnishing creditor: A prior assignment of receivables, properly notified to the debtor, generally gives the assignee a better right than subsequent garnishing creditors. The debtor who pays garnishing creditors despite notice of a prior assignment may be held liable to the assignee.
• Jurisdiction follows the complaint: The regular courts, not the CIAC, have jurisdiction over money claims of third persons against a contractor or developer where the claim does not arise from the construction contract itself.
• Not all disputes are construction disputes: Even if a dispute involves parties to a construction contract, if the claim concerns assignment, preference of credits, or other non-construction matters, the CIAC may not have jurisdiction.
• Notice of assignment is critical: Contractors and developers should carefully track assignments and garnishments. Paying a later garnishing creditor while ignoring an earlier-notified assignee creates liability.
• Timing matters: The order of notice—when the assignment was communicated versus when garnishment was served—can determine who gets paid first.

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