Contract Termination in Construction: When Express Terms and Damages Control

Construction projects rarely fail in a single dramatic moment. More often, they unravel slowly — missed deadlines, substandard work, unpaid billings — until one party decides to walk away. When that happens, the dispute usually turns on two questions: was the termination valid, and who owes whom?

In Riser Airconditioning Services Corporation v. Confield Construction Development Corporation, G.R. No. 143273 (September 20, 2004), the Supreme Court answered both questions by returning to a basic principle: a contract is the law between the parties, and courts will enforce its plain terms.

The project and the dispute

In 1994, ABS-CBN Broadcasting Corporation engaged Confield Construction Development Corporation to install air-conditioning and ventilation systems in its Quezon City facilities. Confield, in turn, sub-contracted the work to Riser Airconditioning Services Corporation for P15,700,000.00, covering the main building and Studios 4 and 5. Additional works for Studios 2, 3, 6 and 7 followed, along with separate air-conditioning projects in Greenbelt, Makati.

The sub-contract ran from August 1994 to June 1995 and expressly stated that time is of the essence. It also gave Confield the right to take over the work — and to claim liquidated damages of P1,570.00 per day — if Riser fell behind schedule or if its work failed to meet approved plans and specifications.

By early 1995, the project was behind schedule. The project manager reported poor workmanship. Confield sent Riser a letter dated April 6, 1995 stating its intention to terminate, and another on June 16, 1995 terminating the sub-contract and giving Riser until the next day to "start on full blast." Riser submitted its seventh billing, claiming about 78% completion, but Confield terminated the contract and took over the work.

The parties then orally agreed that Confield would issue six checks totaling P3,100,000.00, with the understanding that Riser would not deposit them until Confield re-evaluated the accomplished work. Confield honored only P1,000,000.00 and stopped payment on the rest after its re-evaluation showed the work was not commensurate with the settlement amount.

The rulings below

The Regional Trial Court ruled for Riser, ordering Confield to pay the unpaid balance, interest, actual damages, attorney's fees, and exemplary damages. The Court of Appeals reversed, dismissing Riser's complaint and ordering it to refund P2,752,611.73 in overpayments. Riser elevated the case to the Supreme Court.

Termination was valid under the contract

Riser argued that Confield terminated the sub-contract without the prior written notice required by Article V. The Supreme Court disagreed. The two letters — one in April announcing the intention to terminate, and one in June actually terminating the contract and giving Riser a chance to catch up — constituted sufficient notice.

Riser also insisted that the grounds cited did not fall under Article V and that it was never informed of the project schedule. The Court was not persuaded. Under the Civil Code, when the terms of a contract are clear and leave no doubt as to the intention of the parties, the literal meaning of its stipulations controls (Article 1370). Article V plainly allowed Confield to take over the work if, as assessed by Confield, progress was slow or the installations did not conform to approved plans and specifications.

The Court noted that the schedule was fixed in the agreement itself, and that early June 1995 made it obvious Riser would not finish on time. Riser should have taken steps to speed up and correct its work. Its failure to do so justified termination.

The oral settlement did not novate the sub-contract

Riser next argued that the oral settlement agreement replaced the original sub-contract through novation. The Court rejected this. A compromise agreement can be entered into without supplanting existing contracts; its essence is that the parties make reciprocal concessions to avoid or end litigation. Novation is never presumed. For a new agreement to supersede an old one, the parties must expressly agree to abrogate the old contract, and all must consent to the substitution. Here, the arrangement merely ensured payment so Riser could continue the work — it coexisted with the sub-contract rather than replacing it.

On Riser's claim that the settlement amount matched its 78% accomplishment, the Court held this was a factual question. A petition for review under Rule 45 is limited to errors of law, not a re-weighing of evidence.

Why Riser could not recover damages

The Court restated the rule: it is the unilateral act of terminating a contract without legal justification that makes a party liable for damages. Because Confield's termination complied with the sub-contract, it did not breach the agreement. It was Riser, by failing to complete the work on schedule and according to specifications, that gave cause for termination. Being the party at fault, Riser could not claim damages. The petition was denied and the Court of Appeals decision affirmed in full.

Practical takeaways

• Read termination clauses carefully. If a contract allows termination based on the other party's assessment of delay or work quality, courts will generally enforce that language as written.
• Notice can be satisfied by a series of communications. A letter of intent followed by a formal termination letter, coupled with an opportunity to catch up, may be enough even without a single formal notice.
• A compromise agreement does not automatically replace the original contract. Novation must be express and clearly intended; parties should state in writing if they mean to abrogate prior agreements.
• Document work accomplishment. Where payment is based on actual quantities accomplished, contemporaneous records and independent evaluations matter — and factual findings of the Court of Appeals are generally binding on review.
• Damages follow fault. A party that validly terminates under the contract is not liable for damages; the party whose breach prompted termination cannot recover them.

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