Ka Kuen Chua v. Colorite Marketing Co.

G.R. No. 193969-193970 July 5, 2017 Reyes, J.

Topic: Interpretation of Contracts Created by: mateo
Petitioner Respondent
KA KUEN CHUA, doing business under the name COLORITE MARKETING CORPORATION
and style KA KUEN CHUA ARCHITECTURAL
Recit Ready Summary

Colorite Marketing Corporation (Colorite) and Ka Kuen Chua Architectural (KKCA) signed a construction contract where
KKCA will build a 4 storey residential/commercial building for Colorite on a parcel of land in Makati City. Colorite engaged the
services of WE Construction Company (WCC) to undertake excavation work. However, on January 17, 2004, the excavation
resulted in erosion, which caused damage to the adjacent property owned by the Hontiveros family.

The Hontiveros family filed a complaint and a Hold Order was issued. All excavation activities were stopped and restoration
of the eroded portion was ordered. This resulted in the delay of the project because the family refused to sign a waiver to lift
the Hold Order until their property was restored.

After 878 days of delay, Colorite demanded that KKCA pay the damages pursuant to the contract. KKCA refused because the
completion period was suspended because of the hold order. Colorite also said that KKCA is liable for liquidated damages
for the amount of P8,780,000 plus P10,000 per additional day of delay until the project is completed.

KKCA said that his liability does not extend to excavation works done by the sub-contractor (WCC) and that the design fees
were not paid.

The SC ruled that the parties expressly agreed that all excavation works are included in KKCA’s scope of work, as the
general contractor of the project. This is shown in Paragraph 21 of Addendum #01. WCC was placed under KKCA’s
supervision and control. Article 1370: “If the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.”

The courthat tt also said he liquidated damages was not meant to penalize the contractor for the delay but to compensate the
owner for the loss it may suffer. It does not operate to remove the stipulation’s character as a penal clause. Neither does it
require that the loss suffered be proved.

Applying the stipulated rate shall amount to P43,800,000 which even surpasses the total contract price. Under Article
1229 of the Civil Code: “even if there has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.”

Facts of the Case

1. Colorite Marketing Corporation (Colorite) and Ka Kuen Chua Architectural (KKCA) signed a construction contract
where KKCA will build a 4 storey residential/commercial building for Colorite on a parcel of land in Makati City.
2. The parties agreed to a full contract price of P33 million subject to the following stipulations:

a. The project will commence in seven days from the time KKCA received a notice to proceed from Colorite
and will be completed within 365 days reckoned from the seventh day after the release of the down
payment.
b. In the event the project is not completed on time, the amount of P10,000 for each calendar day of delay
shall be paid by KKCA to Colorite.
c. Only a maximum of 20% slippage, or 73 calendar days of delay is allowed, and Colorite has the right to
terminate the contract if the delay exceeded the maximum number of days allowed
d. Colorite has the right to take over and complete the construction of the project and all costs incurred
thereby will be deducted from the amount due to KKCA.
3. Colorite issued a Notice to Proceed and paid the P6.6 million downpayment (20% of contract price)
4. Colorite engaged the services of WE Construction Company (WCC) to undertake excavation work. However, on
January 17, 2004, the excavation resulted in erosion, which caused damage to the adjacent property owned by the
Hontiveros family.
5. The Hontiveros family filed a complaint and a Hold Order was issued directing KKCA to stop immediately all its
excavation activities in the premises, and to restore the eroded portion of the adjacent property. This incident
resulted in the delay of the project because the Hontiveros family refused to sign a waiver that was required for the
lifting of the Hold Order unless their property was restored.
 6. After 878 days of delay, Colorite demanded from KKCA to pay damages pursuant to the contract. KKCA refused
contending that (a) the agreed completion period was suspended because of the hold order and (b) Colorite failed to
pay the costs of soil protection as well as 70% of the restoration cost of the Hontiveros property, which allegedly
formed part of the agreement.
7. Colorite filed a claim with the Construction Industry Arbitration Committee (CIAC) saying that KKCA is liable for
liquidated damages for the amount of P8,780,000 plus P10,000 per additional day of delay until the project is
completed.
8. KKCA said that his liability does not extend to excavation works done by the sub-contractor (WCC) and that the
design fees were not paid.

Ruling of CIAC

- Colorite is entitled to 50% of the liquidated damages because it was equally responsible for the delay, while KCCA is
entitled to soil protection works fee, design fee, 50% of the restoration costs, and claim for recovery of the costs
maintaining the project site, and damages.

Ruling of CA

- Removed the price of construction materials and damages for KKCA.

- Both parties were at fault, but not in bad faith.

Motions for reconsideration denied, case was brought to SC.

Issues Ruling
1. W/N KKCA is liable for restoration cost of the erosion Yes. It is
expressly stated
in the contract.

2. W/N KKCA is liable for liquidated damages for the amount of P8,780,000 plus P10,000 per No. It is
additional day of delay until the project is completed. iniquitous or
unconscionable

Rationale/Analysis/Legal Basis
1. KKCA is at fault for the erosion which damages Hontiveros property.
- The parties expressly agreed that all excavation works are included in KKCA’s scope of work, as the general
contractor of the project. This is shown in Paragraph 21 of Addendum #01. WCC was placed under KKCA’s
supervision and control.
- KKCA cannot deny its contractual obligation to ensure that the excavation works were properly done.
- While KKCA imputes negligence on the part of WCC, they fail to specifically mention how.
- KKCA argues that there were already excavation works before contract was signed. This is untenable because the
contract was signed freely without duress.
3. Soil protection is within the contractor’s scope of work; hence, deemed included in the contract price
- KKCA claims it is entitled to reimbursement for the cost spent for soil protection. They cannot be reimbursed
because it was stipulated in their contract under Addendum #01 which placed excavation and soil protection
within the scope of its undertakings. The consent was not vitiated.
- The interpretation of contracts Is clear

Article 1370: “If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.”

4. There was no agreement that Colorite has to share in the restoration of the Hontiveros property.
- There was no evidence to sufficiently prove that an agreement to share in the restoration cost of the Hontiveros
property was perfected between the parties.

5. KKCA is under obligation to secure the quitclaim of the Hontiveros family and the lifting of the Hold Order
issued by the City Government of Makati.
- The obligation is deemed written under Article XIII of the construction contract, which states that “the owner shall be
held free and harmless from any liability arising from claims of third parties arising from the construction such as but
not limited to wages, pay, compensation for injury, or death to laborers, SSS premiums, adjoining property
settlement, etc. all of which shall be for the account of the contractor.”
- Article 1315: the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the
 consequences which, according to their nature, may be in keeping with good faith, usage and law.

6. Colorite is equally at fault for the protracted delay of the project

- Their inaction cannot be justified and they acted in bad faith, contributing to the unnecessary delay.

7. On claims of Damages
- Court prays for damages alleging that the subject property could have been rented for P460,189 per month.
However there is no showing that an actual lease agreement exists, so the loss of rentals is factual and not
speculative.
- The liquidated damages was not meant to penalize the contractor for the delay but to compensate the owner for
the loss it may suffer. It does not operate to remove the stipulation’s character as a penal clause. Neither
does it require that the loss suffered be proved.
- Applying the stipulated rate shall amount to P43,800,000 which even surpasses the total contract price. Under
Article 1229 of the Civil Code: “even if there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.”

8. KKCA is ordered to finish the project. The parties are to share in the increase in the construction cost over
and above the contract price.
- Parties should comply with their contractual obligations.
- One injured by a breach of contract, or by wrongful or negligent act or omission shall have a fair and just
compensation commensurate to the loss sustained as a consequence of defendant’s act.
- It would be unjust to rule that KKCA should shoulder the entire amount. It will tantamount to unjust enrichment.
- The court deems that a sharing of the increase in the construction cost at a ratio of 40% for Colorite and 60% for
KKCA is equitable.
- Maintenance cost up to April 30, 2006 shall be for the sole account of KKCA
Disposition
WHEREFORE, the Decision and Resolution of the Court of Appeals, dated July 28, 2009 and October 4, 2010,
respectively in CA-GR SP Nos. 103892 and 103899 are AFFIRMED with MODIFICATIONS.
Separate Opinions
None.