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549 SCRA 12, March 2008


On August 26, 1995, Diesel and UPSI entered into a

Construction Agreement for the interior architectural
construction works of the 14th to the 16th floors of UPSI
Building 3 Meditel/Condotel Project located in Ermita, Manila.
The agreement contained provisions on contract works and
completion, extension of contract period, change or extra work
orders, etc. Under the agreement, Diesel for 12.7M agreed to
take the project payable by progress billing. As stipulated,
Diesel posted through FGU Insurance Corp, a bond in favor of
UPSI.-Under the agreement, the project was to start on Aug 2,
1999 to run for a period of 90 days, or until Nov. 8, 1999. But
they later agreed to move the commencement date to Aug 21
and the completion to Nov 20, 1999. There was also a section
in the agreement obliging Diesel in case of unjustifiable delay,
to pay the owner liquidated damages in the amount equivalent
to 1/5 of 1% of the total project cost for every calendar day of
delay. During the project implementation, change orders and
extensions were sought because of the several delaying
factors such as: 1) manual hauling of the materials from 14th
to 16th floor, 2)delayed supply of marble, 3) various change
orders, 4) delay in the installation of shower assembly.-UPSI
disapproved the extensions putting Diesel in a state of default
and assessed Diesel for liquidated damages, deducting from
his progress payments.-Diesel, through its project manager,
sent a letter of notice to UPSI, on March 16, 2000, stating that
the project has been completed as of that date. UPSI
disregarded such and refused to accept the delivery claiming
that Diesel abandoned the project unfinished, withholding the
10% retention money and refusing to pay the balance of the
contract price.-Diesel filed a complaint before CIAC
(Construction Industry Arbitration Commission), praying that
UPSI becompelled to pay the balance plus damages and
attorney’s fees.
UPSI’s counterclaim denied liability and prayed for the
repayment of expenses it incurred for completing the project
and for a declaration that the deductions it made for liquidated
damages were proper. CIAC rendered a judgment ordering
UPSI to pay Diesel about 4M covering the unpaid balance and
attorney’s fees, dismissing UPSI’s counterclaim. UPSI went to
CA on a petition for review. CA modified the ruling of CIAC,
granting the claim of UPSI for liquidated damages (1.3M)
representing 45 days of delay. CA also ruled that Diesel
complied with the contract and is entitled to 100% payment of
contract price (2.4M unpaid balance). In sum, UPSI is held
liable to Diesel in the amount of 1.1M. Both parties sought
reconsideration. CA denied UPSI but partially granted Diesel’s motion,
reducting the liquidated damages. UPSI was held to be liable to
Diesel for 2.5M. Parties filed separate petitions before the SC.


Whether as an effect of presumption Diesel can be entitled to

full payment of the contract amount.


The CIAC found Diesel not to have incurred delay, thus negating
UPSI’s entitlement to liquidated damages. The CA, on the other
hand, found Diesel to have been in delay for 45 days. In
determining whether or not Diesel was in delay, they
considered the fact that Diesel had the Project period
extended beyond 90-day completion period. Both agreed that
there were factors that gave Diesel the right to an extension
but differed on the matter of length of the extension, and on
the nature of the delay, that is, whether the delay is excusable
or not.