CONSTRUCTION

CONTRACT
MANAGEMENT

2022
Construction
Contract
Management
A primer on avoiding or managing
disputes in construction projects in
the Philippines
DISCLAIMER

The material in this publication has been prepared by Quisumbing Torres to provide general
information only. It is not offered as advice on any particular matter, whether it be legal, procedural,
commercial or otherwise, and should not be taken as such. For this reason, the information contained
in this publication should not form the basis of any decision as to a particular course of action; neither
should it be relied upon as legal advice nor regarded as a substitute for detailed advice in individual
cases. The authors expressly disclaim all liability to any person in respect of consequences of
anything done or omitted to be done, wholly or partly in reliance upon the whole or any part of the
contents of this publication.

This publication is copyrighted. No part of this publication may be reproduced or transmitted by any
process or means without the prior permission of Quisumbing Torres.

The law is stated as of August 2022.

 Construction Contract Management

Table of Contents
Introduction ...................................................................................................................... 1
I. Construction in the Philippines: The legal framework ......................................... 2
1. Construction defined..................................................................................... 2
2. Construction contracts.................................................................................. 2
3. Resolution of construction disputes ............................................................... 4
II. Construction contracts: Essential features and common issues ........................ 6
1. Cost/price..................................................................................................... 6
2. Scope of work .............................................................................................. 7
3. Time – completion and delays ...................................................................... 7
4. Changes ...................................................................................................... 8
5. Defects ...................................................................................................... 10
6. Resolution of disputes ................................................................................ 11
7. Frequent issues in Philippine construction projects...................................... 11
III. Avoiding construction disputes: Best practices and considerations ............... 14
1. Choosing the right contractual form/framework............................................ 14
2. Contract drafting......................................................................................... 15
3. Adopting an effective and enforceable dispute resolution process................ 15
4. Documentation and strict implementation .................................................... 18

Quisumbing Torres i
 Construction Contract Management

Introduction
Construction in the Philippines
According to a recent World Bank report, the Philippine economy is projected to recover from the
effects of the COVID-19 pandemic and to grow at an annual rate of 5.9% through 2022.

There is an expected surge in construction projects in the next few years , both in the public and
private sectors, which will result in a corresponding increase in investor interest for such projects. As
the number of construction projects grows, the risk of disputes arising from these projects likewise
increases.

In anticipation of these potential disputes, it is useful for all stakeholders in a construction project (e.g.,
the owner/employer, the engineer/architect, the contractor/subcontractor and the project managers) to
be aware of and be familiar with the Philippine legal framework governing construction, as well as the
common issues that arise in connection with construction projects and some of the best practices to
manage, if not avoid altogether, such disputes. The Philippines has a unique legal framework for
construction disputes, which should be taken into account when drafting contracts and for purposes of
ensuring proper resolution of disputes.

Objective of this primer

While it is hoped that this will be helpful to the various stakeholders involved in construction projects in
the Philippines, this primer is only a high-level presentation of the various features of Philippine
construction law and of common issues encountered in construction projects, intended to assist
parties in managing and avoiding disputes in construction projects in the Philippines. Given the broad
range of issues that may arise from the negotiation and implementation of construction projects, this
primer is not intended as a substitute for seeking legal advice.

Quisumbing Torres 1
 I. Construction in the Philippines: The legal framework
1. Construction defined
"Construction" refers to all on-site works on buildings or the alteration of structures, from land
clearance through completion, including excavation, erection and assembly, and installation of
components and equipment. 1

2. Construction contracts
The performance of construction activities in the Philippines by one party in favor of another party is
generally done pursuant to a contract. Parties to a construction contract are generally free to establish
such stipulations, clauses, terms and conditions as they may deem fit or convenient for their particular
project. The stipulations, clauses, terms and conditions, however, should not be contrary to law,
morals, good customs, public order or public policy.2

A construction contract is considered a contract for "a piece of work." 3 Article 1713 of the Philippine
Civil Code states that "[b]y the contract for a piece of work, the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain price or compensation." The contractor in
a contract for a piece of work may either employ only their labor or skill, or also furnish the material.

Unless the parties provide for specific and contrary stipulations, the following rules, applicable to a
contract for a piece of work, may apply by default to a construction contract:

Aspect of construction Default rule

Materials If the contractor agrees to produce the work from materials furnished by
him, he shall deliver the thing produced to the employer and transfer
dominion over the thing. 4

Standard of care The contractor shall execute the work in such a manner that it has the
qualities agreed upon and has no defects that destroy or lessen its
value or fitness for its ordinary or stipulated use. Should the work be not
of such quality, the employer may require that the contractor remove
the defect or execute another work. If the contractor fails or refuses to
comply with this obligation, the employer may have the defect removed
or another work executed, at the contractor's cost. 5

Risk of loss If the contractor bound himself to furnish the material, he shall suffer the
loss if the work should be destroyed before its delivery, save when
there has been delay in receiving it. 6

A contractor who has undertaken to put only his work or skill cannot
claim any compensation if the work should be destroyed before its
delivery, unless there has been delay in receiving it, or if the destruction
was caused by the poor quality of the material, provided this fact was

1 Fort Bonifacio Development Corporation v. Domingo, G.R. No. 180765, 27 February 2009, citing Cyril M. Harris,
The Dictionary of Architecture and Construction.
2 Civil Code, Article 1306.
3 Id., Article 1713.
4 Id., Article 1714.
5
Id., Article 1715.
6 Id., Article 1717.

2 Quisumbing Torres
 Construction Contract Management

communicated in due time to the owner. If the material is lost through a

fortuitous event, the contract is extinguished.7

Payment The price or compensation shall be paid at the time and place of
delivery of the work, unless there is a stipulation to the contrary. If the
work is to be delivered partially, the price or compensation for each part
having been fixed, the sum shall be paid at the time and place of
delivery, in the absence of stipulation.8

Time of completion and If in the execution of the work an act of the employer is required, and he
delay incurs a delay or fails to perform the act, the contractor is entitled to a
reasonable compensation. The amount of the compensation is
computed, on the one hand, by the duration of the delay and the
amount of the compensation stipulated, and on the other hand by what
the contractor has saved in expenses by reason of the delay or is able
to earn by a different employment of his time and industry. 9

If the work cannot be completed on account of a defect in the material

furnished by the employer, or because of orders from the employer,
without any fault on the part of the contractor, the latter has a right to an
equitable part of the compensation proportional to the work done, and
reimbursement for proper expenses made.10

Acceptance and defects Acceptance of the work by the employer relieves the contractor of
liability liability for any defect in the work, unless (1) the defect is hidden and
the employer is not, by his special knowledge, expected to recognize
the same; or (2) the employer expressly reserves his rights against the
contractor by reason of the defect. 11
The engineer or architect who drew up the plans and specifications for
a building is liable for damages if within 15 years from the completion of
the structure, the same should collapse by reason of a defect in those
plans and specifications, or due to defects in the ground. The contractor
is likewise responsible for the damages if the edifice falls, within the
same period, on account of defects in the construction or the use of
materials of inferior quality furnished by him, or due to any violation of
the terms of the contract. If the engineer or architect supervises the
construction, he shall be solidarily liable with the contractor. Acceptance
of the building, after completion, does not imply waiver of any of the
causes of action by reason of such defects. The action must be brought
within 10 years following the collapse of the building.12

A clause in a construction contract that waives or limits the contractor's

liability for any defect in the work is void if the contractor acted
fraudulently.

Changes A contractor who undertakes to build a structure or any other work for a
stipulated price, in conformity with plans and specifications agreed upon

7 Id., Article 1718.

8 Id., Article 1720.
9 Id., Article 1721.
10 Id., Article 1722.
11
Id., Article 1719.
12 Id., Article 1723.

Quisumbing Torres 3
 with the land owner, can neither withdraw from the contract nor demand
an increase in the price on account of the higher cost of labor or
materials, save when there has been a change in the plans and
specifications, provided (1) such change has been authorized by the
proprietor in writing and (2) the additional price to be paid to the
contractor has been determined in writing by both parties.13

Termination The owner may withdraw at will from the construction of the work,
although it may have been commenced, indemnifying the contractor for
all the latter's expenses, work, the usefulness that the owner may obtain
therefrom, and damages. 14

Liability for The contractor is responsible for the work done by persons employed
subcontractor by him. He is liable for all the claims of laborers and others employed by
him, as well as of third persons, for death or physical injuries during the
construction. 15

Dispute resolution
If it is agreed that the work shall be accomplished to the satisfaction of
the proprietor, it is understood that in case of disagreement, the
question shall be subject to expert judgment. If the work is subject to
the approval of a third person, his decision shall be final, except in the
case of fraud or manifest error. 16

The Construction Industry Authority of the Philippines (CIAP), an attached agency of the Department
of Trade and Industry that promotes and regulates the growth and development of the construction
industry, established the "Uniform General Conditions of Contract for Private Construction" or the
CIAP Document 102. 17 CIAP Document 102 is a template contract intended to reflect prevailing best
practices in the construction industry, which the parties can adopt. However, CIAP Document 102 was
last revised in 2004 and needs to be updated.

For government construction projects, the legal framework is generally governed by Republic Act No.
9184, or the Government Procurement Reform Act (GPRA). The Philippine government also has
standard template conditions of contract (also known as the General Conditions of Contract and the
Special Conditions of Contract), which are largely based on the GPRA's provisions and govern the
rights and obligations of the parties in respect of the implementation of the project.

On the other hand, the Philippine government may agree to adopt international forms of contract for
projects funded through Official Development Assistance (ODA) loans. These forms include those
prepared by the World Bank, the Japan International Cooperation Agency and the Asian Development
Bank.

3. Resolution of construction disputes

3.1 Arbitration before the Construction Industry Arbitration Commission
Executive Order No. 1008 established the Construction Industry Arbitration Commission (CIAC). The
CIAC has original and exclusive jurisdiction over construction disputes, which shall "include those

13 Id., Article 1724.

14 Id., Article 1725.
15 Id., Articles 1727 to 1728.
16 Id., Article 1730.
17
Primer on CIAP Document 102,
http://ciap.dti.gov.ph/sites/default/files/ciap%20doc%20102%20Primer%20V1.pdf , last accessed on 2 April 2019.

4 Quisumbing Torres
 Construction Contract Management

between or among parties to, or who are otherwise bound by, an arbitration agreement, directly or by
reference whether such parties are project owner, contractor, subcontractor, fabricator, project
manager, design professional, consultant, quantity surveyor, bondsman or issuer of an insurance
policy in a construction project."

The CIAC is a hybrid of voluntary and compulsory arbitration. The Philippine Supreme Court has held
that "as long as the parties agree to submit their dispute to voluntary arbitration, regardless of what
forum they may choose, their agreement will fall within the jurisdiction of the CIAC, such that, even if
they specifically choose another forum, the parties will not be precluded from electing to submit their
dispute before the CIAC because this right has been vested by law." 18

Thus, by way of example, if the parties to a construction contract designate the Singapore
International Arbitration Center (SIAC) as the administering arbitration center in case a dispute arises
between them, either party may still elect to file a request for arbitration with the CIAC and the CIAC
shall assume jurisdiction over the dispute, notwithstanding the agreement of the parties to submit their
dispute to arbitration under SIAC rules. This obviously gives rise to the possibility of parallel
proceedings before different arbitral tribunals, which in turn may result in conflicting awards.

Nevertheless, CIAC arbitrators are generally known to be efficient in conducting arbitrations,

especially as opposed to Philippine court litigation. It takes the CIAC an average of six months from
the time of filing of the request for arbitration to hear the case and render an award.

3.2 Remedy from a CIAC award

In Global Medical Center of Laguna v. Ross Systems International,19 ("Global Medical") the Supreme
Court clarified the appropriate remedy/mode of appeal against a CIAC arbitral award. Prior to the
promulgation of Global Medical, an aggrieved party may question a CIAC arbitral award on both
questions of fact and law before the Court of Appeals. However, in Global Medical, the Supreme
Court clarified and laid out the following guidelines on the appropriate remedies against a CIAC
arbitral award:

 If the appeal involves pure question/s of law, it should be filed directly with the Supreme Court
through a petition for review on certiorari under Rule 45 of the Rules of Court.

 If the appeal involves factual issues, the same should be brought to the Court of Appeals
through a petition for certiorari under Rule 65 of the Rules of Court. The factual issues shall
be limited to (a) a challenge on the integrity of the composition of the tribunal or (b) an
allegation that the arbitral tribunal violated the Constitution or positive law in the conduct of
the arbitral process.

 No other circumstances other than those provided above will be available to appeal a CIAC
arbitral award.

3.3 Court litigation

If the construction contract does not contain an arbitration clause, the aggrieved party's remedy is to
file an action before a Philippine court.

However, if the contract provides that the work shall be accomplished to the satisfaction of the owner,
the question shall be submitted to expert judgment in case of disagreement. The decision of the
expert is final, unless fraud or manifest error can be proven, in which case the aggrieved party may
file a court action. 20

18
HUTAMA-RSEA v. Citra Metro Manila Tollw ays Corporation, G.R. No. 180640, 24 April 2009.
19
G.R. Nos. 230112 and 230119, 11 May 2021.
20 Civil Code, Article 1730.

Quisumbing Torres 5
 II. Construction contracts: Essential features and common
issues
Just like any contract, parties to a construction contract have the freedom to include any stipulation
they deem fit, as long as such stipulation does not violate law, morals, good customs, public order or
public policy. 21 Nevertheless, a construction contract should, at the very least, set out the parties'
agreement on the following:

(a) The project's cost/price

(b) The scope of work

(c) Time of completion and the consequences of delay

(d) Changes to work, price and time

(e) Framework for remedying defects

(f) Resolution of disputes 22

These aspects of a construction contract are generally the very areas where disputes commonly
arise. The discussion below aims to provide stakeholders with an overview of the typical contractual
provisions relating to these areas and the considerations to be taken into account when drafting them.

1. Cost/price
Parties usually choose among three types of pricing/costing: lump-sum, cost plus or unit price.

Lump sum
In lump-sum pricing, the project owner pays the contractor a fixed sum for the construction of all of the
works.

Given its simplicity and predictability, a lump-sum costing is generally appealing to the project owner.
On the other hand, a contractor that receives a lump sum might be exposed to lesser profit margins,
especially if costs of materials escalate or are miscalculated. To manage this exposure, a contractor
may try to bargain for the inclusion of additional grounds allowing for the increase of the lump-sum
cost.

Cost plus
Under the "cost plus" model, the contractor will be paid (a) the cost it actually incurred for completing
the works; and (b) a fee for providing the work, which usually corresponds to a percentage of the cost.
The fee will represent the contractor's markup or profit for the project.

Using the cost-plus approach provides better clarity and transparency to the project owner as to the
costs incurred, as opposed to lump-sum costing.23 However, the downside of this approach is that it
may give rise to issues as to whether a particular expense is part of the project cost. Also, this

21 Id., Article 1306.

22 See Nigel Pritchard and John Scriven. EPC Contracts and Major Projects: A Guide to Construction and Other
Project Contracts, Second Edition (2011) and Joshua Glazov, Construction Law Today, Top 10 Construction
Contract Terms, https://w ww.constructionlaw today.com/articles/top-10-construction-contract-terms/, last
accessed on 2 April 2019.
23
Glazov, https://w w w.constructionlaw today.com/2010/01/construction-contracts-the-10-most-important-ter ms-
price/, last accessed on 2 April 2019.

6 Quisumbing Torres
 Construction Contract Management

approach may be more burdensome on the parties. The contractor will have to track and report costs
more extensively, while the project owner must examine the costs to ensure accuracy.

Unit price
In this method, the parties agree on an amount that will be paid for every cost type. 24 This method
would be appropriate for projects that are relatively homogenous, such as road tollways, expressways
and railways.

Regardless of the method of computing or determining the contract cost or price, the parties may
contractually agree on their preferred payment terms. Among the typical payment terms found in
construction contracts are: 25

 Advance payment – The contract may require the project owner to make an initial advance
payment to help the contractor with start-up costs and payments for materials.

 Progress or milestone payments – The contract may provide that the contract price/cost will
be paid to the contractor based on its progress or the achievement of specified milestones.
For progress payments, the contractor may submit a summary of the work completed to the
project owner, who will then conduct a valuation. For milestone payments, the amount
attributable to the specified milestone will be paid once the same is achieved.

 Fixed schedule of payments – The contract may provide for the payment of the contract price
in specified installments regardless of progress. While this minimizes the administrative
burdens of evaluating progress or the achievement of milestones, it does not incentivize
contractors to achieve progress.

2. Scope of work
The scope of the contractor's work is arguably the most essential part of a construction contract. The
scope can be set out in a variety of ways, although typically this can be done either through a general
description in the provisions of the contract itself or through technical documents appended and
integrated into the contract.

To minimize risk of disputes, it is ideal to define the scope in a specific and itemized manner, to the
extent possible, particularly with respect to the design, materials and workmanship of the project. The
scope should also specify the level of the duty required of the contractor (and the project manager, if
any) in performing the scope of work. For instance, the contract may specify that the contractor has
the absolute duty to complete the scope of work. Alternatively, it may state that the contractor only
has the duty to exercise "due diligence" or "reasonable skill."

3. Time – completion and delays

A construction contract should specify the time within which work must be completed. In some
contracts, this is referred to as the Contract Time or Completion Time.

While it is definitely possible for a contractor to complete the work within the Contract Time, delay has
always been one of the primary risks in any construction project. As such, construction contracts over
the years have included remedies to mitigate the risks arising from delay, such as the payment of
liquidated damages and termination for delay.

Perhaps the most common remedy for contractor delay is the payment of liquidated damages.
Conceptually, liquidated damages are those agreed upon by the contracting parties to be paid in case

24
Ibid.
25
See Pritchard and Scriven, pp. 25-27.

Quisumbing Torres 7
 of a breach. It may be recovered without proof of actual loss, as long as the breach that triggers
payment of liquidated damages (e.g., delay) is established.

In the context of delay, where the contractor fails to complete the work within the specified contract
time, the contractor will be liable to pay the project owner liquidated damages in the amount stipulated
in the contract. Parties are free to set the amount of liquidated damages payable for each day of
delay. However, under Philippine law, the amount of liquidated damages may be reduced if the same
is iniquitous or unconscionable. 26 While there is no hard and fast rule as to what is considered to be
iniquitous or unconscionable, construction industry practice sets the maximum amount of liquidated
damages at 10% of the contract price.

The Philippine Supreme Court has also recognized that under construction industry practice,
liquidated damages will not accrue after the contractor has achieved "substantial completion." Citing
CIAP Document 102, there is "substantial completion" when the contractor completes 95% of the
work, provided that the remaining work and the performance of the work necessary to complete the
work shall not prevent the normal use of the completed portion. 27 However, as discussed above, it
must be pointed out that CIAP Document 102 may no longer be reflective of prevailing practices as it
has not been updated for more than 10 years. Thus, parties to a construction contract may consider
agreeing that (a) the principles/practices set out in CIAP Document 102 will not apply, especially if
their intention is to determine delay on the basis of actual or full completion; or (b) prevailing practices
as contained in other template contracts, such as the FIDIC Suite of Contracts written by the
Federation Internationale des Ingeneiurs-Conseil or the International Federation of Consulting
Engineers (FIDIC), will apply.

In addition to payment of liquidated damages, the contract may also state that the project owner may
terminate the contract on account of the contractor's delay. However, unlike the payment of liquidated
damages, this remedy is exercised as a last resort because it usually results in further delays to the
project. The process of replacing a contractor can be tedious.

Aside from identifying the contract time and the consequences arising from delay in completion,
contracts usually set out instances or events where delay is excused. Generally, t hese are events that
cannot be predicted or foreseen by the parties, and are thus denominated as force majeure. In some
cases, contracts can also provide for delays caused wholly or partly by the project owner as
excusable.

4. Changes
Anyone who has been involved in construction projects knows that it is extremely rare to be able to
carry out a project from beginning to end without any changes. Ironically, construction contracts are
often accompanied by detailed timelines, milestone plans and specifications, only for these to later be
changed by the parties. Given this reality, it is essential for any construction contract to set out an
appropriate mechanism to allow for these changes. The two most common mechanisms are variation
(sometimes known as a variation order or a change order) ("Variation") and extension of time.

Variation
A Variation is a change or alteration of the scope of work of a particular construction contract. A
Variation may be an addition, subtraction or modification of the original scope of work. 28 Usually, a
Variation can arise under either of the following processes:

26
Civil Code, Article 2227.
27
Werr Corporation International v. Highlands Prime, Inc., G.R. No. 187543, 8 February 2017.
28 See Pritchard and Scriven, p. 49.

8 Quisumbing Torres
 Construction Contract Management

(a) The project owner itself or its representative issues a Variation. Upon the issuance of the
same, the Variation will be valued by agreement of the parties or through a third party (e.g.,
an independent engineer). 29

(b) The contractor proposes a Variation to be approved by the project owner. Once approved, the
Variation will then be valued by the parties by agreement or through a third party.

It must be noted that under Philippine law, a contractor can only demand an increase in the price if
there is a change in the plans and specifications, under the following conditions:

(a) The Variation is authorized by the project owner in writing.

(b) The additional price to be paid to the contractor has been determined in writing by both
parties. 30

Thus, from the contractor's perspective, it is essential that any Variation that would entitle the
contractor to an increase in payment must be in writing and indicate the parties' agreement.

In most cases, a Variation will not only result in an increase in the contract cost (although in some
cases, it can also result to reduction), but also in an extension of the contract time (or sometimes,
shortening thereof). As such, regardless of how the Variation process is commenced, the contract can
also provide that an approved Variation would be a ground for adjusting the contract time.

Some construction contracts provide for a third party, such as a project manager or an "Engineer,"
who oversees the entire construction process. The contract may provide that the project manager or
"Engineer" has the power to grant a Variation. For example, the 2017 edition of the FIDIC Red and
Yellow Books provide that the Engineer may (a) issue a Variation to the contractor; or (b) confirm that
an earlier instruction is a Variation, if the contractor gives a notice that it believes that the instruction is
a Variation. 31

Extension of time
As mentioned above, construction contracts usually state that the works should be completed within
the contract time. Nevertheless, they also recognize that under certain circumstances, completion
cannot be attained within the originally contemplated time. Consequently, contracts frequently provide
for certain events that would allow the contract time to be extended without the contractor being held
liable for delay.

Typical grounds for extension of time include:

 Variations (see discussion above)

 Force majeure or events that cannot be predicted or foreseen by the parties

 Change in law

 Delays in obtaining regulatory requirements despite the contractor taking reasonable steps to
prevent such delays

Similar to a Variation, the procedure for claiming extension of time is usually set out in detail in
construction contracts. Normally, the contractor would send a written request for extension of time to
the project owner, which should indicate the ground for the same. The contractor should also explain
why the ground being cited directly causes delay, in order to increase the probability that the

29
Id.
30
Civil Code, Article 1724.
31
FIDIC Rainbow Suite ed. 2017 Press Release,
http://fidic.org/sites/default/files/press%20release_rainbow %20suite_2018_03.pdf .

Quisumbing Torres 9
 extension will be granted. To facilitate the preparation of such requests or claims for extension of time,
it would be strongly prudent for the contractor to be very meticulous and thorough in
contemporaneously tracking the progress of the work as well as actual and potential delays.

As with a Variation, extensions of time may be granted by a designated third person in the
construction contract, such as the project manager or the Engineer, instead of the project owner
itself. 32

If a claim for extension of time is granted, the point at which liquidated damages for delay would
accrue would be moved accordingly.

5. Defects
In the same way that it is nearly impossible to have an on-time, within-budget construction of a
project, it is almost always inevitable that defects may arise during and after construction. Thus, it is
extremely important that a construction contract outline the framework by which these defects are to
be managed, corrected and rectified.

The parties should first consider how to define what a "defect" is. As defining defects is essentially
contractual in nature, 33 the parties can choose to use standards such as "works not carried out in a
workmanlike manner" or "works not in accordance with industry standards." They can also opt not to
include an express definition, in which case work will be considered defective if it does not conform to
the design or workmanship provisions of the contract.34

Construction contracts usually provide that during the construction period or prior to project
completion, the project owner has the right to conduct an inspection of the works.35 Such right of
inspection may include the right to uncover work that has been covered up or conduct testing of
materials or completed portions of the project. Generally, the cost of inspection and uncovering is
borne by the project owner, except if it is shown that the works inspected are defective (in which case,
the contractor will answer for such cost). 36

The presence of defects does not necessarily preclude completion or handover of the project to the
owner. As mentioned above, the parties, following construction industry practice, may agree to
incorporate the rule of "substantial completion" (or "practical completion" as known in other
jurisdictions). In Philippine construction contracts, it is common to find provisions stating that the
project can be considered substantially complete if the contractor completes 95% of the work, with the
remaining work being minor "punch-list" (or "snagging-list") defects that would not prevent the normal
use of the completed part. However, in view of some Supreme Court decisions stating that the
projects are substantially complete if there is 95% completion without regard to the nature of the
remaining work, 37 a project owner that prefers full completion should insist on including provisions (a)
requiring that the work be fully complete and free of any patent defects prior to handover; and (b)
expressly stating that the "95% substantial completion" rule, as understood in some Philippine
Supreme Court decisions, is not applicable.

32 John Papw orth Frics, Claims Under the New FIDIC Conditions of Contract,
http://fidic.org/sites/default/files/papw orth_claims.pdf ; Lew Yoke-Lian, The Assessment of Applications of
Extension of Time Claims in Malaysian Construction Industry, IACSIT International Journal of Engineering and
Technology, Vol. 4., August 2012, p. 446.
33 See Pritchard and Scriven, p. 67.
34 Id.
35 See Section 7.3, Conditions of Contract for Construction, June 2010, FIDIC Multilateral Development Bank

Harmonised 2010 Edition, https://w ww.adb.org/sites/default/files/fidic -gcc-construction.pdf; See Clause 3.19,

Joint Contracts Tribunal Standard Building Contract w ith Quantities 2005.
36
See Pritchard and Scriven, p. 68
37 Diesel Construction Co. v. UPSI Property Holdings, Inc., G.R. No. 154885, 24 March 2008.

10 Quisumbing Torres
 Construction Contract Management

For the period after completion, construction contracts typically provide for a warranty or defects
liability period. In fact, the adoption of such a period is established usage in the Philippines for private
and government construction contracts. 38 During the warranty or "defects liability" period, the
contractor is obligated to remedy defects that may arise during such period. Contractors will usually
try to limit their liabilities for defects during the warranty period, but it is almost always expected that
the project owner will not agree.

Once the defects liability period expires, the contractor may still be held liable for the cost of the
defects pursuant to applicable law, although it will no longer be obliged to remedy the defects itself.
Under Philippine law, the engineer or architect who drew up the plans and specifications for a building
is liable for damages if, within 15 years from completion of the structure, the same should collapse
due to a defect in those plans and specifications or in the ground. The contractor is also liable for the
damages if the structure falls, within the same 15-year period, on account of defects in the
construction or if they used materials of inferior quality, or due to any violation of the terms of the
contract. 39

6. Resolution of disputes
As discussed below, the current trend is to provide for preconditions to arbitration or litigation (which is
usually chosen as the ultimate mode of dispute resolution) with a view to resolving disputes in a much
quicker and cost-effective manner. Typically, these preconditions may constitute one or a combination
of any of the following: (a) resolution by an engineer or contract manager, (b) negotiation, (c) expert
determination, (d) dispute review boards and (e) mediation.

Unfortunately, the inclusion of these preconditions may not readily achieve its ultimate purpose,
unless there are definite timelines and standards in measuring whether a particular precondition has
been met. For instance, clauses that simply provide for arbitration as the final mode of dispute
resolution after "unsuccessful negotiations" may be difficult to enforce, because there are no
measurable standards to define the absence of success in negotiations.

7. Frequent issues in Philippine construction projects

7.1 Poor contract drafting
As perhaps is the case in a good number of jurisdictions, most issues arise as a result of poor
contract drafting. Given the complexity and detailed nature of construction activities, it is very tempting
for contracting parties to copy provisions from local and internationally known template contracts such
as FIDIC, if not adopt the template contracts altogether, without understanding the intention behind
such provisions. For example, if a certain template contract is intended for a particular framework
(e.g., FIDIC Yellow Book, which is for plant and design-build), it should not be applied for an
EPC/turnkey contract (as it is the FIDIC Silver Book, which is more appropriate for an EPC/turnkey
contract).

7.2 Noncompliance with contractual terms

Similar to ordinary contracts for commercial transactions, noncompliance with the stipulated
contractual terms is a common issue in Philippine construction projects. An example would be failure
to abide by the payment terms set out in the contract.

In Hanjin Heavy Industries v. Dynamic Planners and Construction, Corp.,40 Hanjin Heavy Industries
("Hanjin") entered into a contract with the Department of Transportation and Communications
(DOTC) for an airport construction project, where 35% of the contract price was to be paid in US

38
Golangco v. Philippine Commercial International Bank, G.R. No. 142830, 24 March 2006.
39
Civil Code, Article 1723.
40 G.R. No. 169408 & 170144, 30 April 2008.

Quisumbing Torres 11
 dollars. Hanjin then entered into a subcontract with Dynamic Planners and Construction Corp.
("Dynamic"), which incorporated the contract with DOTC. Hanjin did not pay the down payment in
lump sum as stipulated, but spread it over six months. Moreover, Hanjin frequently paid late amid
massive capital outlay from Dynamic, which ultimately prevented Dynamic from completing the
Project by the April 2002 deadline. Dynamic eventually commenced arbitration to claim payment for
the work done, which was taken over by Hanjin after the project works reached a 94% completion
level. Among the items claimed by Dynamic was a share in the US dollar portion of the contract price.
The Supreme Court eventually held that Hanjin's argument against Dynamic's entitlement to such
portion — that Dynamic should not be awarded the same because it failed to complete the project by
the deadline — is wrong because Hanjin's failure to abide by the payment terms prevented Dynamic
from completing the project.

7.3 Insufficient documentation

The detailed nature of construction projects requires that documentation of all transactions and
actions during implementation are clear and organized. In most construction projects in the
Philippines, documentation has been usually lacking or insufficient. As such, this has resulted in
numerous disputes, such as whether (a) an extension of time or a Variation has been granted; and (b)
a particular phase of the work has been completed (i.e., because there are no progress reports).

The Supreme Court has ruled, notably, that incomplete documentation does not absolve a principal
from its obligation to pay for additional work done. In HL Carlos Construction, Inc. v. Marina Proper
Corporation, 41 HL Carlos Construction, Inc. ("HL") claimed that Marina Proper Corporation ("Marina")
had not yet paid for additional work on the project ordered by the latter. The contract stipulated that
any orders for extra work required a supplemental agreement; however, there was no such
supplemental agreement. The Supreme Court held that Marina must pay HL for the extra work
because it never denied having ordered the extra work and its work engineer even manifested that
additional work was indeed done. The Supreme Court further held that HL was due payment on the
basis of quantum meruit.

7.4 Failure to determine actual progress

Without conducting a proper review of the valuation of the work completed, disputes regarding the
valuation and the progress of the work may arise.

In F.F. Cruz & Co., Inc., v. HR Construction Corp.,42 the Supreme Court held that it was the
responsibility of the main contractor to call for a joint valuation, together with representatives of the
subcontractor and the project owner. The main contractor's failure to do so, coupled with its voluntary
payments based on the valuation given by the subcontractor, resulted in a waiver of the right to
demand a joint valuation.

7.5 Acceptance and waiver of claims for delay

If the project owner accepts the project despite delay on the contractor's part, the principal may be
considered to have waived its right to claim damages for delay under the principle of estoppel.

If the contract clearly states that the principal's acceptance of the project will not constitute a waiver of
claims for delay, the courts will enforce this provision. In Engr. Cayetano-Abano v. Colegio de San
Juan Letran-Calamba,43 the contract clearly stated that acceptance of any work not completed shall
not be deemed a waiver by the project owner of any damages due to delays in the completion of the
work. Pursuant to this provision, the Supreme Court held that even though the project owners took
over the building, there was no waiver of claims for damages due to delays.

41
G.R. No. 147614, 29 January 2004.
42
G.R. No. 187521, 14 March 2012
43 G.R. No. 179545, 11 July 2012.

12 Quisumbing Torres
 Construction Contract Management

7.6 Applicability of CIAP Document No. 102

In a number of cases, the Supreme Court has applied the provisions of CIAP Document No. 102, a
template contract prepared by the CIAP, to fill gaps in the parties' construction contract.

In Werr Corporations International v. Highlands Prime,44 the Supreme Court ruled that (a) "the
construction industry's prevailing practice may supplement any ambiguities or omissions in the
stipulations of the contract"; and (b) "CIAP Document 102 applies suppletorily to private construction
contracts to remedy the conflict in the internal documents of, or to fill in the omissions in, the
construction agreement." On the other hand, in Transcept Construction v. Teresa C . Aguilar,45 the
Supreme Court also applied CIAP Document 102 in resolving the issue of liability for liquidated
damages, even if it was not referred to by the parties' contract.

As pointed out, the CIAP Document 102 may not be reflective of prevailing practices as it has not
been updated for more than 10 years.

7.7 Jurisdiction of the CIAC

It has been held that "as long as the parties agree to submit their dispute to voluntary arbitration,
regardless of what forum they may choose, their agreement will fall within the jurisdiction of the CIAC,
such that, even if they specifically choose another forum, the parties will not be precluded from
electing to submit their dispute before the CIAC because this right has been vested by law."46 This
gives rise to the probability of simultaneous arbitrations being commenced before different arbitral
tribunals (i.e., before the CIAC and before the tribunal constituted under the rules of the chosen
institution), and consequently, to conflicting awards being rendered.

44
G.R. No. 187543, 8 February 2017.
45
G.R. No. 177556, 8 December 2010.
46 HUTAMA-RSEA v. Citra Metro Manila Tollways Corporation, G.R. No. 180640, 24 April 2009.

Quisumbing Torres 13
 III. Avoiding construction disputes: Best practices and
considerations
Construction disputes are probably the most complex types of disputes, especially given the large
scale of the work, the number of parties involved, the volume of the documents and reports usually
prepared in the course of a particular project, and other various factors. They also cost the parties
significant time and money, and cause delays in the completion of the project.
Given these considerations, it is essential for the parties to a construction contract to carefully
manage and administer the performance of the contract and incorporate mechanisms to avoid
disputes. This section sets out a number of best practices that the parties may consider applying in
their respective construction contracts.

1. Choosing the right contractual form/framework

Perhaps one of the most important practices in preventing disputes is to select the right contractual
form or framework. This will depend on the most appropriate method in constructing and delivering
the project. These methods include design-build, design-bid-build (DBB), and construction manager at
risk. 47

1.1 Design-build
In a design-build project, the project owner contracts with one entity/contractor to deliver the project
from beginning to end. In this scheme, pricing changes are seldom and may occur only when there
are unknown conditions or if the project owner requests for such change. The design-build method is
usually utilized when time is of the essence for the project and there are no substantial issues
regarding project design.

1.2 Design-bid-build
The most traditional of all project methods, a DBB scheme separates the design and the construction
process.

At the start, an architect or engineer is hired by the project owner to create the project design. After
the design documents are completed, the project owner will issue a bid tender requesting contractors
to submit proposals for the construction based on the design.

The DBB method usually works for simple, low-budget projects that are not under strict time
constraints. However, the downside is that there is a risk of increased cost during construction
because the contractor might not be able to fully carry out the construction based on the design
specifications.

1.3 Construction manager at risk

In this method, the project owner engages a construction or project manager who will exercise overall
supervision, management and coordination over the project. Typically, the design and the
construction of the project under this method are contracted separately.

The construction or project manager provides input on all aspects of the project, such as design, cost
and timeline. It may also be engaged in the procurement of contractors for particular project phases.
This method is appropriate for large complex projects where oversight of a project manager is highly
recommended.

47
See Jerry Rolfson, Sr., How Does Construction Manager At-Risk Differ from Design-Build, Performance
Services, https://w w w.performanceservices.com/resources/how -does-construction-manager-at-risk-differ-from-
design-build.

14 Quisumbing Torres
 Construction Contract Management

To aid contracting parties in adopting the right form of contract for their chosen project delivery
method, there are a number of standard forms that have been created by various construction
organizations and associations. Foremost, and perhaps the most well-known, are the FIDIC Suite of
Contracts written by the FIDIC.

Other known standard forms of contract in the market are the NEC Contracts and the Joint Contracts
Tribunal Standard Forms of Contract.

2. Contract drafting
As with all other contracts, disputes arising from construction contracts can be avoided and prevented
through very careful drafting of clauses. Given the complex nature of a construction project and the
numerous variables that may arise during contract implementation, it is best practice to include strict
controls and procedures in the contract, especially in respect of the areas where issues commonly
arise.

For instance, and as discussed above, parties frequently encounter issues relating to changes in the
scope of work, the contract time and the contract cost/price. To minimize disputes arising from these
changes, there should be contractual clauses stating that changes or instructions to effect changes
initiated by the project owner must be in writing. Similarly, the contract should state that changes
proposed by the contractor can only be implemented with the express written approval of the project
owner.

Taking this a step further, and to remove any doubt as to the existence of the project owner's
approval, the parties can agree that particular standard approval forms must be used by the project
owner. Moreover, to avoid disputes relating to possible inaction by the project owner on the
contractor's proposal for changes, the parties may wish to expressly agree that inaction of the project
owner within a specific period will be deemed an approval that can no longer be questioned by the
latter.

Another area where careful drafting can help prevent disputes relates to delay in project completion.
As discussed above, the concept of "substantial completion" is recognized in the Philippines and has
the effect of preventing the project owner from claiming liquidated damages as penalty for delay. A
project owner that would like to require full completion within the contract time may wish to insist on a
provision stating that (a) the project must be fully completed within the contract time; and (b) for
purposes of determining delay and liability for liquidated damages, the rule expressed in some
Supreme Court decisions that 95% completion is "substantial completion" does not apply. Such a
clause would also remove doubts regarding the start and duration of the warranty or the defects
liability period, should the contract provide for one.

With respect to the contract costs, the contract should provide for clear steps for invoicing/valuation
(especially for cost-plus and unit price projects) and payment. For example, in a cost-plus contract,
there should be a provision setting out the specific requirements and procedures that the contractor
should follow in order to substantiate the costs being claimed and obtain payment therefor.

3. Adopting an effective and enforceable dispute resolution process

Arbitration is a recommended mechanism for resolving disputes in construction contracts, because it
(a) is speedier compared to court litigation, (b) allows parties to choose or craft the rules that will
govern the proceedings, and (c) affords parties the opportunity to choose arbitrators that are
knowledgeable in the subject matter. However, in drafting arbitration clauses for construction
contracts, the parties should be mindful that under Philippine law, disputes arising out of a
construction contract that contains an arbitration clause fall within the original and exclusive
jurisdiction of the CIAC. Such jurisdiction subsists even if the parties choose a different arbitral
institution. Thus, to deter parties from invoking the CIAC's jurisdiction and ensure any arbitration

Quisumbing Torres 15
 commenced would be administered by the chosen arbitral institution, the parties may wish to include a
provision to the effect that (a) the commencement of CIAC arbitration is a breach of the contract and
renders the commencing party liable for damages; and (b) the commencing party will answer for all
costs, including the other party's legal fees.

The current trend is to provide for preconditions to arbitration or litigation with a view to resolving
disputes in a much quicker and cost-effective manner. The parties have the freedom to set their
preferred preconditions, otherwise known as tiers of the dispute resolution process; but the most
typical of these are (a) resolution by an engineer or contract manager, (b) negotiation, (c) expert
determination, (d) dispute review boards and (e) mediation.

3.1 Resolution by engineer or contract manager

The construction contract may provide for the appointment of an engineer before whom any dispute or
claim will be first referred for resolution. The contract can provide for the scope of the engineer's
authority, but usually these would cover all technical issues during the project. The engineer may also
be given administrative authority to issue certifications of compliance with technical specifications,
which can be questioned further in arbitration or litigation.

The main criticism about this option is that the engineer's independence is subject to question, given
the project owner's role in appointing and compensating the engineer. As a result, contracts
nowadays are less likely to provide the engineer a role in resolving disputes.

3.2 Negotiation
Another possible precondition to arbitration or litigation is requiring the parties to engage in high-level
negotiations within a definite period. Normally, contracts will state that each party has the duty to
designate or appoint one of its senior officers to represent it in the negotiations.

However, to be an effective and enforceable precondition, the contract should provide for a definite
negotiation period, the lapse of which will entitle any party to commence arbitration or litigation should
no amicable settlement be had.

3.3 Expert determination

The parties can provide that a particular set of issues — particularly those technical in nature — would
be referred to an independent expert. Whether the expert's decision on these issues would be final
and binding is completely up to the parties' agreement, although the likelihood of these usually
depends on how technical the issues are.

The contract can also provide for a specific method of appointing the expert, such as, the expert will
be appointed pursuant to the parties' agreement. Failing such agreement, the parties can designate
an institution that will appoint the expert, such as the International Chamber of Commerce
International Centre for Expertise or the Chartered Institute of Arbitrators. The parties may also
require particular qualifications for the expert.

Once a claim or dispute is referred, the expert can conduct the proceedings as they deem fit, unless
the contract requires a particular procedure.
3.4 Dispute boards
Perhaps the most common dispute resolution tier that is incorporated by parties to a construction
contract nowadays is the referral of disputes to a dispute board (DB). The prevailing trend is that
parties may choose to refer to either a dispute adjudication board (DAB) or a dispute review board
(DRB).

16 Quisumbing Torres
 Construction Contract Management

A DAB has the power to issue a binding decision, which stands unless superseded by agreement,
arbitration or a court judgment. 48 A party that does not accept the DAB's decision may submit the
dispute to arbitration or the courts (depending on the parties' agreement), but such decision must be
complied with pending a ruling by the arbitral tribunal or the court.49

In contrast, the DRB issues nonbinding recommendations. A party that disagrees with any
recommendation may question the same further through arbitration or litigation (again, depending on
the parties' contract). However, unlike DAB decisions, parties are not required to comply with DRB
recommendations pending a ruling by the arbitral tribunal or the court, although they may voluntarily
choose to do so. 50

In most construction contracts, the DB, which may be comprised of either one or three members, is
constituted at the start of the project.51 Although the parties can prescribe a procedure for appointing
the DB members, typically the first two members are chosen by the parties and the third member (the
chairperson) is selected by the two members. The DB has the power to conduct proceedings as it
wishes, including calling meetings, questioning witnesses and visiting the project site.

This has contributed to the popularity of DBs as a form of "real-time" dispute resolution,52 with many
DBs conducting hearings and resolving disputes on-site. The DB may likewise intervene even before
a dispute arises between the parties (i.e., dispute avoidance), subject to any contrary stipulation in the
contract. To emphasize the avoidance element of DBs, some contract forms — such as the 2017
FIDIC contracts — have renamed the DBs from DAB to Dispute Avoidance and Adjudication Boards
(DAAB), which expressly recognizes the dispute avoidance function of DBs, in addition to
adjudication. 53 As DAABs have dispute avoidance function, they are by nature standing DBs,54 i.e.,
they are appointed at the start of the project, rather than once a dispute arises.

The International Chamber of Commerce Dispute Board Rules (ICC DB Rules) provided for a third
type of DB — the combined dispute board (CDB). CDBs normally issue recommendations but may
also issue binding decisions when it is requested by a party without objections from the other party, or
the DB decides to render a decision over the objection of the other party based on criteria set out in
the ICC DB Rules (i.e., urgency, prevention of disruption, necessity to preserve evidence). 55

3.5 Mediation
Mediation is a form of alternative dispute resolution in which the parties meet with an independent
third party — the mediator — who will assist and facilitate the parties in working toward an amicable
resolution of the dispute. However, as opposed to an arbitrator in an arbitration, the mediator has no
power to issue binding decisions that can be enforced against the parties.
Mediation can be a very cost-effective mode of resolving construction disputes. Mediation
proceedings can be completed faster than litigation or arbitration proceedings. Also, mediation is a
good way of bringing all stakeholders together in one proceeding, which may not be possible in an
arbitration or litigation due to jurisdictional or legal constraints. With all stakeholders participating in a

48 2014 CIARB Dispute Board Rules, Article 4.3.

49 Id., Article 4.5.
50 Id., Articles 3.1 and 3.5.
51 Dispute Boards, https://iccw bo.org/dispute-resolution-services/dispute-boards/.
52 2014 CIARB Dispute Board Rules, Article 6.3.
53 See Lindy Patterson QC and Nicholas Higgs, Dispute Boards, Global Arbitration Review ,
https://globalarbitrationreview .com/guide/the-guide-construction-arbitration/fourth-edition/article/dispute-boards
54 See Lindy Patterson QC and Nicholas Higgs, Dispute Boards, Global Arbitration Review ,

https://globalarbitrationreview .com/guide/the-guide-construction-arbitration/fourth-edition/article/dispute-boards
55 See Kenneth M. Roberts, The Benefits of Real-Time Dispute Resolution, New York Law Journal,

https://w ww.law.com/new yorklawjournal/2019/03/15/the-benefits-of-real-time-dispute-

resolution/?slreturn=20190227061309.

Quisumbing Torres 17
 singular, non-adversarial process, the chances of arriving at a solution that is universally acceptable
would be much higher.

The success of mediation, however, largely rests on the competence of the mediator. Thus, while the
parties are free to choose who they would like to mediate, it is highly recommended that the mediator
of a construction dispute have experience in the construction industry and a solid understanding of the
roles of each stakeholder and the interactions between all parties involved. To help them choose the
most appropriate mediator, the parties may opt to conduct the mediation through notable institutions,
such as the Centre for Effective Dispute Resolution, the International Chamber of Commerce, the
Hong Kong International Arbitration Centre (which assists in appointing mediators), and the Singapore
International Mediation Centre.

As shown above, the parties have a variety of pre-arbitration or pre-litigation dispute resolution
mechanisms to choose from in order to avoid a prolonged, costly dispute. To ensure the effectivity of
these mechanisms, the parties should ensure that compliance with each dispute resolution tier is
mandatory (e.g., by using mandatory language like "must" or "shall," instead of "may"). Otherwise, the
pre-arbitration or pre-litigation dispute resolution mechanism may not be considered enforceable.

4. Documentation and strict implementation

Proper choice and careful drafting of contract, however, is not enough. A well-drafted construction
contract is essentially useless, unless the parties make a conscious effort to strictly implement the
same. Hence, given the complexity of construction projects, it would be advisable for both the owner
and the contractor to designate a competent contract management team to closely monitor
implementation and compliance with the prescribed procedures and requirements. Ideally, the team
should include a technical person and a lawyer who are both well-versed and experienced in dealing
with construction disputes, so that potential problem areas can be readily identified and the risk of
disputes relating to these areas can be carefully managed and mitigated.

Further, the simplest and yet perhaps the most effective way of avoiding disputes is to document and
memorialize every action, event and milestone during contract implementation. Documentation or
memorialization should be done contemporaneously, i.e., during or after the event; otherwise, it may
not be given any weight later on by the court or the arbitral tribunal. The documentation can be
through videos, photos, letters, notices, emails and even SMS messages, as long as they can be
readily identified by witnesses that have personal knowledge of the same. Accurate, comprehensive
and detailed documentation, especially if they bear the conformity of both parties, would definitely
remove any doubts that could give rise to a dispute in respect of a particular issue.

18 Quisumbing Torres
Contact
Donemark Calimon
Partner, Dispute Resolution
Partner, Industrials, Manufacturing & Transportation
donemark.calimon@quisumbingtorres.com

Michael Macapagal
Partner, Dispute Resolution
Partner, Energy, Mining & Infrastructure
michael.macapagal@quisumbingtorres.com

Dranyl Jared Amoroso

Partner, Dispute Resolution
Partner, Industrials, Manufacturing & Transportation
jared.amoroso@quisumbingtorres.com

Renson Louise Yu
Associate, Dispute Resolution
Associate, Financial Institutions
renson.ouise.yu@quisumbingtorres.com

Quisumbing Torres
16th Floor, Net One Center
26th Street corner 3rd Avenue
Crescent Park West, Bonifacio Global City
Taguig City, Philippines 1634
Tel.: +63 2 819 4700
Fax: +63 2 816 0080

quisumbingtorres.com

©2022 Quisumbing Torres. All rights reserved. Quisumbing Torres is

a member firm of Baker & McKenzie International, a Swiss Verein.