William Golangco Construction Corp. vs Philippine Commercial International Bank

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William Golangco Construction Corp. (WGCC) vs Phil Commercial Intl Bank (PCIB)
G.R. No. 142830
March 24, 2006

Facts:

William Golangco Construction Corporation (WGCC) and the Philippine Commercial International Bank (PCIB) entered into a contract for the construction of the extension of PCIB Tower II on October 20, 1989. The project included, among others, the application of a granitite wash-out finish on the exterior walls of the building.

PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the turnover of the completed work by WGCC in a letter dated June 1, 1992. To answer for any defect arising within a period of one year, WGCC submitted a guarantee bond dated July 1, 1992 issued by Malayan Insurance Company, Inc. in compliance with the construction contract.

The controversy arose when portions of the granitite wash-out finish of the exterior of the building began peeling off and falling from the walls in 1993. WGCC made minor repairs after PCIB requested it to rectify the construction defects.
In 1994, PCIB entered into another contract with Brains and Brawn Construction and Development Corporation to re-do the entire granitite wash-out finish after WGCC manifested that it was "not in a position to do the new finishing work," though it was willing to share part of the cost. PCIB incurred expenses amounting to P11,665,000 for the repair work.

PCIB filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC) for the reimbursement of its expenses for the repairs made by another contractor. It complained of WGCC’s alleged non-compliance with their contractual terms on materials and workmanship. WGCC interposed a counterclaim for P5,777,157.84 for material cost adjustment.

The CIAC declared WGCC liable for the construction defects in the project. WGCC filed a petition for review with the Court of Appeals (CA) which dismissed it for lack of merit. However, its motion for reconsideration was similarly denied.
There is a question of certiorari in this case.

Issue:

Whether or not petitioner WGCC is liable for defects in the granite wash-out finish that occurred after the lapse of one-year defects liability period provided in Art. XI of the construction contract?

Held:

The court ruled in favor of WGCC. The controversy pivots on a provision in the construction contract referred to as the defects liability period:

Guarantee

In Article XI on Guarantee - the CONTRACTOR hereby guarantees the work stipulated in this Contract, and shall make good any defect in materials and workmanship which [becomes] evident within one (1) year after the final acceptance of the work. The CONTRACTOR shall leave the work in perfect order upon completion and present the final certificate to the ENGINEER promptly.

If in the opinion of the OWNER and ENGINEER, the CONTRACTOR has failed to act promptly in rectifying any defect in the work which appears within the period mentioned above, the OWNER and the ENGINEER may, at their own discretion, using the Guarantee Bond amount for corrections, have the work done by another contractor at the expense of the CONTRACTOR or his bondsmen.

However, nothing in this section shall in any way affect or relieve the CONTRACTOR’S responsibility to the OWNER.

Although both parties based their arguments on the same stipulations, they reached conflicting conclusions. A careful reading of the stipulations, however, leads us to the conclusion that WGCC’s arguments are more tenable.

Autonomy of Contracts

The autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Obligations arising from contracts have the force of law between the parties and should be complied with in good faith.

The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the Philippines for private and government construction contracts. However, the contract did not specify a different period for defects in the granitite wash-out finish; hence, any defect therein should have been brought to WGCC’s attention within the one-year defects liability period in the contract.

The inclusion in a written contract for a piece of work, such as the one in question, of a provision defining a warranty period against defects, is not uncommon. This kind of a stipulation is of particular importance to the contractor, for as a general rule, after the lapse of the period agreed upon therein, he may no longer be held accountable for whatever defects, deficiencies or imperfections that may be discovered in the work executed by him.

Unfulfilled Obligations

PCIB calls our attention to Article 62.2 which provides: Notwithstanding the issue of the Defects Liability Certificate[,] the Contractor and the Owner shall remain liable for the fulfillment of any obligation[,] incurred under the provisions of the Contract prior to the issue of the Defects Liability Certificate[,] which remains unperformed at the time such Defects Liability Certificate is issued[. And] for the purpose of determining the nature and extent of any such obligation, the Contract shall be deemed to remain in force between the parties of the Contract. (emphasis ours).

Ruling

The lower courts conjectured that the peeling off of the granitite wash-out finish was probably due to "defective materials and workmanship." This they characterized as hidden or latent defects. WGCC does not agree with the conclusion that the alleged defects were hidden.

First, PCIB’s team of experts (who were specifically employed to detect such defects early on) supervised WGCC’s workmanship. Second, WGCC regularly submitted progress reports and photographs. Third, WGCC worked under fair and transparent circumstances. PCIB had access to the site and it exercised reasonable supervision over WGCC’s work. Fourth, PCIB issued several "punch lists" for WGCC’s compliance before the issuance of PCIB’s final certificate of acceptance. Fifth, PCIB supplied the materials for the granitite wash-out finish. And finally, PCIB’s team of experts gave their concurrence to the turnover of the project.

The purpose of the defects liability period was precisely to give PCIB additional, albeit limited, opportunity to oblige WGCC to make good any defect, hidden or otherwise, discovered within one year.

Contrary to the CA’s conclusion, the first sentence of the third paragraph of Article XI on guarantee previously quoted did not operate as a blanket exception to the one-year guarantee period under the first paragraph. Neither did it modify, extend, nullify or supersede the categorical terms of the defects liability period.

Under the circumstances, there were no hidden defects for which WGCC could be held liable. Neither was there any other defect for which PCIB made any express reservation of its rights against WGCC. Indeed, the contract should not be interpreted to favor the one who caused the confusion, if any. The contract was prepared by TCGI for PCIB.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP No. 41152 is ANNULED and SET ASIDE.