G.R. Nos. 173219-20; August 11, 2010
ALC INDUSTRIES, INC., Petitioner, vs. DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, Respondent.

FACTS

DPWH awarded ALC Industries a road construction contract. Significant delays ensued, attributed by ALC to errors in the original design requiring a full-scale redesign and delays in plan approval by DPWH. The parties executed a Reduction in Scope Agreement, but ALC continued to fall behind schedule. DPWH issued several warnings and ultimately rescinded the contract, citing ALC’s negative slippage exceeding 15% under P.D. 1870. ALC sought arbitration before the CIAC, contesting the rescission and claiming monetary compensation.
The CIAC computed ALC’s negative slippage at 22.06% but, after adjusting for weather delays, found it was only 12.85%. The CIAC voided DPWH’s rescission, converted it to a mutual termination, and awarded ALC a net sum after offsets. Both parties appealed to the Court of Appeals. The CA agreed the negative slippage was below 15% but upheld the rescission based on ALC’s other contractual breaches. It also disallowed ALC’s claims for standby costs, significantly reducing the monetary award and ultimately ordering ALC to refund a portion to DPWH.

ISSUE

The primary issues were: (1) the timeliness of DPWH’s appeal to the CA; (2) the validity of the contract rescission; and (3) the propriety of awarding standby costs to ALC.

RULING

The Supreme Court affirmed the CA decision. On procedural grounds, it found the DPWH appeal was timely filed within granted extensions. On the merits of rescission, the Court upheld the CA. It ruled that while negative slippage below 15% removed the statutory basis for rescission under P.D. 1870, the contract itself provided independent grounds. The DPWH rescission letter cited ALC’s failure to comply with the Reduced Scope Agreement and its rejection of a proposed Supplemental Agreement, which constituted breaches of contractual covenants. Rescission under the Civil Code for breach of contract was therefore justified.
Regarding standby costs, the Court denied ALC’s claims. For costs due to the late issuance of the notice to proceed, the contract’s Clause 12.2 only allowed for a time extension, not monetary compensation. For costs attributed to inclement weather, the contract’s Clause 44 also only provided for time extensions. The Court emphasized that no contractual provision authorized cost recovery for weather delays, which are fortuitous events where each party bears its own loss.