G.R. No. 154885 and G.R. No. 154937; March 24, 2008
DIESEL CONSTRUCTION CO., INC., Petitioner, vs. UPSI PROPERTY HOLDINGS, INC., Respondent. [and the consolidated case]

FACTS

Diesel Construction Co., Inc. (Diesel) and UPSI Property Holdings, Inc. (UPSI) entered into a Construction Agreement for interior works on a building project. The contract stipulated a 90-day period, with Diesel liable for liquidated damages of 1/5 of 1% of the total project cost per day of unjustifiable delay. During project execution, Diesel requested time extensions due to factors like manual hauling and delayed material supply, but UPSI disapproved these requests. UPSI subsequently deducted liquidated damages from Diesel’s progress billings.
Diesel declared project completion on March 16, 2000, but UPSI refused acceptance, alleging abandonment and withholding the final payment and retention money. Diesel filed a complaint with the Construction Industry Arbitration Commission (CIAC) to recover the unpaid balance. UPSI counterclaimed for liquidated damages and completion costs. The CIAC ruled for Diesel, awarding the unpaid contract balance and attorney’s fees while dismissing UPSI’s counterclaim. The Court of Appeals modified this, upholding Diesel’s right to full payment but granting UPSI liquidated damages for a 45-day delay, offsetting the amounts.

ISSUE

The core issue was whether UPSI was entitled to liquidated damages for the alleged delays by Diesel in completing the construction project.

RULING

The Supreme Court ruled in favor of Diesel, deleting the award of liquidated damages to UPSI. The legal logic centered on the proper application of contractual provisions for time extensions and the consequent waiver of the right to claim damages. The Court found that the contract required written approval from UPSI’s Project Manager for any time extension. The record showed that the Project Manager had indeed granted several extensions through written communications and, critically, by approving progress billings that accounted for the extended periods without deducting liquidated damages for those specific intervals.
By approving billings that incorporated the extended timelines, UPSI, through its agent, effectively sanctioned the delays and waived its right to impose penalties for those periods. Liquidated damages are intended for inexcusable delays; once the owner acquiesces to an extension, the basis for claiming damages for that period is extinguished. The Court emphasized that UPSI could not inconsistently approve billings reflecting an adjusted schedule and later claim damages for the very time it had allowed. Therefore, with the delays justified and extensions effectively granted, no basis remained for the imposition of liquidated damages. The CIAC award for the unpaid contract price to Diesel was reinstated.