G.R. No. 180824; August 28, 2009
URBAN CONSOLIDATED CONSTRUCTORS PHILIPPINES, Petitioner, vs. THE INSULAR LIFE ASSURANCE CO., INC., Respondent.

FACTS

Petitioner Urban Consolidated Constructors Philippines, Inc. (Urban) entered into a General Construction Agreement with respondent Insular Life Assurance Co., Inc. (Insular) to construct a building. The original contract was amended, extending the completion deadline to September 30, 1991, and increasing the contract price. Urban failed to complete the project by the extended deadline, tendering the building only on July 21, 1992. Urban filed a collection case against Insular, alleging that the delays were caused by Insular’s actions, such as delays in approving billings and a boundary dispute, and sought payment for various claims including excess construction costs and unpaid billings. Insular counterclaimed for liquidated damages, asserting that Urban was solely responsible for the delay.
The Regional Trial Court ruled in favor of Urban, awarding actual damages. The Court of Appeals reversed this decision. It found that the increased contract price in the amended agreement already accounted for any cost increases Urban suffered. The appellate court held Urban liable for the delay, noting that the obligation to procure materials and secure permits remained with the contractor. It awarded Insular liquidated damages, though it reduced the amount for equity, and offset this against sums it ordered Insular to pay Urban for unpaid change orders and retention money.

ISSUE

Whether petitioner Urban is liable to pay liquidated damages to respondent Insular for the delay in the construction project.

RULING

Yes, Urban is liable for liquidated damages, but the Supreme Court further reduced the amount. The Court affirmed the appellate court’s finding that Urban was responsible for the delay. The legal logic rests on the principle that liquidated damages, as stipulated in the contract, are permissible as compensation for breach, not as a penalty. However, under Article 2227 of the Civil Code, the courts may equitably reduce such damages if the principal obligation has been partly or irregularly complied with. The Court agreed with the Court of Appeals that a reduction from the stipulated P38,885 per day was warranted because Urban eventually completed the project. The High Court, however, found the reduced award of P2,940,000 (P10,000/day) still iniquitous. Considering that Insular benefited from the finished building and Urban incurred costs from the delay, the Supreme Court further reduced the liquidated damages to P1,940,000. This final modification balanced the enforcement of the contractual stipulation with the equitable power of the court to prevent unconscionable awards, ensuring the penalty remained compensatory rather than punitive in nature.