G.R. No. 188866 ; October 19, 2011
PHILIPPINE ECONOMIC ZONE AUTHORITY, Petitioner, vs. GREEN ASIA CONSTRUCTION & DEVELOPMENT CORPORATION Represented by Mr. Renato P. Legaspi, President/CEO, Respondents.

FACTS

The Philippine Economic Zone Authority (PEZA, formerly EPZA) and Green Asia Construction & Development Corporation entered into a contract on September 23, 1992, for a road network/storm drainage project with a fixed contract price of ₱130,595,337.40. On March 26, 1996, Green Asia sent a letter to PEZA claiming a price escalation of ₱9,860,169.58 under Presidential Decree (PD) No. 1594. PEZA denied the claim, asserting that Section 8 of PD 1594 required proof that the increase in construction costs was due to the direct acts of the government, which Green Asia allegedly failed to present. PEZA also argued that the contract’s fixed-price stipulation constituted a waiver of PD 1594’s provisions. Green Asia persisted with its claim through subsequent correspondence and, on August 2, 2007, sent a final demand notice, also seeking payment for another project, bringing the total claim to ₱12,360,525.69. Green Asia appealed to the Office of the President (OP). The OP granted Green Asia’s claim, ordering PEZA to pay the amount subject to verification using the parametric formula in the Implementing Rules and Regulations (IRR) of PD 1594, plus legal interest. The OP held that proof of a government-caused price increase was not required by law for price escalation. The Court of Appeals sustained the OP Decision but modified it by ordering the parties to compute the price escalation using the parametric formula provided in Clauses 12.1(6) and (7) of the IRR of PD 1594, rather than affirming a specific sum.

ISSUE

The primary issue is whether a contractor is entitled to a price escalation in a government infrastructure contract under PD 1594 and its IRR without first proving that the increase in the cost of construction materials was due to the direct acts of the government.

RULING

The Supreme Court granted the Petition and reversed the decisions of the Court of Appeals and the Office of the President. The Court ruled that a contractor is not automatically entitled to price escalation. The right to price adjustment under Section 8 of PD 1594 is contingent upon the contractor proving that any increase or decrease in the cost of labor, equipment, materials, and supplies required for the project is due to the direct acts of the government. The Court held that the parametric formula in the IRR of PD 1594 is merely a computation mechanism and does not eliminate this prerequisite condition of proving government causation. The Court further ruled that the contract’s stipulation of a fixed price, as stated in Article IV, effectively constituted a waiver by the contractor of any claim for price escalation under PD 1594. Since Green Asia failed to present evidence that the cost increases were due to direct government acts, its claim for price escalation was without legal basis.