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~upreme <!Court
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FIRST DIVISION

EL DORADO CONSULTING G.R. Nos. 245617

REALTY AND DEVELOPMENT & 245836
GROUP CORP.,
Petitioner,
Present:

PERALTA, CJ
Chairperson,
- versus - CAGUIOA,
CARANDANG,
ZALAMEDA,
GAERLAN,JJ

PACIFIC UNION INSURANCE Promulgated:

COMPANY,
Respondent. NOV 10 2020
x------------------------------------------------------------------------------- - -

DECISION

CARANDANG, J.:

Before this Court is a Petition for Review on Certiorari 1 under Rule 45

of the Rules of Court, assailing the Consolidated Decision2 dated July 23,
2018 and Consolidated Resolution3 dated February 28, 2019 of the Court of
Appeals (CA) in CA-G.R. SP No. 150085 and 150092 which denied the
petitions for review filed by both parties and affirmed with modification the
ruling of the Construction Industry Arbitration Commission (CIAC).

Facts of the Case

On July 27, 2014, El Dorado Consulting Realty and Development

Group Corporation (El Dorado) entered into an Owner-Contractor

Rollo, pp. 8-50.

Penned by Associate Justice Henri Jean Paul B. lnting (now a member of this Court), with the
concuJTence of Associate Justices Maritlor P. Punzalan Castillo and Danton Q. Bueser; id at 57-81.
Id. at I 05-109.
 Decision 2 G.R. Nos. 245617 & 245836

Agreement4 with ASPF Construction and Development, Inc. (ASPF

Construction) for the construction of a seven-storey condominium hotel
named "The Ritz" located in Pampanga for a contract price of
Pl 70,000,000.00. 5

On July 10, 2014, ASPF Construction obtained a Performance Bond

from Pacific Union Insurance Company (PUIC) in the amount of
Pl9,641,807.80 to guarantee compliance with all its obligations under the
Owner-Contractor Agreement. Subsequently, the parties amended the Owner-
Contractor Agreement to increase the Performance Bond to P98,209,039 .00,
equivalent to the total contract price for Phase 1 of the project. Hence, PUIC
issued another Performance Bond in the amount of P78,567,23 l .20. 6

During the construction of the project, El Dorado sent several notices

to ASPF Construction for Warnings/Notices of Delayed Works, Site Safety
Violation, Notices of Defect, and Notices to Comply. 7 Eventually, on
February 5, 2015, ASPF Construction requested that a revision of the schedule
of paym·ents, which provided for the payment by condominium units, be
made. ASPF Construction asked that El Dorado pay in cash instead because
it has encountered liquidity problems. However, El Dorado refused,
explaining that the payment by condominium units was a major consideration
why it agreed to enter into the contract. 8

On April 30, 2015, El Dorado sent a Notice of Default, Notice of

Termination of Agreement, Denial of Claim for Payment Billings and
Demand for Return ofUnliquidated Down Payment to ASPF Construction. 9

On May 6, 2015, El Dorado submitted a Notice of Claim to PUIC under

Performance Bond No. 25628 10 in the amount of P19,641,807.80 and
Performance Bond No. 26198 11 amounting to 1>78,567,231.20. In the letter
sent by El Dorado, it stated that ASPF Construction has incurred substantial
delay in the performance of its obligations which are all events of default
under the Owner-Contractor Agreement. Hence, El Dorado requested that
PUIC release the full amount of P98,209,039.20 under the Performance
Bonds. 12

On June 25, 2015, PUIC informed El Dorado that the Performance

Bonds were cancelled for non-payment of premiums. 13

Due to this, on July 13, 2016, El Dorado filed a Request for Arbitration
against PUIC before the CIAC and prayed that it be awarded the following:

t
Id. at 188-205 .
5
Id. at 58.
6
Id. at 59.
7
Id.
8
Id. at 60.
9
Id. at 60, 233.
10
Id.at 212.
II
Id. at 214.
12
Id. at 60-62.
13
Id. at 62.
 Decision 3 G.R. Nos. 245617 & 245836

(1) unliquidated down payment amounting to Pl 7,000,000.00; (2) cost of

retrofitting in the amount of P350,000.00; (3) liquidated damages in the
amount of P21,538,294.76; and (4) interest and costs of arbitration amounting
to P3,500,000.00. 14

In its Answer with Compulsory Counterclaim, 15 PUIC questioned the

jurisdiction of the CIAC alleging that it was not a party to the Owner-
Contractor Agreement which contains the Arbitration Clause and sought the
recovery of exemplary damages in the amount of P l ,000,000.00 and
attorney's fees amounting to Pl ,000,000.00. 16

Ruling of the CIAC

On March 6, 2017, the CIAC issued its Final Award. 17 The CIAC
discussed that is within its jurisdiction to take cognizance of the case because
the dispute between the parties arose from or is connected with the Owner-
Contractor Agreement entered into between El Dorado and ASPF
Construction. 18

The CIAC found that El Dorado only paid a total of Pl 7,000,000.00

representing the 10% down payment for the whole project. The actual
accomplishment of ASPF Construction as of March 28, 2015 was estimated
to be 10.39%. Compensating the two, there is still left a balance of 0.39% of
the contract price or P663,000.00 in favor of ASPF Construction. Hence, El
Dorado cannot recover the Pl 7,000,000.00 it paid to ASPF Construction. 19 As
to the cost of retrofitting or pre-requisite works, the CIAC held that it cannot
grant the same to El Dorado because the latter is still liable to ASPF
Construction for the 0.39% of the contract price as discussed above. El Dorado
will be unjustly enriched at the expense of ASPF Construction if the same is
granted. 20 However, the CIAC found it proper to award P l ,700,000.00 as
liquidated damages in favor ofEl Dorado.2 1 The CIAC also ordered the parties
to pay their pro rata share of the arbitration costs. 22

On the other hand, the CIAC denied the prayer for exemplary damages
and attorney's fees submitted by PUIC. 23

Both El Dorado and PUIC filed an appeal to the CA.

14
Id. at 158.
15
Id. at 366-376.
16
Id. at 159,375.
17
Id. at 158- 176.
18
Id. at 166- 167.
19
Id. at 169- 170.
20
Id. at 170.
21
Id. at 173.
22
Id.
23
Id.
 Decision 4 G.R. Nos. 245617 & 245836

Ruling of the CA

In its July 23, 2018 Consolidated Decision, 24 the CA agreed with the
CIAC that El Dorado is not entitled to its claim for unliquidated damages,
costs of retrofitting, and the interests and costs of arbitration. Further, the CA
deleted CIAC' s award of Pl ,700,000.00 liquidated damages in favor of El
Dorado. 25

The CA agreed that El Dorado is not entitled to reimbursement of

rehabilitation and other prerequisite work because the same is in the nature of
actual damages that has to be proved. Here, El Dorado failed to adduce actual
receipts, invoices, contracts, and similar documents to support such claim. 26

In deleting the Pl ,700,000.00 liquidated damages awarded by the CIAC

to El Dorado, the CA discussed that as a precondition thereto, there must be
proof that ASPF Construction incurred delay in the performance of its
obligation. In this case, the CA found that there is insufficiency of evidence
to establish the fact of delay. Moreover, since El Dorado did not pay the down
payment on time and deliberately refused to settle the progress billings or
perform its other contractual obligations, it cannot demand that ASPF
Construction deliver on time or recover damages by reason of its own breach.
The CA concluded that El Dorado was equally at fault. 27

Lastly, the CA denied PUIC's contention that the unpaid First Variation
/ Order Billing in the amount of P729,668. l 1 be offset against El Dorado's
claim because there is no proof to support the billings. 28

El Dorado filed a motion for partial reconsideration 29 which was denied

in the Consolidated Resolution30 dated February 28, 2019.

Since the CA deleted the only monetary claim awarded by CIAC in its
favor, El Dorado filed this Petition for Review on Certiorari3 1 reiterating its
demand to be reimbursed the amount of Pl 7,000,000.00 it paid as down
payment, P21,538,294.76 as liquidated damages, interest, costs of arbitration,
and attorney's fees. 32

In its Comment, 33 PUIC agreed with the CA in deleting the award of

liquidated damages in the amount of Pl,700,000.00 in favor of El Dorado for
lack of legal basis. 34

24
25
26
27

28
29
Supra note 2.
Rollo, p. 80.
Id. at 71.
Id. at 72-75.
Id. at 79.
Id. at 82-101.
t
30
Supra note 3.
3I
Rollo, pp. 8-50.
32
Id. at 49.
33
Id. at 259-292.
34
Id. at 266.
 Decision 5 G.R. Nos. 245617 & 245836

Issue

Whether the CA correctly affirmed with modification the ruling of the

CIAC.

Ruling of the Court

This case originated from a Request for Arbitration35 filed by El Dorado

against PUIC without impleading ASPF Construction. At the outset, it must
be first determined whether the CIAC correctly took cognizance of the case.
PUIC questioned the jurisdiction of the CIAC in its Answer with
Counterclaim but did not insist on the same argument when the case reached
the CA. The silence of PUIC and its failure to raise the issue of jurisdiction
before the CA and before this Court is immaterial. Jurisprudence has
consistently held that for a court or an adjudicative body to have authority to
dispose of the case on the merits, it must acquire, among others, jurisdiction
over the subject matter. Jurisdiction over the subject matter is the power to
hear and detennine the general class to which the proceedings in question
belong; it is conferred by law and not by the consent or acquiescence of any
or all of the parties or by erroneous belief of the comi that it exists. Thus,
when a court has no jurisdiction over the subject matter, the only power it has
is to dismiss the action. 36

A judgment rendered by a court without jurisdiction is null and void

and may be attacked anytime. It creates no rights and produces no effect. It
remains a basic fact in law that the decision of a court or tribunal without
jurisdiction is a total nullity. A void judgment for want of jurisdiction is no
judgment at all. All acts performed pursuant to it and all claims emanating
from it have no legal effect. 37

The question of whether the CIAC has jurisdiction over a surety, which
issued a performance bond to guarantee the performance by the contractor of
its obligation under the construction agreement, is not novel. In Prudential
Guarantee and Assurance, Inc. v. Anscor Land, Inc, 38 property owner Anscor
Land, Inc. (ALI) entered into a contract for the construction of an eight-unit
townhouse with Kraft Realty and Development Corporation (KRDC). KRDC
secured the completion of the construction project through a surety and
performance bond it obtained from Prudential Guarantee. The delay in the
construction project prompted ALI to terminate the contract and to file
arbitration proceedings against both KRDC and Prudential Guarantee.
Prudential Guarantee argued that CIAC did not have jurisdiction over it for
not being a signatory of the construction agreement between ALI and KRDC.
In ruling that the CIAC has jurisdiction over Prudential Guarantee, the
Supreme Court held that:

35 Id. at 10.
36 Bi fag v. Ay-ay, 809 Phil. 236, 248 (20 17), citing Mitsubishi Motors Philippines Corporation v.
Bureau ofCustoms, 760 Phil. 954, 960(2015).
n Id.
JS
644 Phil. 634 (20 10).
Decision 6 G.R. Nos. 245617 & 245836

As regards the first requirement, the Performance

Bond issued by the petitioner [Prudential Guarantee] was
meant to guarantee the supply of labor, materials, tools,
equipment, and necessary supervision to complete the
project. A guarantee or a surety contract under Article 2047
of the Civil Code of the Philippines is an accessory contract
because it is dependent for its existence upon the principal
obligation guaranteed by it.

In fact, the primary and only reason behind the

acquisition of the perfonnance bond by KRDC was to
guarantee to ALI that the construction project would proceed
in accordance with the contract terms and conditions. In
effect, the performance bond becomes liable for the
completion of the construction project in the event KRDC
fails in its contractual undertaking.

Because of the performance bond, the construction

contract between ALI and KRDC is guaranteed to be
performed even if KRDC fails in its obligation. In practice,
a performance bond is usually a condition or a necessary
component of construction contracts. In the case at bar, the
performance bond was so connected with the construction
contract that the former was agreed by the parties to be a
condition for the latter to push through and at the same time,
the former is reliant on the latter for its existence as an
accessory contract.

Although not the construction contract itself, the

performance bond is deemed as an associate of the main
construction contract that it cannot be separated or severed
from its principal. The Perfonnance Bond is significantly
and substantially connected to the construction contract that
there can be no doubt it is the CIAC, under Section 4 of EO
No. I 008, which has jurisdiction over any dispute arising
from or connected with it.

However, in the case of Stronghold Insurance Company, Inc. v.

Spouses Stroem, 39 which involved property owners Sps. Stroem who entered
into an Owner-Contractor Agreement with Asis-Leif and Company, Inc.
(Asis-Leif) for the construction of a two-storey house, Asis-Leif likewise
secured a performance bond from Stronghold Insurance Company, Inc.
(Stronghold). When Asis-Leif failed to finish the project on time, Sps. Stroem
filed a Complaint for breach of contract and for sum of money with claims for
damages against both Asis-Leif and Stronghold before the Regional Trial
Court (RTC). Stronghold argued that the RTC has no jurisdiction over it in
view of the arbitration clause found in the Owners-Contractor Agreement
entered into by Sps. Stroem and Asis-Leif. This time, the Supreme Court held
that the RTC and not CIAC has jurisdiction over the surety ruling thus:

39 751 Phil. 262 (2015).

Decision 7 G.R. Nos. 2456 17 & 245836

This court, however, cannot apply the ruling in

Prudential to the present case. Several factors militate
against petitioner's claim.

The contractual stipulations in this case and in

Prudential are different. The relevant provisions of the
Owners-Contractor Agreement in this case state:

ARTICLE 5. THE CONTRACT

DOCUMENTS. -

The following documents prepared by the

CONTRACTOR shall constitute an integral part
of this contract as fully as if hereto attached or
herein stated, except as otherwise modified by
mutual agreement of parties, and attached to this
agreement.

Attachment 5.1 Working Drawings

Attachment 5.2 Outline Specifications

Attachment 5.3 Bill of Quantities

Attaclm1ent 5.4 CONTRACTOR Business

License

xxxx

ARTICLE 7. PERFORMANCE (SURETY)

BOND.-

7.1 Within 30 days of the signing of this

agreement, CONTRACTOR shall provide to
OWNERS a performance bond, issued by a duly
licensed authority. acceptable to the OWNERS,
and equal to the amount of PHP4,500,000.00
(Four Million and Five Hundred Thousand
Phi lippine Pesos), with the OWNERS as
beneficiary.

7.2 The performance bond will guarantee the

satisfactory and faithful performance by the
CONTRACTOR of all provisions stated within
this contract.

r
ARTICLE 8. ARBITRATION. -

8.1 Any dispute between the parties hereto which

cannot be amicably settled shall be finally settled
by arbitration in accordance with the provision of
Republic Act 876, of The Philippines, as
amended by the Executive Order 1008 dated
February 4, 1985.

In contrast, the provisions of the construction

contract in Prudential provide:
Decision 8 G.R. Nos. 245617 & 245836

Article 1
CONTRACT DOCUMENTS

1.1 The following shall fonn part of this Contract

and together with this Contract, are known as the
"Contract Documents":

a. Bid Proposal

xxxx

d. Notice to proceed

xxxx

j. Appendices A & B (respectively, Surety

Bond for Performance and, Supply of
Materials by the Developer)

This court in Prudential held that the construction

contract expressly incorporated the performance bond into
the contract. In the presen.t case, Article 7 of the Owners-
Contractor Agreement merely stated that a performance
bond shall be issued in favor of respondents, in which case
petitioner and Asis-Leif Builders and/or Ms. Ma. Cynthia
Asis-Leif shall pay P4,500,000.00 in the event that Asis-Leif
fails to perform its duty under the Owners-Contractor
Agreement. Consequently, the performance bond merely
referenced the contract entered into by respondents and Asis-
Leif, which pertained to Asis-Leifs duty to construct a two-
storey residence building with attic, pool, and landscaping
over respondents' prope11y.

To be clear, it is in the Owners-Contractor

Agreement that the arbitration clause is found. The
construction agreement was signed only by respondents and
the contractor, Asis-Leif, as represented by Ms. Ma. Cynthia
Asis-Leif. It is basic that "[c]ontracts take effect only
between the parties, their assigns and heirs[.]" Not being a
party to the construction agreement, petitioner cannot invoke
the arbitration clause. Petitioner, thus, cannot invoke the
jurisdiction of the CIAC. 40 (Emphasis supplied)

The Owner-Contractor Agreement in this case is the same as in

Stronghold in the sense that it failed to expressly incorporate the perfonnance
bonds thereto. Article 2 of the Owner-Contractor Agreement between El
Dorado and ASPF Construction provides the following:

Article 2
CONTRACT DOCUMENTS
q
2.01 The CONTRACT DOCUMENTS, which are
hereto incorporated and made integral part hereof, and which

40
Id. at 281-282.
 Decision 9 G.R. Nos. 2456 17 & 245836

are duly signed by the OWNER and the CONTRACTOR,

shall consist of, but not limited to the following:

a. Contractor's Proposals dated May 22, 2014 -Annex "A";

b. Plans, Specifications and other bid docwnents dated _ _
Am1ex "B"_;_
c. Notice of Award dated and instruction to Bidders -
Am1ex " C";
d. Unit Price Schedule - Annex "D";
e. Bar Chart/CPM Network - A1mex "E" ;
f. United Architects of the Philippines (UAP) Document 301
General Conditions - Am1ex " F";
g. Schedule of Payment - A1mex "G"
41
XX X X

It is clear from the Owner-Contractor Agreement that the Performance

Bonds were not made an integral part of the same. Even though the
Performance Bonds made reference to the Owner-Contractor Agreement,
neve1iheJess, the arbitration clause, which is the basis for CIAC to take
cognizance of the case, was only signed by E l Dorado and ASPF Construction.
PUIC is not a signatory of the Owner-Contractor Agreement. Thus, only El
Dorado and ASPF Construction, the parties to the Owner-Contractor
Agreement who agreed to the arbitration clause, can invoke the same. Not
being a pa1iy to the Agreement, it is not proper for PUIC to be impleaded in
the arbitration proceedings before the CIAC. This is consistent with the basic
principle that contracts shall take effect only between the parties, their assigns,
and heirs. 42

Since the CIAC has no jurisdiction over PUIC, the CIAC cannot rule
on the liability of PUIC over the Performance Bonds.

WHEREFORE, the Petition for Review on Certiorari is DENIED.

CIAC Case No. 36-2016 is DISMISSED for lack of jurisdiction on the part
of the Construction Industry Arbitration Co1111nission.

SO ORDERED.

,11
Rollo, p. 190.
42
C IVIL C ODE OF THE PHI LIPPINES, Al1. I 3 I I.
Decision 10 G.R. Nos. 245617 & 245836

WE CONCUR:

.PERALTA
tstice

S. CAGUIOA

==~
AER
SAMUEL~
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that

the conclusions in the above Decision had been reached in consultation before
the case was assigned to the writer of the opi · n of the Court's Div· ·on.