In a contract dispute, determining who gets paid first when there are competing claims – like an assignee versus creditors with garnishment orders – is crucial. The Supreme Court ruled in this case that an assignee’s rights to receivables take precedence over subsequent garnishments, provided the assignment was properly communicated. This means that if a contractor assigns its right to receive payment to a third party (the assignee) and the project owner is notified, the assignee has a superior claim to those funds compared to creditors who later attempt to garnish those same funds.

Navigating Contractual Waters: Assignment of Funds vs. Garnishment Claims

This case, Fort Bonifacio Development Corporation v. Manuel N. Domingo, revolves around a construction project, a contractor, and a dispute over who has the right to receive payment for work done. Fort Bonifacio Development Corporation (FBDC) hired LMM Construction for work on a condominium. LMM Construction, in turn, owed money to Manuel N. Domingo and assigned a portion of its receivables from FBDC to Domingo to settle the debt. Subsequently, other creditors of LMM Construction sought to garnish LMM’s receivables from FBDC. The central question is: who has the priority claim to those receivables – Domingo, the assignee, or the garnishing creditors? The resolution of this issue hinges on the principles of contract law, specifically assignment of rights, and the procedural rules governing garnishment.

At the heart of the matter is the Trade Contract between FBDC and LMM Construction, which contained a clause for retention money – an amount withheld to guarantee the contractor’s performance. When LMM Construction encountered difficulties, FBDC terminated the contract but still owed LMM Construction for the work completed. However, before Domingo could claim his assigned portion, other creditors of LMM Construction filed notices of garnishment against LMM’s receivables. FBDC, caught in the middle, eventually denied Domingo’s claim, stating that after completing rectification works and satisfying the garnishment orders, no funds remained. This led Domingo to file a complaint for collection of sum of money against both LMM Construction and FBDC.

The Regional Trial Court (RTC) initially denied FBDC’s motion to dismiss the case, asserting the need for a full trial to determine accountability. The Court of Appeals (CA) affirmed the RTC’s decision, stating that Domingo, as a third party to the Trade Contract, was not bound by its arbitration clause, which mandated disputes to be resolved by the Construction Industry Arbitration Commission (CIAC). FBDC appealed to the Supreme Court, arguing that as LMM Construction’s assignee, Domingo was bound by the Trade Contract’s terms, including the arbitration clause. FBDC leaned heavily on Article 1311 of the Civil Code, which states that contracts are binding on the parties, their assigns, and heirs.

The Supreme Court, however, disagreed with FBDC. It emphasized that the nature of Domingo’s complaint was not rooted in a breach of the Trade Contract but in the non-payment of LMM Construction’s debt to him. The Court clarified that the jurisdiction of the CIAC is confined to disputes arising from construction contracts, while Domingo’s claim was a simple collection of money, involving assignment of rights and preference of creditors. “The right of the respondent that was violated, prompting him to initiate Civil Case No. 06-0200-CFM, was his right to receive payment for the financial obligation incurred by LMM Construction and to be preferred over the other creditors of LMM Construction, a right which pre-existed and, thus, was separate and distinct from the right to payment of LMM Construction under the Trade Contract.”

The Court emphasized that while Domingo, as assignee, essentially stepped into LMM Construction’s shoes, the core issue was not LMM Construction’s right to the receivables, but FBDC’s decision to prioritize other creditors. “What respondent puts in issue before the RTC is the purportedly arbitrary exercise of discretion by the petitioner in giving preference to the claims of the other creditors of LMM Construction over the receivables of the latter.” The Supreme Court thus upheld the lower courts’ decisions, ruling that the RTC had jurisdiction over the case.

The Court underscored that encouraging arbitration for construction disputes aims for speedy and cost-effective resolution. However, it also acknowledged that certain cases, like this one, involving broader legal principles beyond construction expertise, are best resolved by the regular courts. Ultimately, the Supreme Court reinforced the principle that an assignee’s rights, when properly established, must be respected, preventing arbitrary denial of claims and upholding the integrity of contractual assignments. The case underscores the significance of providing due notice to all concerned parties regarding any assignment of receivables to safeguard their respective rights.

FAQs

What was the central issue in the Fort Bonifacio case?	The main issue was whether the assignee of a contractor’s receivables has a priority claim over those funds compared to creditors who subsequently garnished the receivables.
Who was Fort Bonifacio Development Corporation (FBDC)?	FBDC was the project owner who hired LMM Construction for work on a condominium. They were the party holding the receivables that were subject to conflicting claims.
Who was Manuel N. Domingo in this case?	Domingo was the assignee of a portion of LMM Construction’s receivables from FBDC. He was assigned the receivables to settle a debt LMM Construction owed him.
What is a ‘Deed of Assignment’ in legal terms?	A Deed of Assignment is a legal document that transfers rights or interests from one party (the assignor) to another (the assignee). In this case, LMM Construction assigned its right to receive payment from FBDC to Domingo.
What does ‘garnishment’ mean?	Garnishment is a legal process where a creditor can seize a debtor’s property or funds held by a third party to satisfy a debt. In this case, creditors of LMM Construction sought to garnish LMM’s receivables from FBDC.
What is the role of the Construction Industry Arbitration Commission (CIAC)?	The CIAC is a body that has jurisdiction over disputes arising from construction contracts. However, the Supreme Court ruled that the CIAC did not have jurisdiction in this case because the core issue was not a construction dispute.
What did the Supreme Court decide in this case?	The Supreme Court decided that the Regional Trial Court (RTC) had jurisdiction over the case, and that Domingo, as the assignee, had a valid claim to the receivables, which should be addressed before subsequent garnishments.
Why was Article 1311 of the Civil Code important to the arguments?	Article 1311 deals with the relativity of contracts, stating contracts bind the parties, their assigns, and heirs. FBDC argued Domingo was bound by the Trade Contract’s arbitration clause as LMM’s assignee, but the Court disagreed.
What was the basis for the Supreme Court’s decision?	The Supreme Court based its decision on the fact that Domingo’s claim was not related to a breach of the construction contract but was for the collection of debt assigned to him, and should be settled by the RTC, not the CIAC.

This ruling underscores the importance of proper notification and recognition of assignment agreements in construction projects. Parties involved in such arrangements must ensure all stakeholders are duly informed to avoid similar disputes and to protect the rights of assignees.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Fort Bonifacio Development Corporation v. Manuel N. Domingo, G.R. No. 180765, February 27, 2009