When is a Construction Project ‘Done Enough’? Substantial Completion and Your Rights

TRANSCEPT CONSTRUCTION AND MANAGEMENT PROFESSIONALS, INC. VS. TERESA C. AGUILAR, G.R. No. 177556, December 08, 2010

Imagine you’ve hired a contractor to build your dream home. Months pass, costs escalate, and the project drags on. But, at what point can you say the project is ‘substantially complete,’ and what are your rights if it’s not finished on time? This case tackles the tricky issue of ‘substantial completion’ in construction contracts and how it affects liquidated damages.

This case between Transcept Construction and Teresa Aguilar highlights the importance of clearly defined contracts, quality workmanship, and understanding the legal concept of substantial completion in construction projects. The Supreme Court decision provides valuable guidance for both contractors and property owners involved in construction agreements.

Legal Context: Key Principles in Philippine Construction Law

Construction law in the Philippines is governed by the Civil Code, special laws like the Construction Industry Arbitration Law (CIAC Law), and industry-standard documents published by the Construction Industry Authority of the Philippines (CIAP). Several articles in the Civil Code pertain to contracts and obligations, which form the bedrock of construction agreements.

Substantial Completion: This is a critical concept. It doesn’t mean ‘perfect’ completion, but rather that the project is sufficiently complete for its intended use. CIAP Document No. 102, Section 20.11(A)(a) defines substantial completion as when the contractor completes 95% of the work, provided that the remaining work does not prevent the normal use of the completed portion.

Liquidated Damages: These are damages agreed upon in advance by the parties to a contract, payable in the event of a breach. In construction, it’s typically a daily or weekly rate charged to the contractor for delays beyond the agreed completion date. However, if there is substantial completion, the owner may not be entitled to the full amount of liquidated damages.

Article 1234 of the Civil Code is central to this case: “If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.” This means even if the project isn’t 100% complete, the contractor may still be entitled to payment, less the cost to complete the remaining work, if they acted in good faith.

For example, imagine a building is 98% complete. Only minor finishing touches are needed, like painting a small section of a wall or installing a missing door handle. The building is clearly usable. In this case, the project could be considered substantially complete, even if not fully finished.

Case Breakdown: The Dispute Between Transcept and Aguilar

The story began when Teresa Aguilar hired Transcept Construction to build a vacation house in Batangas. They signed an initial contract, but disputes arose regarding the quality of work and billing. Aguilar claimed substandard work; Transcept denied the allegations. The parties entered into a second contract to address these issues and extend the completion date.

Despite the second contract, disagreements continued. Aguilar claimed the project was still incomplete, while Transcept sought payment for additional work. Aguilar filed a complaint with the Construction Industry Arbitration Commission (CIAC) to resolve the dispute.

Here’s a breakdown of the legal journey:

• CIAC Decision: The CIAC determined that Transcept had substantially completed the project (98.16% completion). It awarded Aguilar a small amount for uncompleted work but ordered her to pay Transcept for additional work.
• Court of Appeals Decision: Aguilar appealed. The Court of Appeals reversed the CIAC’s decision, finding that Transcept hadn’t substantially completed the project. It awarded Aguilar a larger sum for uncompleted work, liquidated damages, and consultancy fees, while denying Transcept’s claim for additional work.
• Supreme Court Decision: Transcept appealed to the Supreme Court. The Supreme Court partly reversed the Court of Appeals, siding with the CIAC’s original assessment of substantial completion.

The Supreme Court, in its decision, quoted Article 1234 of the Civil Code and stated, “[i]f the obligation had been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee.”

The Court also noted, “The Court of Appeals failed to consider the CIAC’s as well as its own finding that Aguilar did not present any evidence on indirect costs for General Requirements. In addition, Aguilar’s counsel did not cross-examine Transcept’s witnesses… In short, Aguilar did not dispute but merely accepted Transcept’s computation on indirect expenses.”

Practical Implications: What This Means for You

This case underscores the importance of clear and comprehensive construction contracts. Both owners and contractors must understand the concept of substantial completion and its implications for payment and damages. Document everything, including changes, approvals, and any issues that arise during construction.

For property owners, be sure to hire qualified professionals to oversee the project and assess the quality of work. If disputes arise, consider seeking expert legal advice early on. For contractors, maintain detailed records of all work performed, costs incurred, and communications with the owner.

Key Lessons:

• Define Substantial Completion: Clearly define what constitutes ‘substantial completion’ in your contract to avoid ambiguity.
• Document Everything: Keep meticulous records of all work, costs, and communications.
• Seek Expert Advice: Consult with legal and construction professionals early on to avoid costly disputes.
• Understand Your Rights: Know your rights and obligations under the contract and Philippine law.

Frequently Asked Questions (FAQs)

Q: What happens if a contractor abandons the project before completion?

A: If a contractor abandons the project without justification, they are in breach of contract. The owner can sue for damages, including the cost to complete the project and any losses incurred due to the delay.

Q: What is the role of the CIAC in construction disputes?

A: The CIAC is a specialized arbitration body that resolves construction disputes quickly and efficiently. Its decisions are generally final and binding.

Q: Can I withhold payment from a contractor if I’m not satisfied with the work?

A: You can withhold payment for work that is not performed according to the contract. However, you must provide clear and specific reasons for withholding payment. It’s best to consult with a lawyer before withholding payment.

Q: What are ‘change orders’ and how do they affect the contract?

A: Change orders are written agreements that modify the original contract, typically to address unforeseen circumstances or changes requested by the owner. All change orders should be in writing and signed by both parties.

Q: What is the difference between actual damages and liquidated damages?

A: Actual damages are the actual losses suffered by the owner due to the contractor’s breach. Liquidated damages are a pre-agreed amount specified in the contract to compensate for delays or other breaches.

ASG Law specializes in construction law and dispute resolution. Contact us or email hello@asglawpartners.com to schedule a consultation.