In a dispute between Malayan Insurance and St. Francis Square Realty, the Supreme Court clarified what can be included in the “actual remaining construction cost” (ARCC) in joint project development agreements. The Court disallowed the inclusion of interest expenses from loans secured to complete a condominium project, emphasizing that ARCC should only cover costs directly related to construction. This ruling affects how developers and landowners account for expenses and allocate units in joint ventures, ensuring fairer distribution based on actual construction expenditures.
Whose Investment? Unpacking Construction Costs in Joint Development Disputes
The case revolves around a joint project development agreement (JPDA) between Malayan Insurance Company, Inc. (Malayan) and St. Francis Square Realty Corporation (St. Francis) for the construction of the “ASB Malayan Tower.” Under the agreement, Malayan owned the land, and St. Francis was to develop the project. St. Francis, however, failed to complete the project, leading to a Memorandum of Agreement (MOA) where Malayan undertook to complete it. A central issue arose: what constituted the “actual remaining construction cost” (ARCC) for completing the project, and how should the condominium units be distributed based on this cost? This question led to disputes over whether interest expenses, value-added taxes, and other costs should be included in the ARCC. The Construction Industry Arbitration Commission (CIAC) and the Court of Appeals (CA) had differing views, prompting the Supreme Court to step in and provide clarity.
At the heart of the dispute was the interpretation of the MOA, particularly the term “actual remaining construction cost” (ARCC). St. Francis argued that ARCC should be understood in its ordinary context, referring only to the actual cost of completing and building the structure. Malayan, on the other hand, contended that the MOA recognized the parties’ intent to include interest expenses and other capital contributions in the ARCC. The Supreme Court sided with St. Francis, emphasizing that ARCC should be construed in its traditional “construction” sense, rather than in the broader “investment” sense. The Court underscored that interest expense is not an actual expenditure necessary to complete the project, but a mere financial cost. This interpretation aligns with the understanding that construction costs typically encompass direct on-site work, excavation, erection, and installation of components and equipment.
Moreover, the Supreme Court referred to the original agreement, the Joint Project Development Agreement (JPDA), emphasizing that it was about construction and allocation of units, not investments. To bolster its stance, the Court examined Section 9 of the MOA regarding Remaining Construction Cost (RCC), which stated that St. Francis warranted Malayan could complete the project at a cost not exceeding P452,424,849.00. This estimate was based on St. Francis’ Construction Budget Report, which included categories such as:
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I. Balance to Complete Existing Contracts
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– Php 161,098,039.86
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II. Unawarded Contracts
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224,045,419.16
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III. Professional Fee
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4,138,108.08
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IV. Contingencies
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63,143,281.10
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Php 452,424,849.10
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The Court agreed with the CIAC that ARCC was intended to be spent within these categories, subject to adjustments. Interest expenses, being a cost of borrowing money, did not fit within these categories, further solidifying the decision to disallow it from the ARCC calculation. The Supreme Court also addressed the issue of Value Added Tax (VAT), affirming the CA and CIAC’s consistent findings. St. Francis argued that input VAT should not be treated as part of construction cost. The Court, however, maintained that ARCC refers to actual expenditures made to complete the project, and Malayan had to pay input VAT as part of the contract price. This aligns with tax laws where the burden of VAT is shifted to the buyer.
Regarding the Comprehensive All Risk Insurance (CARI), St. Francis questioned its inclusion, citing a lack of proof of expense and discrepancies in receipts. However, the Court found that CARI in the amount of P4,361,291.34 was supported by official receipts and minutes of the Bids and Awards Committee Meeting, where it was agreed that Malayan would secure the CARI directly as the owner. The Court emphasized that the premiums were shouldered by Malayan, justifying its inclusion in the ARCC.
The issue of cost exclusions from the ARCC also came under scrutiny. The Court upheld the CIAC ruling that increased costs of P7,434,129.52 due to reconfiguration should be included in the ARCC. It sustained the CIAC’s observation that St. Francis had consented to the reconfiguration, provided it resulted in savings rather than additional costs. The CIAC’s review of the change orders and calculation of net savings supported this inclusion. However, change orders not due to reconfiguration, amounting to P971,796.29, were excluded from the ARCC. The Court agreed that these were not within the scope of the original work covered by the MOA and were, therefore, the sole responsibility of Malayan. On the other hand, half of the increased costs for Narra Parquet Works was included in the ARCC.
The CIAC decided that the increase in flooring costs due to the government log ban, a force majeure, should be equally shared. The CARI, on the other hand, should be wholly shouldered by Malayan, given the proofs present. Interior design works’ cost should be split equally while costs related to gym equipment should be fully accounted under ARCC.
The ruling also delved into Prolongation Costs and Extended Overhead. The CIAC initially excluded P6,000,000.00, attributing the delay to Malayan. However, the CA included P21,948,852.39 paid to Total Ventures, Inc. (TVI) for a settlement. The Supreme Court partially sided with Malayan, stating that the prolongation costs and interest, amounting to P8,282,974.82, should be included in the ARCC. The ruling affirmed that the reconfiguration of room layouts, which caused the delay, was a deviation by St. Francis, justifying the inclusion of these costs. It thus serves as a clear signal that the party that caused the delay shall shoulder the consequences of said delay.
Finally, the Supreme Court addressed the entitlement to Reserved Units and the income derived from them. It allocated 30% ownership of the reserved units to Malayan and 70% to St. Francis, adjusting the proportionate sharing. Consequently, the income realized from the rental of the reserved units was to be shared in the same proportion: 30% for Malayan and 70% for St. Francis. This decision ensures that both parties receive their fair share, based on the actual construction costs and the value of the reserved units, balancing their respective contributions and investments in the project.
FAQs
| What was the key issue in this case? | The key issue was determining what constituted the “actual remaining construction cost” (ARCC) in a joint project development agreement, specifically whether interest expenses should be included. |
| Why did the Supreme Court disallow the inclusion of interest expenses in the ARCC? | The Court held that interest expenses were not direct construction costs but financial costs and did not fall within the agreed-upon categories in the MOA for ARCC. |
| What is the significance of the Comprehensive All Risk Insurance (CARI) in this case? | The CARI was included in the ARCC because Malayan, as the project owner, secured and paid for the insurance, as supported by official receipts and meeting minutes. |
| How did the Court handle change orders due to reconfiguration? | The Court included the increased costs of change orders due to reconfiguration in the ARCC, as St. Francis had consented to the reconfiguration, anticipating savings rather than additional costs. |
| What was the Court’s ruling on change orders not due to reconfiguration? | Change orders not due to reconfiguration were excluded from the ARCC because they were not within the scope of the original work agreed upon in the MOA. |
| How were the reserved units allocated between Malayan and St. Francis? | The Court allocated 30% ownership of the reserved units to Malayan and 70% to St. Francis, based on the net ARCC and the total aggregate value of the reserved units. |
| What was the Court’s decision regarding the income realized from the rental of reserved units? | The Court ruled that the income from the reserved units should be shared proportionately: 30% for Malayan and 70% for St. Francis, from the date of completion of the project. |
| How did the Court address the attorney’s fees and arbitration costs? | The Court denied the parties’ claims for attorney’s fees due to the lack of a contractual stipulation or bad faith, but arbitration costs were shared pro rata based on the amounts claimed and counterclaimed. |
| What were the key exhibits used in determining the ARCC? | Key exhibits included Exhibit “C-3” (Cost to Complete as of August 10, 2006) and Exhibit “R-48-series” (construction costs computation, receipts, vouchers, and checks). |
In conclusion, this ruling provides valuable insights into how construction costs should be interpreted in joint development agreements. It clarifies that direct construction expenses, rather than broader investment costs, should be the basis for allocating assets and distributing benefits. The case highlights the importance of clear and specific contractual terms in such agreements to avoid disputes and ensure equitable outcomes.
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: Malayan Insurance Company, Inc. vs. St. Francis Square Realty Corporation, G.R. Nos. 198920-21, January 11, 2016