In Hanil Development Co., Ltd. v. Court of Appeals and M.R. Escobar Explosive Engineers, Inc., the Supreme Court clarified how subcontractors should be compensated for blasting work when the nature of the blasted materials is in question. The Court ruled that the specific terms of the subcontract agreement dictate the method of payment. This means subcontractors must provide solid proof if they expect to be paid based on cross-section measurements for solid rock, otherwise, payment will be based on a joint survey method, regardless of how the main contractor is compensated by the project owner. This decision emphasizes the importance of clear contractual terms and the burden of proof in disputes.

Blasting Rights: How Clear Contract Terms Determine Fair Pay in Construction Subcontracts

The case stems from a subcontracting agreement between Hanil Development Co., Ltd. (Hanil), the main contractor for the Iligan-Cagayan de Oro-Butuan Highway Project, and M.R. Escobar Explosive Engineers, Inc. (Escobar), the subcontractor responsible for rock blasting. The contract stipulated that Escobar would be paid P20.00 per cubic meter of blasted rock, with the method of assessment depending on the nature of the rock. If the rocks were solid, the quantity would be assessed using cross-section measurements. However, if the rocks were soft and removable by ripping, the quantity would be based on a joint survey of the actual blasted amount. Disputes arose over areas B-2, B-3, and C-1, where Escobar claimed it was owed P1,341,727.40, arguing that the rocks were solid and should be measured using the cross-section approach.

Escobar argued that since Hanil was paid by the Ministry of Public Works and Highways (MPWH) based on the cross-section system, it should be compensated similarly. The Supreme Court disagreed, emphasizing that the subcontract agreement between Hanil and Escobar was the governing document. The Court cited a letter from the project manager of the engineering consultants, Sauti, Certeza & F.F. Cruz, which stated that determining the exact volume of rock blasted by the subcontractor from the volume paid to the contractor was not possible. The letter noted that the rock blasted might only constitute a percentage of the volume paid in the cross-section, and boulders were often moved without blasting. The Court of Appeals correctly interpreted this to mean that the MPWH’s cross-section computation could not accurately determine payment from Hanil to Escobar.

“These payments are made subject to the specification under Clause 105-3-2 Rock Material’ of the General Specifications, copy attached. Therefore it is not possible to ascertain the exact volume of rock or boulders blasted by the sub-contractor from the volume paid to the contractor because the rock blasted may be, for example, 60% or 65 % of the volume paid in the cross-section. Also very often boulders are pushed by the bull-dozers without blasting.”

The Supreme Court stressed that contracts are the law between the parties, and their validity must be upheld as long as they are not contrary to law, morals, good customs, public policy, or public good. In this case, the terms of the agreement were clear: the cross-section approach would only apply if the blasted rocks were proven to be solid. Escobar failed to provide sufficient evidence to prove that the rocks blasted in the disputed areas were solid. It did not present object samples of the rocks or photographs of the areas, failing to meet the evidentiary burden.

Moreover, the Court noted that Escobar had initially accepted monthly payments computed using the joint survey method for the first seven months of the agreement. This initial conduct contradicted Escobar’s later claim that the payments were merely partial and subject to adjustment using the cross-section approach. The Court held that Escobar could not assume an inconsistent position by invoking the cross-section approach after accepting payments under the joint survey method for a significant period. This principle, often referred to as **estoppel**, prevents a party from contradicting its previous actions or statements if another party has relied on them.

Regarding Hanil’s claims for additional damages, the Court denied the plea for temperate damages, agreeing with the appellate court’s award of P20,000.00 in nominal damages. Hanil failed to prove the actual pecuniary injury it sustained due to Escobar’s unfounded civil suit. The Court also rejected Hanil’s claim for moral damages, citing that corporations, as artificial persons, cannot experience the emotional distress necessary to justify such an award. The Supreme Court held that moral damages are personal and cannot be awarded to entities without feelings or senses.

Similarly, Hanil’s request for exemplary damages was denied because it failed to establish its entitlement to moral, temperate, compensatory, or liquidated damages, a prerequisite for awarding exemplary damages under the Civil Code. However, the Court found that an increase in attorney’s fees from P50,000.00 to P150,000.00 was warranted, given the numerous legal incidents generated by the case over nearly two decades. The Court recognized the extensive litigation efforts required of Hanil, including multiple petitions for certiorari and the defense of its case on appeal and on the attachment bond.

Addressing the application for judgment on the attachment bond, the Court affirmed the illegality of the attachment and Escobar’s bad faith in obtaining it, which had been previously settled in an earlier Court of Appeals decision. The Court pointed to Escobar’s baseless allegations in its Petition for the Issuance of Preliminary Attachment, which included claims that Hanil had secured complete release of its final collection, moved out heavy equipment to unknown locations, and might leave the country. These allegations were found to be untrue, highlighting Escobar’s bad faith.

“(A)fter personal verification by (Escobar) of (Hanil’s) equipment in Cagayan de Oro City, it appears that the equipments were no longer existing from their compound.”

Consequently, the Court awarded Hanil temperate damages of P500,000.00 due to the damages suffered as a result of the illegal writ, including dishonored checks, temporary cessation of operations, and tarnished reputation. Additionally, the Court granted exemplary damages of P1,000,000.00 to deter parties from resorting to baseless allegations to obtain writs of attachment. The Court emphasized that the misuse of legal processes cannot be tolerated, especially when it victimizes foreign entities conducting legitimate business in the Philippines. While liability on the attachment bond is generally limited to actual damages, exemplary damages can be recovered when the attachment is maliciously sued out.

The Court deleted the award of attorney’s fees for the litigation of the application for damages against the bond, as these were already included in the grant of attorney’s fees in the main action. The Court upheld the disallowance of Hanil’s claim for U.S.$3,000.00 spent on the deposition of Engr. Chan Woo Park in South Korea, as the deposition was deemed merely corroborative and superfluous. It also sustained the grant of P7,507.90 as injunction bond premium for being reasonable under the circumstances.

Finally, the Court held that Escobar was liable to its bondsman, Sanpiro, under their Indemnity Agreement, up to the amount of P1,341,727.40, as determined by the terms and conditions of their contract of suretyship. The decision underscores the importance of clear contractual terms, the burden of proof in disputes, and the consequences of acting in bad faith during legal proceedings. It provides valuable guidance for contractors and subcontractors in the construction industry.

FAQs

What was the key issue in this case?	The key issue was whether a subcontractor should be compensated based on cross-section measurements for solid rock blasting when the subcontract agreement required proof of the rock’s nature. The Supreme Court emphasized that specific contractual terms dictate the method of payment.
What did the subcontract agreement stipulate regarding payment?	The agreement stipulated payment of P20.00 per cubic meter of blasted rock. If the rocks were solid, payment would be based on cross-section measurements; if soft, on a joint survey.
Why did Escobar claim it was owed additional money?	Escobar claimed it was owed P1,341,727.40 for areas B-2, B-3, and C-1, arguing the rocks were solid and should be measured using the cross-section approach. It argued that Hanil was paid by the MPWH based on the cross-section system, so it should be compensated similarly.
What evidence did Escobar fail to provide?	Escobar failed to provide sufficient evidence, such as object samples or photographs, to prove the rocks blasted in the disputed areas were solid. This failure was critical in the Court’s decision.
How did the Court interpret the initial payments made to Escobar?	The Court noted that Escobar initially accepted monthly payments based on the joint survey method, contradicting its later claim for cross-section measurement. This inconsistency weakened Escobar’s position.
Why was Hanil denied moral damages?	Hanil was denied moral damages because corporations, as artificial persons, cannot experience the emotional distress necessary to justify such an award. Moral damages are considered personal and cannot be claimed by entities lacking feelings or senses.
What led to the award of exemplary damages against Escobar?	The award of exemplary damages against Escobar was due to its bad faith in obtaining the writ of attachment. The Court found that the misuse of legal processes cannot be tolerated, especially when it victimizes foreign entities.
What was the significance of the Indemnity Agreement between Escobar and Sanpiro?	The Indemnity Agreement between Escobar and Sanpiro made Escobar liable to Sanpiro for the damages the attachment bond had to cover. However, Sanpiro’s liability was capped at P1,341,727.40, as determined by their contract of suretyship.

The Hanil v. Escobar case serves as a critical reminder of the importance of precise contractual language and the need for subcontractors to substantiate their claims with concrete evidence. This ruling emphasizes the need to establish clear, understandable terms in construction contracts to ensure fair and just compensation for all parties involved.

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: Hanil Development Co., Ltd. v. Court of Appeals and M.R. Escobar Explosive Engineers, Inc., G.R. No. 113176 & 113342, July 30, 2001