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Construction Law 2022

Last Updated June 09, 2022

Philippines
 Law and Practice
Law and Practice
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1. General
1.1 Governing Law
The principal laws governing the construction market in the Philippines are
as follows.
Philippine Civil Code
The Philippine Civil Code ("Civil Code") is the general law that governs
contractual relations in the Philippines, which include construction
contracts. Construction contracts are governed by the general rule under
the Civil Code that parties are free to stipulate the terms of their agreement,
provided that these are not contrary to law, morals, good customs, public
order, or public policy.
Consequently, unless otherwise provided by law or contract, a construction
contract will be governed by the provisions of the Civil Code on Obligations
and Contracts and those applicable to contracts for a "piece of work".
Presidential Decree No 1746 (PD 1746)
PD 1746 created the Construction Industry Authority of the Philippines
(CIAP) for the purpose of regulating the construction industry in the
Philippines. PD 1746 also established the Philippine Contractors
Accreditation Board (PCAB), the licensing body for persons seeking to
engage in construction activities in the Philippines.
Republic Act No 4566 (Contractor's Licence Law)
The Contractor's Licence Law requires contractors to obtain a licence from
the PCAB (PCAB Licence), and also sets out the procedure and
requirements for the issuance of such licence.
Executive Order No 1008 (Construction Industry Arbitration Law or
CIAC Law)
The CIAC Law created the Construction Industry Arbitration Commission
(CIAC), which has its own CIAC Rules of Procedure. The CIAC has original
and exclusive jurisdiction over construction disputes arising from a contract
entered into by parties involved in construction in the Philippines that
contains an arbitration clause.
Republic Act No 9184 (Government Procurement Reform Act or
GPRA)
The GPRA applies to all branches of the Philippine government, and to all
procurement activities involving services and infrastructure projects.
The GPRA prescribes standard template conditions of contract (also known
as the General Conditions of Contract and the Special Conditions of
Contract). It affects the overall construction contract when a government
project is involved.
The GPRA also applies to foreign-funded infrastructure projects, unless
otherwise provided by the relevant treaty, international agreement, or
executive agreement.
Republic Act No 6957, as amended by Republic Act No 7718 (PPP
Law)
The PPP Law governs public-private partnership (PPP) infrastructure
projects, specifically those that are under the following schemes:

 build-operate-and-transfer;

 build-and-transfer;

 build-lease-and-transfer;

 build-transfer-and-operate;

 contract-add-and-operate;

 develop-operate-and-transfer;

 rehabilitate-operate-and-transfer; and

 rehabilitate-own-and-transfer.

Presidential Decree No 1096 (National Building Code of the

Philippines)
The National Building Code sets out the national policy and the legal
requirements relating to the design, location, siting, construction, alteration,
repair, conversion, use, occupancy, maintenance, moving, demolition of,
and addition to public and private buildings and structures. It also serves as
a basis for local ordinances enacted by local government units for
implementation within their respective territorial jurisdictions.
Presidential Decree No 1445 (Government Auditing Code of the
Philippines or GACP)
The GACP needs to be considered when dealing with construction
contracts involving the government.
The GACP specifies that the powers of the Philippine Commission on Audit
(COA) extend to the examination, audit and settlement of all debts and
claims of any sort due from or owing to the government or any of its
subdivisions, agencies and instrumentalities. This becomes relevant when,
in the event of a dispute, a contractor obtains a favourable judgment
against the government.
There have been several instances in the past when a CIAC award against
the government has been modified and reduced by the COA, pursuant to
its power to approve money claims against the government. In Taisei
Shimizu Joint Venture v COA and DOTr (2020), the Supreme Court ruled
that the COA may not disregard final and executory judgments rendered by
courts and other adjudicative bodies by disallowing any part of such final
award.
1.2 Standard Contracts
The use of standard contracts is not mandatory in construction projects
procured by a private (ie, non-government entity) employer, and parties are
generally free to agree on the form that will be used.
There have been attempts to come up with template construction contracts
for private projects in the Philippines. For instance, the CIAP has
developed two sets of template contracts: (i) CIAP Document 101, or the
"General Conditions of Contract for Government Construction"; and (ii)
CIAP Document 102, or the "Uniform General Conditions of Contract for
Private Construction". Although these CIAP template contracts are rarely
used, the Philippine Supreme Court has, in some instances, considered
certain provisions of CIAP Document 102 as evidence of prevailing practice
in the construction industry, and has applied these provisions in instances
where there appear to be gaps or uncertainty in the parties' construction
contract (see Werr Corp International v Highlands Prime, Inc, 2017).
On the other hand, for construction and infrastructure projects procured by
the Philippine government, standard forms are normally used that contain
the clauses and terms required under the relevant laws and regulations.
For example, in construction projects procured by the government under
the GPRA, or those undertaken by the government in accordance with the
Build-Operate-Transfer Law (BOT Law), standard forms are used that
contain the terms required under the relevant law and their allied
regulations. For government infrastructure projects that are funded by way
of foreign grants covered by the Official Development Assistance Act (ODA
Act), FIDIC forms are typically used.
1.3 COVID-19
The Philippines construction industry was the fastest-growing in the Asia-
Pacific region prior to the COVID-19 outbreak, but its growth has been
severely impacted by the pandemic.
The COVID-19 pandemic has resulted in the imposition of varying degrees
of health and safety protocols across the country. During the first half of
2020, only essential construction projects, ie, those relating to COVID-19
facilities, emergency works, priority public and private infrastructure
projects, as defined, and the like, were allowed to operate on a skeletal
workforce. As the policy direction for permissible work during the
quarantine period stabilised, public and private construction projects
eventually resumed operations at full operating capacity, subject to
compliance with health and safety protocols.
In an effort to adapt to the circumstances, the CIAC issued guidelines on
how to conduct online proceedings in construction arbitration proceedings,
which essentially require the parties to agree to the conducting of online
proceedings.
The lockdowns have likewise given rise to force majeure claims. "Force
majeure" under Philippine law, pertains to events that could not be
foreseen, or though foreseen, were inevitable (Article 1174, Civil Code).
This general principle on force majeure, however, gives way to contractual
stipulations by the parties.
2. Parties
2.1 The Employer
Companies That Act as Employers
Private individuals, privately owned entities, and government agencies and
instrumentalities typically act as employers in construction projects in the
Philippines.
Rights and Obligations
The general rights and obligations of the employer under a construction
contract normally include the following.
Rights

 To inspect the works or any portion thereof;

 to require the correction of defects due to faulty materials,

equipment, or workmanship that may appear within a certain
period upon completion of the works;

 to stop the works or any portion thereof, if the contractor fails to

complete or correct the same, and to carry out or correct the work
by itself or through other contractors;

 to obtain title and ownership over all completed works, and over
all materials, equipment, tools, and supplies for which payment
has been made under the contract; and

 to request variations, in accordance with the contract.

Obligations

 To pay the contract price;

 to provide the contractor access to and possession of the site, to

enable the contractor to perform the construction works;

 to provide pertinent information regarding the site that may be

needed by the contractor in connection with the construction
works;

 to obtain relevant government permits and licences needed for

the project; and

 to obtain and maintain the relevant insurance coverages required

under the contract.

General Relations Between the Employer, Contractor, Subcontractors

and Financiers
Generally, no principal-agent, employer-employee or partnership
relationship is created between the employer, on one hand, and the
contractor, subcontractors and financiers, on the other hand. The employer
is not bound by the acts of such parties and its relationship with them will
generally be governed by the terms of the relevant agreements among the
parties.
2.2 The Contractor
Companies That Act as Contractors
The entities that typically act as contractors in construction projects are
Philippine stock corporations that secure the appropriate licence from the
PCAB.
There are also instances where multiple contractors, each holding a PCAB
licence, form an unincorporated joint venture (UJV) to undertake only a
single specific project. In such cases, the UJV itself must obtain its own
PCAB licence.
A consortium between a PCAB-licensed contractor and a non-contractor
may also be formed to undertake only a single specific project. In such a
case, the consortium itself must obtain its own PCAB licence.
Entities that act as contractors are also normally required by employers to
satisfy certain legal, financial and technical eligibility requirements.
Types of PCAB Licences
There are two main types of PCAB licence: a Regular Licence and a
Special Licence.
Regular Licence
Under the Implementing Rules (IRR) of the Contractors' Licence Law, a
Regular Licence may be issued only to Filipino sole proprietorships, and to
partnerships and corporations that have at least 60% Filipino equity
participation and are organised under Philippine law. A Regular Licence
authorises the licensee to engage in construction contracting within the
field and scope of the licence classification during the licence's validity,
renewable annually.
Special Licence
On the other hand, a Special Licence may be issued to a joint venture, a
consortium, a foreign constructor or a project owner, and only authorises
the licensee to engage in the construction of a single, specific project. It
must be renewed annually for as long as the project is in progress. The
number of renewals is limited to the period until the completion of the
specific project for which the licence was issued.
Regular Licence with Annotation – the Quadruple-A Licence
In 2015, the IRR of the Contractor's Licence Law was amended to allow for
the issuance of a Regular Licence with Annotation, which is a sub-type of
Regular Licence under the Quadruple A Category ("Quadruple-A Licence").
A Quadruple-A Licence may be issued to a corporation organised under
Philippine law, including ones that are up to 100% foreign-owned. An
applicant for a Quadruple-A Licence must have a minimum paid-up
capitalisation of at least PHP1 billion at the time it applies for the licence.
The holder of a Quadruple-A Licence may undertake only specific types of
vertical and horizontal projects, each with a prescribed minimum contract
value.
Recent court ruling
In a recent Supreme Court decision, PCAB v Manila Water Company, Inc
(2020), the foreign ownership restrictions applicable to PCAB Regular
Licences were declared invalid. It was held that while the Contractor's
Licence Law authorises the PCAB to adopt rules to effect classification of
contractors as may be necessary, the intention is not for such law to
discriminate against foreign contractors. The classification of contractors is
limited only to the classifications specifically provided under the
Contractor's Licence Law, which excludes nationality-based classification.
Moreover, the court held that the constitutional provision that limits the
practice of professions to Filipino citizens is inapplicable to the licensing of
contractors in the construction industry.
In a 2021 Resolution, the Supreme Court denied PCAB's Motion for
Reconsideration and the intervention of several non-parties, and upheld its
2020 Decision. PCAB has yet to implement the ruling of the Supreme
Court, because one of the intervenors in the case has also filed a Motion
for Reconsideration of the 2021 Resolution, which remains pending.
Rights and Obligations Under a Construction Contract
The general rights and obligations of the contractor under a construction
contract normally include the following.
Rights

 To receive the contract price;

 to be given access to and possession of the site, to enable the

contractor to perform the construction works;

 to receive pertinent information regarding the site that may be

needed by the contractor in connection with the construction
works; and

 to receive an extension of time, where applicable, in accordance

with the terms of the contract.

Obligations

 To perform and complete the works within the timelines provided

in the contract and, at completion date, to hand over the sites and
the completed works to the employer;
  to perform the works using materials, goods, equipment and
methods of constructions of the quality and standards required
under the contract;

 to provide and pay for all labour, materials, equipment, tools,

construction equipment, and all machinery, transportation, and
other facilities and services necessary for the proper execution
and completion of the works;

 to obtain the permits necessary for the works from the relevant
government agencies;

 to warrant that the works conform with the requirements of the

applicable law, the contract and other requirements of the
employer, and are free from hidden defects, imperfections or
faults;

 to rectify or remedy any defect or deficiency during the

construction period or within a period of time thereafter;

 to comply with all relevant labour laws applying to its employees;

 to ensure security and safety at the site; and

 to procure and maintain appropriate bonds and insurance from

reputable and financially sound companies acceptable to the
employer.

General Relations Between the Contractor and Employer

See 2.1 The Employer.
General Relations Between the Contractor and Subcontractors
The contractor is normally responsible for all the acts of its subcontractors,
including any negligent, wilful or reckless acts or omissions on the part of
any subcontractor, its agents or employees, as if they were the acts,
negligence and omissions of the contractor.
General Relations Between the Contractor and Financiers
See 2.1 The Employer.
2.3 The Subcontractors
Companies That Act as Subcontractors
See 2.2 The Contractor for the kinds of entities that typically act as
contractors in construction projects.
Rights and Obligations Under a Construction Contract
The rights and obligations of a subcontractor are governed, not by the
construction contract between the employer and the contractor, but by its
own agreements with the contractor. Normally, in the agreements between
the contractor and the subcontractor, the subcontractor will have the same
rights and obligations as those of the contractor under the latter’s contract
with the employer, to the extent applicable to the portion of the works
subcontracted to the contractor. However, the contractor would not be
relieved of its obligations towards the employer with respect to the
subcontracted works.
General Relations Between the Subcontractor and Employer
Construction contracts may or may not allow the contractor to subcontract
the whole or a portion of the works, or may require the contractor to obtain
the employer’s consent prior to such subcontracting.
If subcontracting is allowed, it is generally the contractor that remains liable
to the employer for all the acts of its subcontractors, including any
negligent, wilful or reckless acts or omissions on the part of any
subcontractor. It is also the contractor, and not the employer, that is
typically responsible for the proper and timely payment of all
subcontractors.
General Relations Between the Subcontractor and Contractor
See 2.2 The Contractor with regard to general relations between the
contractor and subcontractors.
General Relations Between the Subcontractor and Financier
Generally, no principal-agent, employer-employee or partnership
relationship is created between subcontractors and financiers. The
subcontractors' relationship with the financiers will generally be governed
by the terms of the agreements (if any) that may exist between them.
2.4 The Financiers
Companies and/or Institutions That Act as Financiers
For construction projects procured by a private (ie, non-government entity)
employer, the financing required by the employer and/or the contractor is
usually secured from private financial institutions, such as banks.
On the other hand, for construction projects procured by the government,
the financier would normally be the government itself through direct
government appropriations and financing arrangements secured from
private financial institutions. Another typical source of financing for
construction projects procured by the government would be Official
Development Assistance (ODA) in the form of loans and/or grants secured
from foreign governments and/or from international financial institutions
such as the World Bank and the Asian Development Bank.
Rights and Obligations Under a Construction Contract
Financiers are not typically made parties to the construction contract.
However, there are instances where the construction contract would
expressly provide that the financiers are entitled to certain rights, such as
the following:

 extensive information, auditing and inspection rights;

 granting of a security interest over the project;

 to cure the breach on behalf of the defaulting party; and

 to nominate a third party (which may be the financier itself) to

assume the rights of the defaulting party.

Construction contracts do not usually provide for obligations of financiers.

General Relations Between the Financier and Employer
The relationship between the employer and the financier would normally be
governed not by the construction contract, but by the financing or other
similar agreement between the employer and the financier. However, as
mentioned above, certain rights may be granted to the financier under the
construction contract, in order to protect the financier’s financial interest in
the project.
General Relations Between the Financier, Contractor and
Subcontractors
Normally, there would be no direct relationship between the financier and
the contractor and subcontractors. However, as mentioned above, certain
rights may be granted to the financier under the construction contract, in
order to protect the financier’s financial interest in the project.
3. Works
3.1 Scope
Typically, the scope of the works is determined by the employer and its
relevant consultants based on the former’s requirements, and is included in
the tender documents for the project. However, it is also common for the
scope of the works to be prepared jointly by the employer (and its relevant
consultants) and the contractor, and once agreed and finalised, to be
incorporated in the construction contract.
Methods of description used for the scope of the works include the
following:

 programme of works;

 terms of reference;

 drawings (including supplementary details and shop drawings)

and specifications prepared by the architect and/or other relevant
consultants; and

 project schedules and milestones.

3.2 Variations
Scope and Price of Variations Requested by the Employer
In practice, the scope of variations requested by the employer would
typically include:

 changes in quantities or an increase in the scope of the work of

the contractor resulting from adjustments in work drawings;

 extra work or alterations, additions to or deductions from the

scope of the work; and

 the need for additional or a different type of work resulting from

materially different sub-surface conditions from those shown in
the drawings, specifications, or contract documents.

In determining the price of the variation, the value of any extra work or
change is usually determined by the employer in any one or more of the
following ways:

 by a lump sum acceptable to the contractor;

 by unit prices either stipulated in the contract or subsequently

agreed upon; and/or

 by actual direct cost plus value added tax, if any, and a fixed
percentage for the contractor's profit and overheads (eg, 15%).

Scope and Price of Variations Requested by the Contractor

Generally, the parties may contractually agree on the determination of the
scope and price of variations requested by the contractor.
The usual procedure adopted is that the contractor proposes a variation to
be adopted by the employer. Once approved, the variation will then be
valued by the parties by agreement or through a third party (eg, an
engineer).
It must be noted that under Philippine law (Civil Code, Article 1724), a
contractor can only demand an increase in the price if there is a change in
the plans and specifications under the following conditions:

 the variation is authorised by the employer in writing; and

 the additional price to be paid to the contractor has been

determined in writing by both parties.

3.3 Design
It is more common in the Philippines for design works to be separately
contracted by the employer to a design consultant. In such cases, the
construction contract will typically provide that the employer is fully
responsible for the adequacy of the design. The drawings and
specifications prepared by the architect or the design consultant are
normally attached to, and an integral part of, the construction contract, and
must be adhered to by the contractor in their performance of the works. It is
also usually stipulated in construction contracts that the architect or the
design consultant shall inspect the works to determine compliance with the
drawings and specifications. The employer may require the rectification of
works that the architect or design consultant determines to be non-
compliant.
However, there are also instances where the employer and the contractor
agree that a part or the whole of the works shall be designed by the
contractor. In such cases, the contractor is responsible for the adequacy of
the design, and all such responsibilities normally assigned to the owner in
relation to the design are instead assigned to the contractor.
3.4 Construction
The contractor is generally responsible for the performance of all the works,
and their completion within the timelines provided under the construction
contract, and is normally expected to supply all the materials, goods and
equipment needed for the works. It is also the contractor’s responsibility to
rectify or remedy any defect or deficiency that may arise during the
construction period and/or within a certain period thereafter.
If allowed under the contract, the contractor may subcontract a portion of
the works. In such cases, the contractor normally remains responsible for
all acts of its subcontractors, as if they were the acts, negligence and
omissions of the contractor itself.
The employer, on the other hand, is generally liable only to pay the contract
price to the contractor, and allow the contractor and subcontractor access
to the site to perform the works. The employer is generally not involved in
the performance of the works.
3.5 Site Access
Prior to Construction
Responsibility for matters relating to the status of the site prior to
construction is normally stipulated in the contract. The contract may provide
that any remedial works needed to prepare the site for construction are
included in the scope of the contractor’s works, or that any such remedial
works shall be the responsibility of the employer (through its other
contractors) prior to the commencement of the works.
However, contractors typically visit the project site prior to the bidding and
awarding of the contract in order to assess the facilities that would be
needed and the difficulties that could potentially attend the execution of the
works. Most contracts also require the employer to provide the contractor
with a geodetic survey and subsurface exploration.
The employer is normally responsible for any violation of environmental
laws and regulations relating to the status of the site prior to construction.
Accordingly, any regulatory penalties that may result from such violations
would be imposed on the employer.
Construction contracts often provide that all archaeological finds, and other
similar items found on the site, shall be considered the property of the
employer.
During Construction
On the other hand, construction contracts normally provide that, while
performing the works during the construction period, the contractor is
responsible for the site and must comply with all applicable environmental
laws and regulations. The contractor may also be held responsible for
violations under environmental laws and regulations if the violation arises
from its own acts or omissions.
3.6 Permits
The following are the primary permits required for a construction project:

 Contractor's Licence from the Philippine Contractor's

Accreditation Board;

 Environmental Compliance Certificate (and allied permits) or

Certificate of Non-Coverage (as may be applicable) from the
Department of Environment and Natural Resources;
  zoning/locational clearance, building permit (and other related
permits; eg, electrical permits, mechanical permits) and
occupancy permit, from the relevant local government unit;

 fire safety evaluation clearance, from the Bureau of Fire

Protection;

 for projects near airports, a height clearance permit from the Civil
Aviation Authority of the Philippines; and

 such other permits as may be required under applicable special

laws and/or regulations.

Except for the Contractor's Licence (which the contractor must obtain and
hold in its own name), all the permits required for the construction project
would normally be issued in the employer’s name. However, the contract
usually provides that the contractor is responsible for obtaining such
permits for and on behalf of the employer.
3.7 Maintenance
The maintenance of the works is normally governed by a contract between
the employer and another service provider. The maintenance contract is
typically separate from the construction contract, but there are also
instances where the construction, operation and maintenance of the project
are integrated in a single contract (eg, in public-private partnership projects
between the government and private proponents that involve the
construction, operation and maintenance of infrastructure facilities).
The scope of operation and maintenance works varies depending on the
type of project involved, and is generally dependent on the agreement of
the parties. However, the scope of maintenance works usually involves the
regular scheduled maintenance of the works, day-to-day administration,
management, upkeep, repairs, overhauls, improvements and replacements
that are necessary for the safe and proper operation of the works.
The construction contract may provide that the manual for the maintenance
works shall be prepared by the contractor and turned over to the employer
on completion of the construction.
3.8 Other Functions
Other functions in the construction process are usually contracted by the
employer to third parties.
Operational services are usually covered by a separate agreement
between the employer and an operation and maintenance service provider
(which may or may not be the contractor). See 3.7 Maintenance.
Financing arrangements are also usually covered by a separate financing
agreement and are independent of the construction. However, the financier
may also be provided with certain rights (see 2.4 The Financiers), which
may be exercised in accordance with the terms of the construction contract.
The transfer of the project from the contractor to the employer is normally
governed by the terms of the construction contract.
3.9 Tests
Upon completion of the works, the contractor will normally request the
employer to conduct an inspection. The employer (through its relevant
consultants) may conduct tests, at its own expense, to determine whether
the contractor has satisfactorily completed the works in accordance with
the contract and the employer's instructions.
If the tests reveal that the contractor has not satisfactorily completed the
works, it would be the contractor’s responsibility to promptly replace or
repair the works at its own expense. In such cases, the contractor would
also typically shoulder the expenses that will be incurred to conduct further
tests until the works are satisfactorily completed.
If the tests determine that the works have already been satisfactorily
completed, the employer will certify such completion in accordance with
mechanics set out in the construction contract.
3.10 Completion, Takeover, Delivery
The contracts would provide separate milestones for Substantial
Completion and Final Completion. Substantial Completion typically entails
completion of at least 95% of the works, which already allows the employer
to use the site. Final Completion refers to the completion of all the works
under the contract.
Substantial Completion
If the contractor determines that it has met Substantial Completion, it will
request the employer to inspect the works. If the employer finds that
Substantial Completion has indeed been met, it will issue a Certificate of
Substantial Completion. If the employer finds that Substantial Completion
has not been met, it will notify and allow the contractor to perform the works
necessary to achieve Substantial Completion.
After issuance of the Certificate of Substantial Completion, the works and
the site would be turned over to the employer.
Final Completion
If the contractor determines that it has met Final Completion, it will request
the employer to inspect the works. If the employer finds that Final
Completion has indeed been met, it will issue a Certificate of Final
Completion. If there are any defective of non-compliant works, the
employer may issue a "punch list" identifying such works. Upon the
contractor's completion of the punch list to the employer’s satisfaction, the
employer will issue the Certificate of Final Completion.
3.11 Defects and Defects Liability Period
The construction contract usually provides for a defects liability period
where the contractor can be held liable for defects in the works upon notice
by the employer. Typically, the defects liability period would be for a period
of one year counted from Substantial or Final Completion.
In the event that defects are discovered during the defects liability period,
the employer may require that the defects be remedied at the sole cost of
the contractor. If the contractor fails to remedy the defects, the employer
may (i) remedy the defects or request another party to do so, and (ii) claim
from the warranty security or retention an amount to defray the costs for
such rectification.
In the absence of any contractual stipulation, the defects liability period
under the Civil Code (Article 1723) applies.

 The engineer or architect who drew up the plans and

specifications for a building is liable for damages if within 15
years from the completion of the structure, the same should
collapse by reason of a defect in those plans and specifications,
or due to the defects in the ground.

 The contractor is responsible for damages if the edifice falls,

within 15 years, on account of defects in the construction or the
use of materials of inferior quality furnished by the contractor, or
due to any violation of the terms of the contract.

Actions under either of the above must be brought within ten years
following the collapse of the building.
The Civil Code does not provide for a period within which to report
discovered defects after the initial defects liability period.
4. Price
4.1 Contract Price
The contract price is typically expressed as a lump sum or a fixed amount
in the contract, subject only to adjustments as may be needed in case of
variations, and as may be agreed upon by the parties. The contract price
would already consider all costs and expenses that the contractor may
incur for the proper execution, completion and performance of the works.
Cost-Plus Contracts
Cost-plus contracts are also regularly used in the Philippines, particularly in
instances where the scope of the works has not been clearly defined. The
variations of cost-plus contracts that are typically used are cost plus fixed
percentage, and with lesser frequency, cost plus fixed fee.
Milestone Payments
It is also common for construction contracts to provide for milestone
payments. Each milestone payment is usually subject to verification or
testing by the employer prior to payment. Contracts also often provide for a
down payment, normally upon delivery of the performance bond required
under the contract and after the necessary permits and licences have been
obtained from the relevant government agencies. Full payment of the
contract price is made upon Final Completion, subject to any agreement
relating to any retention amount.
4.2 Payment
Parties are free to stipulate the conditions of late or non-payment, which
may include the payment of interest or penalties, and may also constitute a
ground for the suspension of work or termination of the contract.
The following measures are typically applied in case of late or non-
payment:

 within an agreed period after a receipt of request for payment

from the contractor, the employer shall pay the amount as
certified;

 where the employer fails to pay the amount due on time, the
employer shall pay, in addition to the amount due, interest
thereon;

 a delay in the payment of any progress billing shall automatically

extend the Completion Time by a period equal to the delay;

 the contractor has the right to suspend work or terminate the

contract upon written notice to the employer, if the employer fails
to pay the contractor the approved request for payment; and/or

 if the contractor incurs a delay in the mobilisation and/or in the

progress of the work for reasons attributable to the employer, the
contractor may be entitled to a claim for extra cost, and delay in
said payment shall entitle the contractor to an extension of time
and to payment of interest.
Advance payments, delayed payments and/or interim payments are
schemes that are generally used and may be stipulated in construction
contracts. For instance, the parties may mutually agree on the amount of
advance payment to be made by the employer, subject to the contractor’s
posting of a surety bond of equivalent amount to guarantee repayment. The
advance payment is used for mobilisation, purchase of materials, etc.
4.3 Invoicing
The particular means and form of invoicing are not normally provided in the
contract. However, in milestone payments, approval by the employer is
generally required before the contractor may issue invoices to the employer
for the particular payment.
5. Time
5.1 Planning, Programme
Generally, the plans, schedules and milestones are arranged and
determined by the employer, and finalised and incorporated into the
contract upon agreement with the contractor. Inputs from the architect and
the employer's other consultants may also be taken into account in
preparing the plans, schedules and milestones.
In some instances, the contract may also provide that the contractor should
prepare a contractor's plan, consistent with the scope of the work and the
requirements of the employer, for approval by the employer. Once
approved, the contractor’s plan is binding between the parties, and the
works would need to be performed in accordance with its terms.
In either case, any amendment to the plans, schedules and milestones
requires approval by the employer and the contractor.
The completion of milestones is subject to verification and testing (see 3.9
Tests and 3.10 Completion, Takeover, Delivery). Milestone certificates
would also usually be issued by the employer to evidence the completion of
milestones.
5.2 Delays
In relation to delay in payments, see 4.2 Payment.
Parties are free to stipulate what constitutes a delay in performance and
the effects of the delay on the respective obligations of the parties.
A party is generally required to notify the other party that the latter is
causing a delay. This is consistent with Article 1169 of the Civil Code,
which states that those obliged to deliver or do something incur a delay
from the time the demand is made. However, demand is not necessary for
the delay to exist when the law or obligation expressly so declares, such as
express stipulation in the agreement as to the contract key dates or
timeline. Nevertheless, a notification requirement is common practice in
order to determine the period from which an extension of time or additional
cost claim shall be based, if any. After notification, the claiming party is
generally required to substantiate the impact of the delay and its
corresponding entitlement to an extension of time and/or additional cost
claim.
5.3 Remedies in the Event of Delays
The employer would typically be entitled to the payment of liquidated
damages and other consequential costs (which may be collected from the
performance bond) in the event of delay by the contractor. Substantial
delay may also be cause for the employer to terminate the construction
contract.
5.4 Extension of Time
In practice, if the contractor is obstructed or delayed in the completion of
the work by reasons not attributable to the contractor (ie, employer's action,
neglect, delay or fault; third-party strikes or lockouts; an act of God or force
majeure; etc), the contractor is entitled to an equitable adjustment of the
completion time.
The contractor must, within a period specified under the contract, notify the
employer. In turn, the employer must, within a similar specified period, give
the contractor an equitable adjustment of the completion time, subject to
the employer's determination as to the period. If the contractor and the
employer cannot agree on the proposed period, the contract may provide
mechanisms to settle the dispute. The parties may also stipulate that the
employer’s failure to reply to the contractor may be deemed as approval by
the employer of the adjustment requested by the contractor.
5.5 Force Majeure
Under the principle of force majeure (also known as fortuitous events) in
Philippine law, no person is responsible for events that could not be
foreseen or that, although foreseen, were inevitable. The most common
force majeure events in construction contracts in the Philippines include:
war, riot, sabotage, acts of terrorism, insurrections, acts of public enemies;
strike, industrial dispute, blockade, labour dispute, lockout; fire, explosion,
flood, typhoon, tornado, epidemic or pandemic, earthquakes, or other
natural disasters; export or import restrictions; closing of harbours, docks,
canals, or other assistance to or adjuncts of the shipping or navigation of or
within any place; rationing or allocation, whether imposed by law, decree,
or regulation; etc.
Nonetheless, parties are free to contractually limit or exclude certain
circumstances from being qualified as force majeure events.
5.6 Unforeseen Circumstances
Unforeseen circumstances may be in the following forms: fortuitous events,
as discussed under 5.5 Force Majeure, legal or physical impossibility, or
difficulty beyond the contemplation of the parties. The provisions of the Civil
Code are deemed written into the contract. Unless the parties stipulate
otherwise, the provisions of the Civil Code will govern.
Under the Civil Code, a debtor in obligation to perform a service will be
released when the obligation becomes legally or physically impossible
without any fault on the part of the obligor. Legal impossibility refers to
instances where an act is prohibited or prevented by law, while a physical
impossibility is where an act can no longer be accomplished by reason of
its nature.
As for difficulty beyond the contemplation of the parties, the Civil Code
provides that when the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
from the obligation, in whole or in part. The scenario contemplated includes
exceptional changes in circumstances, taking into account the risks
assumed by the parties at the inception of the contract.
Unforeseen circumstances may be classified as force majeure or a change
in legislation that would entitle the contractor to an extension of time, and/or
additional cost, depending on the circumstances and the ability of the
contractor to substantiate its claims.
6. Liability
6.1 Exclusion of Liability
Liability for future fraud cannot be contractually excluded under mandatory
law (Civil Code, Article 1171). In addition, limitation of liability for gross
negligence and wilful misconduct may be considered void, as it is contrary
to public policy.
6.2 Wilful Misconduct and Gross Negligence
Wilful misconduct and gross negligence are governed by the Civil Code
provisions on tort. Gross negligence has been interpreted by the Supreme
Court to be the "want of even slight care and diligence" and "such entire
want of care as to raise a presumption that the person in fault is conscious
of the probable consequences of carelessness, and is indifferent, or worse,
to the danger of injury to person or property of others".
Under Article 2176 of the Civil Code, whoever by act or omission causes
damage to another, there being fault or negligence, is obliged to pay for the
damage done. Meanwhile, in addition to actual damages, a party that acts
with gross negligence may also be liable for exemplary damages under
Article 2231 of the Civil Code.
As explained in 6.1 Exclusion of Liability, limitation of liability for gross
negligence and wilful misconduct may be considered void.
6.3 Limitation of Liability
Parties may contractually limit their liability. Typically, limitations on liability
expressly pertain to the liabilities of the contractor in general under the
contract. Parties also usually agree to limit liabilities for certain types of
consequential damages, such as lost profits. In these cases, parties
typically agree that these damages cannot be claimed by one party against
another, subject to statutory limits on limitations of liability (eg, fraud, gross
negligence). When contracts provide for a limitation of liability, the cap is
usually set at an amount equivalent to the contract price, or an agreed
percentage of the contract price.
In addition, in the absence of any agreement to the contrary, parties are
also generally not liable for events of force majeure.
However, it is not possible to limit liability if it arises from a fraudulent act or
an act constituting gross negligence or wilful misconduct. Such a stipulation
would be considered void, as explained in 6.1 Exclusion of Liability.
7. Risk, Insurance and Securities
7.1 Indemnities
Indemnities are normally used to limit risk in construction contracts.
Typically, indemnities are given by the contractor to the employer for the
following:

 the failure of the contractor or subcontractors to perform their

obligations pursuant to the contract or in accordance with
applicable laws and regulations;

 the failure of the contractor to complete the works within the

agreed period;

 the contractor's or subcontractor's negligence, errors, omissions,

negligent supervision, and negligent construction administration;

 breach of warranties and of confidentiality obligations under the

contract;

 infringement or violation of the intellectual property rights of third

persons;
  death, disease or injury to the contractor's or subcontractor's
employees, or damage to any property arising from the
construction works, which are attributable to the contractor;

 employment-related claims of the contractor’s employees;

 unpaid bills for labour and materials; and

 damage caused by the contractor or its employees to any

property of the employer and the adjoining property.

7.2 Guarantees
The contractor generally guarantees the works performed in the contract
against defects in workmanship and material for a certain period of time
counted from the completion of the works. The guarantees usually include:

 that the works conform to the requirements of applicable law, the

contract, and the relevant requirements of the employer, and that
the same shall be free from hidden defects, imperfections, or
faults;

 that all materials, facilities and equipment used in the works (if
supplied by the contractor) are standard products of trade and
comply with the standards provided in the contract, and are free
from defects; and

 that all civil works and installation of materials, facilities and

equipment are carried out in a workmanlike manner according to
the standards provided in the contract or sound professional
practices.

A certain amount of the contract price may also be subject to retention by

the employer after completion of the works, which will cover any violation of
warranties within the warranty period. Alternatively, the contractor may be
required to deliver a warranty security (eg, a bond or letter of credit) to the
employer, which shall remain in force until the warranty period expires.
7.3 Insurance
Construction contracts often require the contractors to obtain and maintain
insurance policies from reputable and financially sound insurance
companies acceptable to the employer. The policies required normally
include:
  contractor's all-risk insurance – against all risks, including fire,
earthquake, typhoon, hurricane, windstorm, any other similar
perils, or any other cause;

 third-party liability insurance – against all claims for bodily or

personal injury, death and/or damage to property;

 professional liability insurance – against losses suffered from

negligence, wrong advice and other similar acts of advisers; and

 automobile liability insurance – against bodily injury, death and

property damage arising from owned, non-owned and hired
vehicles.

7.4 Insolvency
The insolvency of a party is normally considered an event of default that
would entitle the other party to terminate the contract, in accordance with
the terms of the contract. This remedy is usually afforded to both the
employer and contractor.
In the event of insolvency of the employer, the contractor is also usually
given the right to cease all work immediately.
7.5 Risk Sharing
Risks arising from the construction works are generally the responsibility of
the contractor. In line with this, contracts usually provide that the contractor
is fully responsible for the care of the works from the commencement of the
works until handover to the employer, at which time the responsibility for
the care of the works would pass to the employer. However, even after
handover to the employer, the contractor would still normally be liable for
any loss or damage caused by its actions, and for loss or damage that may
be the result of a previous event for which the contractor was liable.
Risks that may possibly be shared by the parties would include force
majeure and unforeseen circumstances (refer to 5.5 Force
Majeure and 5.6 Unforeseen Circumstances). The parties would typically
provide that losses or damages arising out of force majeure or unforeseen
circumstances shall not be the responsibility of the contractor.
8. Contract Administration and Claims
8.1 Personnel
Party Responsible for Personnel
The contractor would usually be responsible for providing and paying for all
labour and manpower needed for the performance and completion of the
works, and for ensuring that all relevant labour laws applying to its
employees are complied with.
The contractor would also be required to implement an appropriate
construction safety and health programme at the contract site and require
all its employees to obey all applicable laws and regulations concerning
safety at work.
Consequently, contracts often provide that the employer should not be
answerable or accountable for the payment of wages, all applicable
workers' compensation, disability and other employment benefits, and any
liabilities relating to the employment of the contractor's employees.
Employment Arrangements
Workers in the construction industry are usually engaged on project
employment. Nevertheless, such workers may also be engaged under
other types of employment such as on a regular, casual, fixed-term, or
piece-work basis.
Depending on the specific type of employment under which the worker is
engaged, employment contracts normally provide for the effective
date/duration of the employment relationship, the compensation and
benefits granted to the employee, the reporting structure and work
schedule, job description, rules on employment termination, and other
company rules and policies affecting the employee.
8.2 Subcontracting
Contracting and subcontracting are legally permitted and are usual market
practice in the construction industry. Construction projects are normally
farmed out to contractor companies and, subject to the agreement between
the employer and the contractor, portions or phases of the project may be
further subcontracted to another entity.
In a contracting/subcontracting arrangement, workers of the
contractor/subcontractor are assigned and/or deployed to the project to
perform the work under the construction contract/s.
For a contracting arrangement to be valid and for the contractor to be
considered a legitimate/independent contractor, the following conditions
must be satisfied:

 the contractor is engaged in a distinct and independent business

and undertakes to perform the job/work on its own responsibility,
according to its own manner and method;
  the contractor has substantial capital to carry out the job on its
own account, manner and method, and investment in the form of
tools, equipment, machinery and supervision;

 the contractor is free from control and/or direction of a principal in

all matters connected with the performance of the work except as
to the result thereof; and

 a service agreement ensures compliance with all the rights and

benefits of the contractor’s employees under labour laws.

Furthermore, the elements of an employment relationship should not be

present between the employer and the contractor’s employees, particularly:

 selection and engagement of the individual;

 payment of wages to the individual;

 power to dismiss or impose other disciplinary action on the

individual; and

 power to control the individual with respect to the means and

method by which the work is to be accomplished (“control test”).

The most important element to determine the existence of an employer-

employee relationship is the so-called “control test”. The presence of such
power of control will indicate an employment relationship, while its absence
indicates an independent contracting relationship. Even though no actual
control is exercised, there can still be an employment relationship if there is
a right to exercise control. Thus, the principal should be interested only in
the results of the performance of the agreed services by the contractor’s
employees. The absence of such control should be evident both in the
agreement with the contractor and in the day-to-day interaction between
the principal and the contractor’s employees.
8.3 Intellectual Property
Intellectual property (IP) clauses typically found in construction contracts in
the Philippines include:

 a comprehensive description of “intellectual property” should

include trade marks, copyrights, designs, patents, or other IP
recognised anywhere in the world;
  delineation of the IP to be retained by the contractor and
employer, usually for IP developed before and after the
construction engagement;

 granting of permission to use pre-existing IP or IP retained by

parties, without payment (due to strict “technology transfer
agreement” regulations, “licensing” of IP is usually avoided);

 an agreement concerning ownership of jointly developed IP;

 an agreement concerning ownership of modifications of IP;

 the confidential treatment of all IP disclosed and shared between

the contractor and employer;

 the automatic assignment of IP created during engagement;

 a provision requiring execution of necessary documents to

effect/complete/formalise record assignments of IP;

 a provision to co-operate in enforcement of assigned IP;

 an agreement to subsequently assign IP that may not be covered

by provisions on automatic assignment;

 a waiver of moral rights, except where such waiver shall permit

another:

1. to use the name of the author, or the title of their work, or

otherwise make use of their reputation with respect to any
version or adaptation of their work which, because of
alterations therein, would substantially injure the literary or
artistic reputation of another author; or

2. to use the name of the author with respect to a work they

did not create; and

 provisions as to the ownership of IP rights in feedback.

9. Remedies and Damages

9.1 Remedies
Philippine general contract law states that in the event of a breach of
contract, the injured party may choose between fulfilment of the obligation,
otherwise referred to as "specific performance", and the rescission of the
obligation (if the breach is substantial), with the payment of damages in
either case. The law further provides that those who, in the performance of
their obligations, are guilty of fraud, negligence or delay, and those who in
any manner contravene the intention behind such obligation, are liable for
damages.
The remedies of specific performance, rescission and damages are
available to all relevant parties in a construction contract. Nevertheless, the
parties may contractually agree to limit or expand the available remedies of
the parties. Aside from the statutory remedies, parties typically agree that
the following remedies are available in case of breach:

 payment of liquidated damages by the contractor, in case of

delay;

 suspension of work by the contractor in case of the employer’s

breach, in which case the contractor is entitled to an equitable
adjustment of the completion time and/or contract price;

 the employer’s right to order suspension of work due to the

contractor’s breach; and

 termination of contract for specified causes, such as bankruptcy

or insolvency and negative slippage of the contractor.

See 4.2 Payment and 5.3 Remedies in the Event of Delays.

9.2 Restricting Remedies
It is common practice for parties to a construction contract in the
Philippines to agree on the remedies available to each party in case of
breach. The only limitation would be mandatory laws applicable to
limitations of liability and public policy, such as those prohibiting:

 waiver of remedies/actions arising from future fraud; and

 waiver of remedies/actions involving gross negligence or wilful

misconduct.

9.3 Sole Remedy Clauses

Sole remedy clauses are not typically used in construction contracts in the
Philippines. However, waivers of rights and remedies are generally allowed
under Philippine law, and thus enforcement of such waivers is possible.
Nevertheless, sole remedy clauses may, in certain circumstances, be
considered void and unenforceable if they essentially limit claims/remedies
in situations where limitations of liability are disallowed (eg, fraud).
9.4 Excluded Damages
As mentioned in 6.3 Limitation of Liability, parties usually agree to limit
liabilities for certain types of consequential damages, such as lost profits. In
such cases, parties typically agree that these damages cannot be claimed
by one party against another, subject to statutory limits on limitations of
liability (eg, fraud).
9.5 Retention and Suspension Rights
Construction contracts typically allow the employer to retain a portion of the
contract sum for a specified period after the completion of the works, until
the lapse of the agreed defects liability period.
Suspension rights are usually allowed and are not typically contractually
excluded. Normally, the contractor is given the right to suspend work or
terminate the contract on written notice to the employer, if the employer
fails to pay the contractor an approved request for payment. The employer
is also usually given the right to order suspension of work due to a breach
on the part of the contractor.
10. Dispute Resolution
10.1 Regular Dispute Resolution
Disputes arising out of construction contracts that have no arbitration
clauses are resolved through ordinary court litigation, before the first and
second-level courts in the Philippines.
If a construction contract provides for arbitration as the mode of dispute
resolution, the dispute will be resolved via arbitration before the CIAC,
regardless of whether another institution is chosen. The Philippine
Supreme Court has held that “as long as the parties agree to submit their
dispute to voluntary arbitration, regardless of what forum they may choose,
their agreement will fall within the jurisdiction of the CIAC, such that, even if
they specifically choose another forum, the parties will not be precluded
from electing to submit their dispute before the CIAC because this right has
been vested by law” (National Irrigation Administration v Court of Appeals,
1999).
Where a construction contract involves a project under the PPP Law, the
revised IRR of the PPP Law says that "acts and decisions of Regulators
shall not be subject to arbitration".
Recent Court Ruling
In Global Medical Center of Laguna v Ross Systems International (GR Nos
230112 & 230119, 11 May 2021), the Philippine Supreme Court limited the
grounds to appeal arbitral awards in construction disputes presided over by
tribunals under the CIAC. Factual issues may still be appealed to the
Philippine Court of Appeals, but only on grounds that pertain to (a)
challenges to the integrity of the composition of the arbitral tribunal such as
allegations of corruption, fraud, misconduct, evident partiality, incapacity, or
excess of powers; and (b) allegations that the tribunal violated the
Constitution or positive law in the conduct of the arbitral process.
Meanwhile, issues involving pure questions of law are to be resolved by the
Supreme Court. Previously, the practice was to appeal all factual and legal
issues to the Court of Appeals, which allowed a re-examination of a CIAC
arbitral award.
10.2 Alternative Dispute Resolution
Republic Act No 9285 (The Alternative Dispute Resolution Act of 2004)
recognises mediation, arbitration and other forms of alternative dispute
resolution mechanisms.
Arbitration, mediation and the use of Dispute Boards are alternative means
of dispute resolution available to parties to a construction contract. These
are commonly used in the Philippines, subject to the limitation that, where a
construction contract involves an arbitration clause, it is the CIAC that has
jurisdiction over a dispute arising therefrom.
Dispute Boards are also becoming popular in construction contracts in the
Philippines, particularly those that adopt, or are based on, a FIDIC contract.
Quisumbing Torres
16th Floor, One/NEO Building
26th Street corner 3rd Avenue
Crescent Park West
Bonifacio Global City
Taguig City
Philippines 1634
+63 2 8819 4700
+63 2 8819 4626
[email protected] www.quisumbingtorres.com