Construction Law 2022 Comparisons

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.

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.

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. 

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.   

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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. 

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.

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.

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.

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.

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.

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.

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.

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. 

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.

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. 

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.

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.

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.

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). 

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).

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.

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.

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.