PEZA VS.

GREEN ASIA CONSTRUCTION & DEVELOPMENT CORPORATION FACTS: Philippine Economic Zone Authority (PEZA), formerly the Export Processing Zone Authority (EPZA), and Green Asia Construction & Development Corporation (hereinafter Green Asia) were parties to a contract for a road network/storm drainage project. Tagumpay R. Jardiniano, administrator of the then EPZA and Renato P. Legaspi, the president of Green Asia, signed the contract on 23 September 1992. The stipulations in the contract include (1) the contract price, (2) the mode of payment, (3) advance payment, and (4) the progress payment. On 26 March 1996, Green Asia sent a letter to the PEZA Director General, invoking Presidential Decree (PD) No. 1594, notifying PEZA of Green Asias claim for price escalation in the amount of P 9,860,169.58. This claim was denied by PEZA. The denial of the claim was anchored on Green Asias failure to establish that the increase in the cost of labor, equipment, materials and supplies required for the construction were due to the direct acts of the government. Despite the denial, Green Asia insisted on its claim and followed it up with three letters sent to PEZA from 1997 to 2000, which were all denied by PEZA. The exchanges of correspondence pertaining to Green Asias claim continued until 2006. PEZA was, however, consistent in its position that Green Asia was not entitled to its claim, as the latter failed to prove the legal necessity of applying the price escalation provided for in PD 1594. In its letter dated 30 November 2006, PEZA pointed out that the contract price was fixed, as stipulated in Article IV of the contract, and that this provision was in effect a waiver of the provisions of PD 1594. On 2 August 2007, Green Asia sent to PEZA another notice, labeled final demand notice, a copy of which was furnished to the Office of the President. Green Asia disagreed with PEZA and posited that the fact that the contract stipulated a fixed price did not mean that it was the final receivable amount for the contractor. The fixed price, according to Green Asia, would apply only when the work orders in the construction did not vary during the construction period. Subsequent to the final demand notice to PEZA, Green Asia sent then PGMA a letter with the heading Appeal for the Settlement of Unpaid Claims for Price Escalation Under Project of the Philippines Economic Zone Authority. In this letter, Green Asia asked PGMA to intervene for the affirmative resolution of its claim against PEZA. The Office of the President (OP) took cognizance of the letter as an appeal and ordered Green Asia to pay the appeal fee and PEZA to forward the complete records of the case. After summary proceedings in the OP, the case was decided in favor of Green Asia and PEZA was ordered to pay claimant the total amount of P12,360,526.70 plus interest. The OPs reason for granting Green Asias claim was that proof of increase in relevant construction prices due to the direct acts of the government was not required by law, before a price escalation may be invoked. The OP also interpreted the phrase due to direct acts of the Government. It held that PD 454, a prior enactment on government infrastructure projects, authorized price escalation; and that direct acts of the government included increases in the prices of gasoline, fuel oil and cement. It was, therefore, not necessary to actually show that the prices of those commodities increased because of the direct acts of the government. In effect, the OP Decision held that price escalation is automatically awarded to contractors of all government infrastructure projects. The CA sustained the OP Decision. It found the OPs construction of PD 1594, in connection with PD 454, proper. Since PD 1594 did not expressly repeal PD 454, and since there was no apparent conflict between the two laws, the appellate court deemed it best to harmonize them. The result was again a favorable decision to Green Asia. PEZA appealed CAs decision. It argues that certain conditions must be met before an adjustment of the contract made be made: (1) there was an increase or decrease the cost of labor, equipment, materials and supplies for construction; (2) the said increase or decrease is due to the direct acts of the government. ISSUE: Whether PD 1594 requires the contractor to prove that the price increase of construction materials was due to the direct acts of the government before a price escalation is granted in this payment dispute in a construction contract. RATIO: No, there was no need to prove that the price increase was due to acts of the government. Proof of increase is sufficient to grant payment for price escalation. The phrase was first used in RA 1595, which was amended by PD 454. The latter amended RA 1595 by supplying the

meaning of the phrase direct acts of the government and expressly including the increase of prices of gasoline within the coverage of that phrase. Consequently, when PD 1594 reproduced the phrase without supplying a contrary or different definition, the definition provided by the earlier enacted PD 454 was deemed adopted by the later decree. Thus, proof of an increase in fuel and cement price and a subsequent increase in the cost of labor and relevant construction materials during the contract period are considered a compliance with the IRR requirements for a claim for price escalation. It was therefore wrong for PEZA to disregard PD 454 by automatically denying the claim of Green Asia for price escalation or to require the latter to prove that the increase in the construction cost was due to the direct acts of the government. PD 454 actually bridges the gap between PD 1594 and its IRR. PD 1594 no longer explains the provision on price adjustment, because it is already found in PD 454 and in older laws. Section 1 of PD 454 provides: (a) If during the effectivity of the contract, the cost of labor, materials, equipment rentals and supplies for construction should increase or decrease due to the direct acts of the government; and for purposes of this Decree the increase of prices of gasoline and other fuel oils, and of cement shall be considered direct acts of the Government; Others: The parties separately invoke PD 1594 and its IRR. A reading of their provisions, however, leads to the conclusion that price adjustment under PD 1594 is actually the same as price escalation under the IRR. They have different names, but pertain to the same thing -- the adjustment of the contract price due to certain circumstances. At first glance, price escalation may be considered as an expansion of the concept of price adjustment. In truth, however, the IRR did not expand anything, but merely laid out a guideline for the computation of the adjustment or escalation of price. The two provisions are therefore not separate and must be read together. Otherwise, if we accept the arguments of both parties that one is invoking either PD 1594 or the IRR, two different rights would arise therefrom, which is obviously not intended by the law. Price escalation, as explained in paragraph 6 of Cl 2.1 of the IRR, is meant to compensate for changes in the prices of relevant construction necessities during the effectivity of the contract, resulting in more than 5% increase or decrease in the unit price of those items. It is thus the prices of the items that have actually increased that become the basis of the computation. In addition, the contract between PEZA and Green Asia did not incorporate provisions prohibiting price escalation or any clause that may be interpreted as a waiver of the price escalation.